Profit and loss account balances are not automatic reserves for surtax capital computation under the statutory scheme.

A credit balance in the profit and loss account is not automatically a reserve for capital computation under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 merely because it represents undistributed profits or may be available for working capital or dividend distribution. Amounts retained to meet a known liability do not constitute reserve, and the statutory scheme excludes surplus and unallocated profit and loss balances from reserves for surtax purposes. The balance therefore could not be treated as reserve, and the issue was decided in favour of the Revenue.

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Issues: Whether the credit balance in the profit and loss account can be included as reserve for the purpose of rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The balance in the profit and loss account was held not to be automatically treated as reserve merely because it represented undistributed profits or was available for use as working capital or dividend distribution. The governing principle applied was that amounts retained to meet a known liability are not reserve, and the statutory scheme under the Surtax Act specifically excludes surplus and unallocated balance in the profit and loss account from reserves for computation of capital.

Conclusion: The credit balance in the profit and loss account cannot be treated as reserve for the purpose of rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The answer was therefore in favour of the Revenue and against the assessee.

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