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Schedule II of the Companies (Profits) Surtax Act, 1964 - Capital - Computation of - Whether before rule 1(iii) of Schedule II can be said to have been attracted, there must be existence of a 'reserve', either general reserve or special reserve to which credit has been made - Held, yes - Depreciation allowed in assessee's case, under Income-tax Act, was higher than that set out in profit and loss account - Whether mere existence of such differential would warrant deduction of amount of difference while computing capital base - Held, no - Whether in view of Tribunal's finding that differential was not credited to general or any other reserve, question of deduction did not arise - Held, yes FACTS The amount allowed by way of depreciation in the income-tax assessment of the assessee was higher than the amount of depreciation charged in the profit and loss account. The revenue held that the difference between the two amounts should be reduced from the capital base of the company under rule 1(iii) of the Second Schedule. However, the Tribunal did not agree with that. On reference : HELD The facts of the instant case were not such as to permit the application of rule 1(iii) of Second Schedule, as it was the finding of the Tribunal that there was no separate depreciation reserve to which the differential was credited nor was there any finding that the difference was credited to a general reserve. On the other hand, the finding was that though there was a general reserve, the amount of the differential was not credited to that or any other reserve. The mere existence of the differential by itself does not warrant the deduction of the amount of the difference while computing the capital base, unless there is material to show that the differential amount was credited to a reserve which has to be taken note of for the purpose of computing the capital base. In absence of such a reserve and/or a credit, the question of deduction does not arise. The assessing authority merely assumed the existence of a notional reserve for which there was no foundation in the books of account or in the profit and loss account of the assessee. The Tribunal had rightly held that on the facts…

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