Capital computation principles: excess tax provision counts as reserve, and general reserve is reduced by prior-year dividend.

For capital computation, excess provision for taxation over actual tax liability is treated as a reserve and included in capital, while the general reserve balance must be taken as it stands on the first day of the accounting year after reducing for dividend declared in the relevant previous year. The Bombay High Court applied its earlier rulings on the first point and followed Supreme Court authority on the second, confirming that reserve computation depends on the legal character of the amounts and the accounting position at the relevant date.

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Issues: (i) Whether excess provision for taxation over actual tax liability was to be treated as a reserve and included in capital computation; (ii) whether the entire balance in the general reserve account on the first day of the accounting year was to be included in capital computation without reducing the dividend declared in the relevant previous year.

Issue (i): Whether excess provision for taxation over actual tax liability was to be treated as a reserve and included in capital computation.

Analysis: The issue was governed by the court's earlier decisions, which had treated such excess provision as a reserve for the purpose of capital computation. The referred question was answered consistently with that settled position.

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

Issue (ii): Whether the entire balance in the general reserve account on the first day of the accounting year was to be included in capital computation without reducing the dividend declared in the relevant previous year.

Analysis: The issue was covered by the Supreme Court's ruling that the balance in the general reserve had to be taken as standing on the first day of the accounting year after accounting for the dividend declared in the relevant previous year. The referred question was answered accordingly.

Conclusion: The second question was answered in the negative and in favour of the Revenue.

Final Conclusion: The reference was disposed of by answering one question for the assessee and the other for the Revenue, with no order as to costs.

Ratio Decidendi: For capital computation, excess provision for taxation over actual liability is a reserve, while the general reserve must be considered on the first day of the accounting year after giving effect to the dividend declared in the relevant previous year.

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