Surtax capital base must reflect only crystallised liabilities; excess tax provision and uncrystallised contingency amounts remain reserves.

For surtax capital-base computation, amounts set apart as retirement gratuity were treated as provisions when created, and later transfer to general reserve did not alter that character; only the excess over actuarial liability could be treated as reserve. Rule 4 of the Second Schedule could not be used to proportionately reduce capital base merely because deductions were allowed under sections 80-I and 80L. Excess provision for taxation was deductible only to the extent of actual liability, while provision for contingencies relating to uncrystallised employee claims retained the character of reserve and was not deductible. The capital base was therefore to be computed by excluding only crystallised liabilities.

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Issues: (i) Whether the amount credited to retirement gratuity reserve and later transferred to general reserve was deductible in computing the company's capital base under the Companies (Profits) Surtax Act, 1964; (ii) whether rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 could be invoked to proportionately diminish the capital base on account of deductions allowed under sections 80-I and 80L of the Income-tax Act, 1961; (iii) whether provision for taxation in excess of actual tax liability and provision for contingencies were liable to be deducted while computing capital base.

Issue (i): Whether the amount credited to retirement gratuity reserve and later transferred to general reserve was deductible in computing the company's capital base under the Companies (Profits) Surtax Act, 1964.

Analysis: Amounts set apart as retirement gratuity were treated as a provision in the year of creation, and the later transfer to general reserve did not change that character. Only the portion found in excess of the liability on actuarial valuation as on the relevant date could be regarded as a reserve. That excess alone was not deductible from the capital base.

Conclusion: The question was answered in the negative and in favour of the Revenue, except to the extent of the excess over actuarial liability, which could be treated as reserve.

Issue (ii): Whether rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 could be invoked to proportionately diminish the capital base on account of deductions allowed under sections 80-I and 80L of the Income-tax Act, 1961.

Analysis: The issue was governed by the binding Supreme Court decision holding that such proportional reduction of capital base was not permissible on that footing.

Conclusion: The question was answered in the affirmative and in favour of the assessee.

Issue (iii): Whether provision for taxation in excess of actual tax liability and provision for contingencies were liable to be deducted while computing capital base.

Analysis: Excess provision for taxation was governed by the principle that only the amount corresponding to the actual liability could be treated as a deduction, while the balance retained the character of reserve. The provision for contingencies related to disputed employee claims that had neither been accepted nor crystallised into a liability on the relevant date, and therefore it was also in the nature of reserve.

Conclusion: Both parts were answered in the affirmative and in favour of the assessee.

Final Conclusion: The reference was disposed of by answering one issue substantially in favour of the Revenue and the remaining issues in favour of the assessee, with the capital base under the surtax provisions to be computed accordingly.

Ratio Decidendi: For surtax computation, only crystallised liabilities reduce capital base; amounts set apart as provisions or reserves remain deductible only when they represent actual liabilities, and excess or uncrystallised amounts retain the character of reserve.

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