Ajit K. Sengupta,J. - (1.) In this reference under Section 256(2) of the Income-tax Act, 1961, the following questions of law have been referred to this court : "(i) Whether, on the facts and in the circumstances of the case, in view of the miscellaneous application filed by the assessee, the Income-tax Appellate Tribunal was justified in law in rejecting the admission of an alternate additional ground ? (ii) Whether, on the facts and in the circumstances of the case, the provision for taxation of Rs. 1,81,00,000 constitutes a fund within the meaning of Clause (ii) of Rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ? (iii) Whether, on the facts and in the circumstances of the case and in view of the miscellaneous application filed by the assessee, the Tribunal was justified in law in not holding that if the cost of investment in shares which did not produce any income was excluded from computation of the capital under Rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, the company should have got the benefit of deduction of provision for taxation from its cost of investment of a fund ?"
(2.) For a proper appreciation of the points at issue, it is necessary to give a review of Rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. Certain items of income are excludible from the total income of a company in the computation of its chargeable profits. A standard deduction is allowed from the chargeable profits at a percentage of the capital of the company computed under Rule 1 of the Second Schedule, but in such computation of capital the aggregate value of the assets shall be diminished by the cost of the assets which fetched excludible income as referred to in Clauses (iii), (vi) and (viii) of Rule 1 of the First Schedule. The idea is that the cost of assets the income from which is not chargeable to surtax should go in diminution of the capital. Otherwise, a double benefit would avail to the assessee-company.
(3.) But in computing the amount of diminution, it is not that the cost of all such assets producing non-chargeable income are to be aggregated. The diminution would be limited to the excess of the aggregate cost of such assets over the aggregate of specified borrowings and any other amount or any fund in surplus and any such reserve as is not to be taken into account in computing the capital under Rule 1. It is, in this context, that the assessee-company's grievance can be understood.;