Plant replacement reserve treated as capital for surtax because it covered a contingent future need, not an accrued liability.

A plant replacement fund credited through the profit and loss appropriation account and later transferred to general reserve was held to be a reserve, not a provision, because it was not earmarked for any specific machinery and no accrued liability for replacement had yet arisen. Applying the distinction between a contingent future contingency and an existing liability, the court treated the amount as part of capital for surtax computation. The question was answered in favour of the assessee and against the Department.

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Issues: Whether the amount standing to the plant replacement reserve was a reserve includible in capital for levy of surtax, or a provision created for a specific liability and therefore excludible.

Analysis: The amount was created in the profit and loss appropriation account and later transferred to general reserve. It was not earmarked for acquisition of any specific machinery, nor had any liability already accrued in respect of replacement of plant. Applying the distinction between provision and reserve, a sum set apart only for a future contingency is a reserve, while a sum created to meet an existing liability is a provision. On the facts found, the fund was created for a contingency and not for a presently accrued liability.

Conclusion: The plant replacement reserve was a reserve and had to be taken into account as capital for surtax purposes. The question was answered in favour of the assessee and against the Department.

Ratio Decidendi: A fund set apart for a contingent future replacement, without an existing accrued liability or earmarking for a specific asset, is a reserve and not a provision for purposes of capital computation under the surtax law.

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