Known liability treated as provision, not reserve, so it cannot be included in capital for surtax computation.

An amount retained to meet a known liability payable to a retrocessionaire, including accrued interest, is not a reserve for computing capital under the Companies (Profits) Surtax Act, 1964. The court applied the distinction between reserve and provision in company law and accountancy, and held that sums set apart for an existing liability fall outside the capital base under the Second Schedule, which also excludes current liabilities and provisions reflected in the balance-sheet. The referred question was answered in the negative, in favour of the Revenue and against the assessee.

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Issues: Whether the reserve shown as amount held on account of retrocessions ceded by the company could be treated as part of the assessee-company's capital or reserve for computation of capital under the Companies (Profits) Surtax Act, 1964.

Analysis: The amount in question represented a liability payable to the retrocessionaire and interest was payable on it. An amount set apart to meet a known liability cannot be treated as a reserve. The statutory scheme for computation of capital under the Second Schedule excludes reserves which have been allowed as deductions in computing income and, by the Explanation, also excludes amounts of the nature of current liabilities and provisions shown in the balance-sheet. The distinction between reserve and provision, as understood in company law and accountancy, shows that a sum retained for a known liability falls outside the concept of reserve for surtax capital computation.

Conclusion: The amount was not includible in the capital base as a reserve. The answer to the referred question was in the negative, in favour of the Revenue and against the assessee.

Ratio Decidendi: An amount retained to meet a known liability is not a reserve for the purpose of computing capital under the Companies (Profits) Surtax Act, 1964.

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