Reserve reclassification does not alter surtax capital base; actuarial excess alone is treated as reserve.

Retiring gratuity transferred from a reserve head to general reserve does not lose its character for surtax capital computation; the real nature of the amount, not its later label, governs, and only any excess over actuarial liability is treated as reserve. Rule 4 of the Second Schedule was also held applicable in the assessee's favour for the capital base computation linked to the deduction claim, so the reduction could not be made in the manner proposed against the assessee. The governing principle is that reserve treatment depends on substantive accounting and liability position, not mere reclassification.

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Issues: (i) Whether the amount of retiring gratuity transferred to the general reserve could be excluded from the capital base for surtax computation. (ii) Whether rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, could be invoked while computing capital base in respect of deduction under section 80-I of the Income-tax Act, 1961.

Issue (i): Whether the amount of retiring gratuity transferred to the general reserve could be excluded from the capital base for surtax computation.

Analysis: The amount had earlier stood in the books as a retiring gratuity reserve and was later transferred to the general reserve. In tax matters, the decisive factor is the real character of what has been done, not the form in which the amount is later described. A mere transfer from one reserve head to another does not alter the character of the amount for capital computation. The prior existence of the reserve and its transfer could not prevent the amount from being considered in determining the capital base, subject to adjustment for any excess over the assessee's liability as shown by actuarial valuation.

Conclusion: The question was answered in the negative and in favour of the Revenue, with a direction that only the excess, if any, over the liability on actuarial valuation be treated as reserve.

Issue (ii): Whether rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, could be invoked while computing capital base in respect of deduction under section 80-I of the Income-tax Act, 1961.

Analysis: The issue was covered by the Supreme Court decision relied on by both sides. On that basis, the claimed reduction could not be sustained and the computation had to be made without invoking rule 4 in the manner suggested against the assessee.

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

Final Conclusion: The reference was disposed of by answering one question for the Revenue and the other for the assessee, with the capital computation to be adjusted only to the extent of any actuarial excess in the gratuity reserve.

Ratio Decidendi: For surtax capital computation, the substantive character of a reserve or provision is determined by its real treatment in the accounts and related liability position, and a mere transfer from one reserve head to another does not by itself change that character.

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