Contingent tax liabilities cannot reduce surtax capital base when they are not treated as ascertained debts.

Disputed central excise duty and sales tax liabilities shown only as contingent liabilities, and not acknowledged as debts or claimed as deductions in the accounts or income-tax assessment, were held not to be ascertained liabilities for capital computation under the Companies (Profits) Surtax Act, 1964. Applying Rule 1A of the Second Schedule, the court held that amounts not properly creditable as provision for taxation or otherwise not reasonably required to be credited could not reduce the capital base on the footing of an existing liability. The question was answered in favour of the assessee, and the liabilities were not deductible while computing capital base.

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Issues: Whether disputed central excise duty and sales tax liabilities, treated by the assessee as contingent liabilities and not provided for in the accounts, were liable to be deducted while computing the capital base under the Companies (Profits) Surtax Act, 1964.

Analysis: Rule 1A of the Second Schedule to the Companies (Profits) Surtax Act, 1964 requires reduction of capital where the company has failed to credit amounts which are in the nature of provision for taxation or proposed dividend, or where the credited amount is short of what should reasonably have been credited. The disputed excise duty and sales tax demands were shown in the balance-sheet as contingent liabilities not acknowledged as debt. They had not been claimed as deductions in the profit and loss account or in the income-tax assessment, and the company had consistently treated them as liabilities contingent upon the outcome of the disputes. On these facts, the amounts could not be regarded as ascertained liabilities for the purpose of capital computation under the surtax provisions.

Conclusion: The disputed central excise duty and sales tax liabilities were not deductible while computing the capital base, and the question was answered in favour of the assessee.

Ratio Decidendi: A disputed liability that is consistently treated as contingent, not acknowledged as debt, and not claimed as a deduction in the accounts or assessment cannot be treated as an ascertained liability for computing capital base under the surtax provisions.

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