RAJENDRA BABU, J. ( 1 ) THE assessee is a public sector Company to which the Uttar Pradesh Government granted some land free of cost and that had not been included in the books of account. On the advice of the statutory auditors and the Company Law Board, the assessee got the land valued and debited to land account by giving a corresponding entry in capital reserve account amounting to Rs. 6,11,415/ -. The assessee included the value of this asset in the sur-tax assessment for the purpose of working capital base. The Sur Tax Officer rejected the claim of the assessee by applying explanation 1 to Rule 2 of the Second schedule to The Companies (Profits) Sur tax Act, 1964 ('act' for short ). He also reduced capital base with reference to income exempt from tax under Section 80-I of the Income Tax Act. ( 2 ) ON appeal, the Commissioner (Appeals) held that the explanation had no application to the case, and in his view a book asset would be an intangible asset such as goodwill. He also held that the reserve had not been brought into existence by revaluing or by creating a book-asset but by including the value of an asset which was brought into accounts so as to truly reflect the state of affairs and therefore he directed the Surtax Officer to include the capital reserve of Rs. 6,11,415/- for working out capital base. He upheld the assessee's contention in regard to the reduction of capital by excluding income under Section 80-I of the Income Tax Act and thus allowed the appeal. ( 3 ) ON further appeal against this order by the Revenue, the Tribunal held that this is not a case where Reserve is brought into existence by creating or revaluing any existing asset already included in the list of book assets and all that the assessee did was only to reflect in the books of account an asset which had not been so done earlier, and this being a valuable asset its value had to be reflected in the books of account and agreed with the reasons given by the commissioner in this regard. The Tribunal also upheld the finding of the Commissioner that the Sur-tax Officer was not justified in reducing the capital base with reference to income exempted under Section 80-I of the act, and dismissed the appeal. The Tribunal also upheld the finding of the Commissioner that the Sur-tax Officer was not justified in reducing the capital base with reference to income exempted under Section 80-I of the act, and dismissed the appeal. ( 4 ) AGGRIEVED by the order of the tribunal, the Revenue sought for reference to this Court and at its instance the following questions have been referred to us: (1) "whether on the facts and in the circumstances of the case, the appellate Tribunal was right in holding that the capital attributable to income for which deduction allowed under Section 80-I for Income-tax purposes should not be deducted from the capital for purposes of sur-tax assessment? (2) Whether on the facts and in the circumstances of the case, the appellate Tribunal was right in holding that Explanation to Rule 2 (1) of Second Schedule to the Sur-tax Act does not apply to the capital reserve created by the assessee by bringing into books the value of land received on gift from U. P. Government? ( 5 ) INASMUCH as, in directing inclusion of the income exempt under Section 80-I of the i. T. Act in assessing capital base, the commissioner (Appeals) and the Tribunal have merely followed a judgment of this court in II I. T. O. Company Circle v Stumpp schule and Somappa, 106 I. T. R. 399. , which is binding upon us, we answer the first question referred to us in the affirmative and against the Revenue. ( 6 ) SO far as the second question is concerned, the learned Senior Standing counsel for the Revenue reiterated the contentions raised before the Tribunal and submitted that a sum of Rs. 6,11,415/- was brought into existence either by creation or revaluation of a book asset. He submitted that this is a creation of a book asset which was not there earlier or amounts to revaluation from zero to Rs. 6,11,415/- and is therefore hit by Explanation 1 to Rule 2 of the Rules incorporated in the Second schedule to the Act (the Rules for short ). Learned counsel for the assessee submitted that the order of the Tribunal was correct and urged that Explanation 1 to Rule 2 of the act has no application at all to the case on hand because reserve is not brought into existence either by creation or revaluation or otherwise of a book asset. Learned counsel for the assessee submitted that the order of the Tribunal was correct and urged that Explanation 1 to Rule 2 of the act has no application at all to the case on hand because reserve is not brought into existence either by creation or revaluation or otherwise of a book asset. Learned counsel contended that the expression 'book asset' is used in the context with reference to notional, fictitious and intangible assets and the assessee had made entries in relation to a tangible asset such as an immovable propcrty, ( 7 ) THE controversy in this case revolves round Explanation 1 to Rule 2 of the Rules and therefore it is necessary to carefully analyse the same. The said provision reads as follows:"a paid up share capital or reserve brought into existence by creating or increasing (by revaluation or otherwise) in book asset is not capital for computing in the capital of a company for the purpose of the Act. " ( 8 ) THE expression 'book asset' is not defined under the Act or under the Income tax Act, 1961. But by referring to similar expressions such as 'book profits' and 'book debts' as understood by well known authors and with reference to decisions, the conclusion we can draw is that book assets are assets owned and possessed in connection with the Company's trade which are entered, or, commonly required to be entered in the books (See: Pagets Law of banking, 9th Edition page 50: Palmer's company Law, 22nd Edition Volume 1 para-44-06; Dawson v I. S. L. E. [1906 (1) chancery Division 633]; Independant automatic Sales Ltd. , v Knowless and Foster, [1962 (1) W. L. R. 974] and Paul and Frank ltd. , v Discount Bank (Overseas) Ltd. [1967 ch. 349]) ( 9 ) THUS the expression 'book asset' used in Explanation 1 to Rule 2 of the Act is used in the normal sense as any asset appearing as such in the books of account of an assessee, even if it does not appear in books of account, and if it is commonly required to be entered in such books such assets also should be treated or considered as a book asset. Therefore, we cannot agree with the contention raised by the learned counsel for the assessee that the expression 'book asset' in Explanation 1 to Rule 2 of the Act refers to only notional, fictitious and intangible assets. ( 10 ) AN analysis will reveal that the provision with which we are concerned simply means this: If an asset entered in the books of account of the assessee is created or revalued in the absence of real increase in order to create or increase paid-up share capital or reserve, Explanation 1 to Rule 2 would be applicable. The effect of explanation 1 to Rule 2 is to deter companies from boosting up the figure of paid-up share capital or reserve by increasing on revaluation or creating any book asset. In this context, it is necessary to notice a decision of the Andhra Pradesh High Court in C. I. T". v Warner Hindustan Ltd. 158 I. T. R. 50. Learned counsel for the Revenue contended that the said decision has no application to the facts of the case, inasmuch as, the Andhra Pradesh High Court in that case was concerned with revaluation of book assets; while in the present case what we are concerned is about creation of a book asset and bringing into existence a reserve thereon. Learned Counsel also submitted that the said decision does not lay down correct law. In that case the Andhra Pradesh high Court was concerned with the increase in asscssee's account on devaluation of rupee and that was included under the head 'gain on Devaluation' and in the balance-sheet the assessee company showed that sum under the head 'reserve and Surplus'. The objection of the learned counsel to adopt the reasoning of the Andhra Pradesh High Court in the present case is that in that decision distinction is made between an amount credited by the assessee to "gain on devaluation account" as representing real increase in value of the assets which is realised as opposed to any unrealised increase by taking recourse to the valuation and the value of the asset having actually gone up, it was necessary for the company to give effect to the actual increase and that was done by the assessee by crediting the increase to reserve account. According to the learned counsel Explanation 1 to Rule 2 of the Act does not make any difference between real increase or unreal increase in the value of a book asset and even where there is a real increase and as a result of which reserve is brought into existence, explanation is attracted. ( 11 ) IF one understands the concept of book asset correctly, there should be no difficulty in the matter at all. As stated earlier, a book asset is such asset which is usually entered in the account books in the ordinary course of business. If an asset had not been entered in books earlier for any reason, if it is entered for the first time, the question is whether there is creation of a book asset; similarly if a book asset had already been entered in the books of account and the entries relating thereto reflect a particular figure as the value of the asset and if the value is altered so as to reflect the true position, whether revaluation of book asset results therefrom? What is to be reflected in the books is a true state of affairs and the true value of the asset. If for any reasons the books of account did not truly reflect, either by non-inclusion of an asset or its true value it is certainly open to an assessee to rectify the same and claim the benefit notwithstanding the explanation 1 to Rule 2 in the Act. The Andhra Pradesh High Court stated that what was done in that case was only to truly reflect the value on devaluation of rupee and therefore the inhibition in explanation 1 to Rule 2 was not attracted with which we respectfully agree. The submission on behalf of the Revenue that the decision of the Andhra Pradesh High Court proceeds on a wrong premise is plainly incorrect. In the present case, it maybe seen the asset, i. e. , the land was in existence, the same having been granted to the assessee by the u. P. Government free of cost. Though the assessee had not incurred any expenditure in acquiring the asset, without that asset the company could not have carried on its business and it formed its capital. Though the assessee had not incurred any expenditure in acquiring the asset, without that asset the company could not have carried on its business and it formed its capital. It is plain that the book asset was neither created nor revalued by the assessee to boost up the capital base but merely the books were corrected to reflect the true position by its inclusion. Therefore the contention raised on behalf of the Revenue to the contrary has got to be rejected. We agree with the conclusion reached by the Tribunal in this regard. Hence we answer" the second question also in the affirmative and against the Revenue. --- *** --- .