Surtax reserve computation: only excess over ascertained liabilities counts as reserve, including dividend-related appropriations.

For surtax computation under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, a sum credited as reserve is not automatically includible in capital in full. Retirement gratuity and taxation reserves were includible only to the extent they exceeded the corresponding ascertained liabilities, with gratuity liability determined on actuarial valuation and tax liability by actual tax due. Dividend-related appropriation was also includible only to the extent it went beyond the dividend actually proposed and declared, because the portion committed for dividend could not be treated as reserve.

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Issues: Whether the retirement gratuity reserve, the dividend reserve and the taxation reserve were includible in capital as reserves under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The reference was answered by applying the principle that a sum shown as reserve is not necessarily a reserve for surtax purposes in its entirety. For retirement gratuity and taxation, only the amount in excess of the corresponding liability could be regarded as reserve, the liability in the former case being determined on actuarial valuation and in the latter by actual tax liability. As to dividend, no reserve created out of the relevant year's profits could be treated as such merely because dividend was later proposed or declared. The amount transferred for dividend purposes was therefore relevant only to the extent it exceeded the dividend actually proposed and declared.

Conclusion: The retirement gratuity reserve and taxation reserve were includible only to the extent they exceeded the assessee's liabilities, and the dividend reserve was includible only to the extent it exceeded the amount of dividend proposed and actually declared.

Final Conclusion: The reference was answered by restricting inclusion in capital to the excess portions of the stated amounts, with no costs order.

Ratio Decidendi: For surtax computation, only the excess of a reserve over the corresponding ascertained liability can be treated as reserve, and a dividend-related appropriation is not a reserve to the extent it represents an amount actually committed for dividend.

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