Excess-liability test for reserves governs capital computation: only the portion above actual liability can be included.

Provision for taxation and gratuity reserve are not treated as reserves in full for capital computation under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963; only the excess, if any, over the actual liability can qualify as reserve. The Bombay HC applied the excess-liability test and held that the available record did not permit ascertainment of the actual liabilities. The matter was therefore remitted to the Tribunal to determine whether either item exceeded the corresponding liability and, if so, to include only that excess in the capital base.

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Issues: Whether the sums shown as gratuity reserve and provision for taxation were includible in the assessee's capital computation under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, and whether only the excess over the actual liabilities could be treated as reserves.

Analysis: The governing principle, as applied from the Supreme Court decision relied upon, is that provision for taxation or gratuity reserve cannot be treated as reserve in full; only the excess, if any, over the actual liability is capable of being regarded as a reserve for capital computation. Since the material necessary to ascertain the actual liabilities was not available on record, the matter required further determination by the Tribunal.

Conclusion: The Tribunal was directed to determine the excess, if any, of both items over the corresponding liabilities and to include only such excess, if found, as reserves in the capital computation.

Final Conclusion: The question was answered by applying the excess-liability test, and the matter was sent back for factual determination so that only the excess portion, if any, would enter the capital base.

Ratio Decidendi: For capital computation, a provision is treated as reserve only to the extent that it exceeds the actual liability.

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