Sen, J. - (1.) This reference arises out of an assessment of Duncan Brothers & Co., under the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as "the said Act"), in the assessment year 1965-66, the previous year whereof ended on the 31st December, 1964.
(2.) Under the said Act, a special tax is levied on the "chargeable profits" of a company, to be computed in accordance with the provisions contained in the First Schedule thereto. The Second Schedule to the said Act contains rules for computing the capital of a company. Under the Third Schedule to the Act surtax is charged on the amount by which the "chargeable profits" exceed the amount of statutory deduction. The part of the chargeable amount as does not exceed 5% of the amount of capital as computed in accordance with the Second Schedule is taxed at the rate of 25%. On the balance, if any, of the chargeable amount, tax is charged at the rate of 40%.
(3.) In the assessment, the assessee had claimed that under Rule 2 of the Second Schedule to the said Act its capital should be diminished by the cost of its assets, the income from which was excluded from its total income in computing its chargeable profits, less two funds, being a provision for taxation of Rs. 31,78,000 and proposed dividend being Rs. 15,90,000. The ITO did not accept the contentions of the assessee and computed the capital without taking into account the said funds.;