RAJENDRA BABU, J. ( 1 ) THESE two references arise under the companies (Profits)Surtax Act, (hereinafter referred to as 'act' ). The questions referred to for our opinion are as follows:1. Whether on the facts and in the circumstances of the case, the Appellate tribunal was right in law in holding that the capital should not be increased to the extent of bonus shares issued out of the general reserves? ( 2 ) WHETHER on the facts and in the circumstances of the case, the Income-tax appellate Tribunal is right in law in holding that the income exempt under chapter VIA of the Income Tax Act, 1961 should be reduced in computing the capital base for the purposes of surtax assessment? the first question has been referred for our opinion at the instance of the assessee while the second question has been referred at the instance of the Revenue. 2. The facts leading to the reference of the first question are as follows: for the assessment year 1972-73, the assessee filed the return showing chargeable profit of rs. 1,23,917/ -. A revised statement was subsequently filed on 22-3-1974 and according to the statement, the chargeable profit is only rs. 1,10,109/ -. The Company claimed a sum of Rs. 7,50,819/- as effective increase in the utility of share capital by issue of bonus shares during the year ending with 31st March, 1972. The assessee relying upon Rule 3 of the Second schedule of the Act, raised a contention that the bonus shares were issued by capitalising the general reserve which is separately added in the computation and the said sum is to be taken as part of capital and capital should be increased. The Surtax Officer rejected this contention holding that there is no rise in the capital as computed in accordance with Rules 1 and 2 of the Second schedule and therefore the claim is inadmissible. This view was affirmed, on appeal, by the commissioner (Appeals) by holding that by issue of bonus shares from reserves, there is definitely an increase in paid-up capital of the company, but therc is no increase in capital on opening day as such, following the decision of the Bombay high Court in CIT v Century Spinning and manufacturing Company Limited, 111 ITR6. Aggrieved by this order, the asscsscc carried the mailer further in second appeal to the Tribunal. Aggrieved by this order, the asscsscc carried the mailer further in second appeal to the Tribunal. The Tribunal also look an identical view as that of the lower authorities and hence dismissed the appeal of the asscssee. Thus at the instance of the assessee present references are made to this court on the questions set forth above. ( 3 ) THE learned counsel for ihc assessee contended that even though paid-up capital is increased during the course of previous year proportionate increase should be made in the capital invested in the business by reference to rule 3 of the Second Schedule to the Act, because as a consequence of issue of bonus shares though out of Reserves, the share capital was increased to that extent. It is the submission of the learned counsel that what is contemplated under Rule 3 is the increase of the capital on account of increase of paid-up share capital without reference to the increase or decrease in the reserves and therefore what is to be looked at in interpreting or construing Rule 3 is only increase or decrease in paid-up capital and for that purpose any other clement referred to in Rule 1 which goes to make up the capital is irrelevant. ( 4 ) THE learned counsel for the revenue however, countered these arguments by relying upon various decisions of several High Courts to which reference will be made later and submitted that there is a fallacy in the argument addressed for the assessee inasmuch as the amount of reserve and proportionate increase in capital will certainly enter into the computation as otherwise it will lead to a double benefit to the assessee and submitted no other argument is possible in the circumstances of the case. ( 5 ) THE controversy Centres round Rule 3 of the Second Schedule to the Act. The said rule reads as follows:"3. ( 5 ) THE controversy Centres round Rule 3 of the Second Schedule to the Act. The said rule reads as follows:"3. Where after the first day of the previous year relevant to the assessment year, the capital of a company as computed in accordance with the foregoing rules of this schedule is increased by any amount during that previous year on account of increase of paid-up share capital or is reduced by any amount on account of reduction of paid- up share capital, such capital shall be increased or reduced, as the case may be, by a sum which bears to that amount, the same proportion as the number of days of the previous year during which the increase or the reduction remained effective bears to the total number of days in that previous year. "this scclion has been very clearly analysed by the Bombay High Court in Commissioner of income-tax, Bombay City III v Century Spg. and Mfg. Co. Ltd. (111 ITR 6) at page 14. It is lo the following effect:-"we have lo bear these principles in mind for interpreting the provisions of Rule 3. The provisions of Rule 3 will be attracted so far as increase in the compulation of capital employed in a business is concerned only if the following conditions arc fulfilled: 1. There must be an increase in the capital of the company as computed in accordance with Rules 1 and 2 of the Second schedule after the 1st day of the previous year relevant to the assessment year. 2. There should be an increase by any amount during the previous year in the capital computed in accordance with rules 1 and 2 of the Second Schedule. 3. Such increase by any amount may be brought about by- (a) on account of increase of paid- up share capital, or (b) issue of debentures, or (c) borrowing of any moneys referred to in clause (v) of Rule 1. "unless these conditions are fulfilled set forth above, the asscsscc cannot claim a benefit under rule 3 extracted above. 3. Such increase by any amount may be brought about by- (a) on account of increase of paid- up share capital, or (b) issue of debentures, or (c) borrowing of any moneys referred to in clause (v) of Rule 1. "unless these conditions are fulfilled set forth above, the asscsscc cannot claim a benefit under rule 3 extracted above. The Bombay High court while analysing the provisions took the view that with reference to the definition char-geable profits Section 2 (5) of the Act and Section 2 (8) of the Act refers to Statutory deductions and stated that when a part of the amount standing to the credit of general reserve is, during the course of the previous year, capitalised by issue of fully paid-up free bonus shares, there is no increase by any amount in the capital computed in accordance with the provisions of Rules 1 and 2 of the Second Schedule to the Act. Similar view has been taken by the Calcutta High Court in Alkali and Chemical Corporation of India limited v Commissioner of Income-tax, West bengal III (122 ITR 490) and followed by the same high Court in Indian Explosives Ltd. v Commissioner of Income-tax, West Bengal-Ill (153 ITR 340 ). There their lordships after noticing the controversy stated the problem involved in the interpretation of Rule 3 is only arithmetical. Inasmuch as what is ultimately to be computed, under the Second Schedule to the Surtax Act is the amount of tax and the reserves also is a necessary clement that goes to make up the capital. While taking note of the increase of share capital by issue of bonus shares out of reserves, the corresponding decrease in the amount of reserves cannot be overlooked. Though as contended by the learned counsel for the assessee it is possible to take two views in the matter but as appeared to the Calcutta High Court in our view the alternative view can only be taken by mis-reading the rules. To the similar effect, Madras High Court also stated the law on the point in Commissioner of Income-tax, Tamil Nadu-II v Sundaram Clayton ltd. To the similar effect, Madras High Court also stated the law on the point in Commissioner of Income-tax, Tamil Nadu-II v Sundaram Clayton ltd. , 140 ITR 235 as follows:"whatever might be the interpretation of that rule, so far as the language of Rule 3 of the Second Schedule to the Surtax Act is concerned, both as a matter of first impression and on the authorities we have earlier referred to, we have no doubt whatever that a mere capitalisation of the reserves and the issue of fully paid-up bonus shares, subsequent to the first day of the previous year, cannot come within the ambit of the said rule, so as to enable the assessee to obtain an increase over the capital computed as on the first day of that previous year. "again the Delhi High Court in Additional commissioner of Surtax, Delhi v Food Specialities Ltd. , 129 ITR 731 referred with particular emphasis on identical contentions advanced before their lordships as it has been done before us. While agreeing with the contentions of the learned counsel that unless there is an increase in the capital as already computed under Rule 1, Rule 3 will not come into operation, they disagreed with the another argument that the closing words of the Rules make it clear that in any case where there is an increase in the capital as contemplated by the opening words, the increase available to the assessee will be a proportionate part of "that amount". The words 'that amount' clearly refer to the words 'any amount' referred to in the opening part of the rule. In other words, it is only to the extent of surplus or excess over the capital as computed at the beginning of the previous year that the assessee gets the relief as envisaged in rule 3. Thus their lordships gave additional reasoning to what had been stated by the Delhi and Calcutta High Courts. Thus all the arguments advanced by the learned counsel for the assessee have been met by the various decisions referred to above and it is necessary to refer to the two decisions relied upon by the learned counsel for the assessee. Thus their lordships gave additional reasoning to what had been stated by the Delhi and Calcutta High Courts. Thus all the arguments advanced by the learned counsel for the assessee have been met by the various decisions referred to above and it is necessary to refer to the two decisions relied upon by the learned counsel for the assessee. In commissioner of Income-tax, Patiala II v Mohan meakin Breweries Ltd. , 95 ITR 586, the himachal Pradesh High Court was concerned with the interpretation of Rule 2 of Second schedule of the Super Profits Tax Act, 1963. That rule reads as follows:"rule 2: Where after the first day of the previous year relevant to the assessment year, the paid-up share capital of a company is increased or reduced by any amount during that previous year, the capital computed in accordance with Rule 1 shall be increased or decreased, as the case may be, by a portion of that amount which is proportional to the portion of the previous year during which the increase or the reduction of the paid-up share capital remained effective. "the learned counsel for the assessee contended that there is hardly any difference between Rule 2 of the Second Schedule of the Super Profits tax Act, 1963 and the rule with which we are concerned and therefore what has been stated by the High Court should be accepted by us. In that decision their lordships took a view that on the language employed by the said rule they cannot reduce the reserve to the extent of its capitalisation and if they compute the reserve as it was on the first day of the previous year, the proportionate increase has to be made in the share capital leading to a benefit which according to the revenue leads to a double benefit but on their interpretation of the letter of the law, held that this double benefit cannot be denied to the asscssec. But a careful reading of the rule with which we arc concerned and the rule with which the lordships of the Himachal Pradesh High court were concerned, discloses that there is substantial difference. What is contemplated under the rule with which we arc concerned is only computation of the capital which results in increase or decrease on account of increase in the paid-up share capital or on certain other circumstances mentioned in the rule. What is contemplated under the rule with which we arc concerned is only computation of the capital which results in increase or decrease on account of increase in the paid-up share capital or on certain other circumstances mentioned in the rule. While in the rule cited in the decision referred to above, merely refers to increase in 'paid-up share capital' whereas in the Rule with which we arc concerned refers to increase in 'capital of a Company' as allowable with the foregoing Rules of the schedule is increased by any amount. Thus there is substantial difference between the language employed in the rule cited in the decision and the rule before us. In CIT v Geoffrey Manneis ltd. , 112 ITR 344, the Bombay High Court merely followed the decision in 95 ITR 586. Therefore, neither of the decisions relied on by the asscssee can have any bearing or relevance for the purpose of interpretation of the Rule on hand. In the circumstances, we have got to answer question No. 1 referred to for our opinion in the affirmative and against the assessce. ( 6 ) THE second question can be answered without much difficulty inasmuch as, it has been covered by a direct authority concluded in the case of M/s. Stumpp Schuele and Somappa (106 itr 339 ). Following the said decision for the reasons stated above, we answer the second question referred for our opinion in the affirmative and against the Revenue. --- *** --- .