Dividend reserve exclusion and limited gratuity reserve treatment govern capital computation under the Surtax Act.

For capital computation under the Surtax Act, a dividend reserve in respect of ordinary shares does not qualify as a reserve and is excluded from capital computation. A gratuity reserve is not wholly includible either; only the excess, if any, over the assessee's known or determinate liability in respect of gratuity can be treated as a reserve. The subject therefore turns on whether the amount set aside represents a true reserve or merely a provision for an ascertained liability, with dividend reserves excluded and gratuity reserves allowed only to the extent of any surplus over the established liability.

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Issues: (i) Whether the dividend reserve qua ordinary shares was a reserve for the purpose of capital computation under the Surtax Act, 1964. (ii) Whether the gratuity reserve was a reserve for the purpose of capital computation under the Surtax Act, 1964.

Issue (i): Whether the dividend reserve qua ordinary shares was a reserve for the purpose of capital computation under the Surtax Act, 1964.

Analysis: The answer to this issue was governed by the Supreme Court's decision in Vazir Sultan Tobacco Co. Ltd. v. CIT, and the parties agreed that the dividend reserve did not qualify as a reserve for capital computation.

Conclusion: The dividend reserve qua ordinary shares was not a reserve for the purpose of capital computation and the issue was answered against the assessee and in favour of the Revenue.

Issue (ii): Whether the gratuity reserve was a reserve for the purpose of capital computation under the Surtax Act, 1964.

Analysis: The answer to this issue was governed by the decision in Goodlass Nerolac Paints Ltd. v. CIT, under which only the excess, if any, over the known or determinate liability in respect of gratuity could be treated as a reserve for capital computation.

Conclusion: The gratuity reserve was not wholly includible as a reserve for capital computation and only the excess over the known or determinate liability, if any, could be so treated; the issue was answered in part in favour of the assessee.

Final Conclusion: The reference was answered by excluding the dividend reserve from capital computation while permitting only the excess portion, if any, of the gratuity reserve over the known or determinate liability to be treated as reserve.

Ratio Decidendi: For capital computation under the Surtax Act, amounts set apart as dividend reserve do not qualify as reserve, and gratuity provisions qualify only to the extent they exceed the assessee's known or determinate liability.

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