Capital base computation: proposed dividend is not a reserve, while excess tax provision and book depreciation excess may qualify.

For capital computation under the Super Profits Tax Act, amounts set aside for a known liability or proposed distribution are provisions, not reserves. A proposed dividend is an appropriation for payment and cannot be included in the capital base as a reserve. Provision for taxation is excluded to the extent it matches the existing tax liability, though any excess provision beyond the amount reasonably required may be treated as a reserve. Excess book depreciation over depreciation allowable under the Income-tax Act is likewise an amount retained out of profits and is includible as a reserve in the capital base.

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Issues: (i) Whether provision for taxation and proposed dividend could be treated as reserves for inclusion in the capital base under the Super Profits Tax Act, 1963; (ii) Whether excess book depreciation over depreciation allowable under the Income-tax Act could be treated as a reserve for inclusion in the capital base.

Issue (i): Whether provision for taxation and proposed dividend could be treated as reserves for inclusion in the capital base under the Super Profits Tax Act, 1963.

Analysis: The capital of a company under the Second Schedule to the Super Profits Tax Act, 1963 includes its reserves. The distinction between a provision and a reserve is governed by the commercial meaning adopted in the Companies Act, 1956. A sum set apart to meet a known and existing liability is a provision, while a reserve is an appropriation of profits retained as part of the capital employed. An amount set apart for a proposed dividend is an appropriation for distribution and cannot be treated as a reserve. Provision for taxation, to the extent it represents an existing tax liability, is likewise a provision and not a reserve. Only any excess provision beyond the liability reasonably required may be treated as a reserve.

Conclusion: Proposed dividend is not includible in the capital base. Provision for taxation is not includible to the extent of the existing liability, but any excess taxation provision is includible as a reserve.

Issue (ii): Whether excess book depreciation over depreciation allowable under the Income-tax Act could be treated as a reserve for inclusion in the capital base.

Analysis: Under the Companies Act, 1956, depreciation written off or retained is treated as a provision, but any excess amount over what is reasonably necessary is treated as a reserve. Where a company has charged higher depreciation in its books than the amount allowable under the Income-tax Act, the excess remains available to the company and is not a charge against an existing liability. Such excess depreciation, when reflected in the accounts, represents an amount retained out of profits and falls within the concept of reserve for the purposes of computing capital under the Super Profits Tax Act, 1963.

Conclusion: Excess book depreciation over the depreciation allowable under the Income-tax Act is includible in the capital base as a reserve.

Final Conclusion: The reference is answered by holding that proposed dividend does not qualify as a reserve, taxation provision qualifies only to the extent of any excess over the existing liability, and excess depreciation charged in the books is to be treated as a reserve for capital computation under the Super Profits Tax Act, 1963.

Ratio Decidendi: For capital computation under the Super Profits Tax Act, an item is a reserve only if it is not a provision for a known liability or proposed distribution, and any excess of a provision over the amount reasonably required may be treated as a reserve.

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