Reserve classification for surtax capital computation turned on earmarked future use, not the reserve-provision label.

For surtax capital computation under the Second Schedule to the Companies (Profits) Surtax Act, 1964, amounts set apart for engine inspection, warranty and technical fees were held to be reserves, not provisions or current liabilities, because the decisive test was their true character as sums earmarked for a specific future purpose. The company-law distinction between reserve and provision was not controlling for rule 1 of the Second Schedule. On that basis, the amounts were excluded from current liabilities and the issue was decided in favour of the assessee. The reference was otherwise answered against the Revenue on the dividend depletion issue, producing a mixed overall result.

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Issues: Whether amounts set apart for engine inspection and warranty and technical fees constituted a reserve rather than a provision or current liability for inclusion in the computation of capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The amounts were shown in the books as provisions, but the decisive question was their true character for surtax purposes. The distinction between reserve and provision in company law was held not to be controlling for rule 1 of the Second Schedule. Applying the governing test, a sum specifically set apart for future use or a specific occasion, if it answers the character of a specific amount earmarked for a specific purpose, falls within reserve. On the facts, the amounts set apart for these contingencies were treated as reserves and not as current liabilities.

Conclusion: The amounts were reserves and were correctly excluded from current liabilities for the purpose of capital computation under the surtax schedule; this issue was decided in favour of the assessee.

Final Conclusion: The reference was answered against the Revenue on the reserve issue and in favour of the Revenue on the dividend depletion issue, resulting in a mixed outcome overall.

Ratio Decidendi: For surtax computation, the true character of an amount depends on whether it is specifically set apart for future use or a specific occasion, and the company-law distinction between reserve and provision is not determinative.

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