Reserve classification for dividend, bonus, taxation and gratuity provisions turns on actual liability and excess amounts.

Provisions for proposed dividend and bonus in the nature of dividend are not reserves for capital computation under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963. Only the portion of a provision for taxation or gratuity that exceeds the actual liability can take the character of a reserve, so the correct capital computation depends on a factual finding of any such excess. On the record described, the dividend and bonus provision was treated as outside reserve, while the taxation and gratuity items required re-examination to determine the extent, if any, of includible reserve.

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Issues: (i) Whether the provision for proposed dividend and bonus in the nature of dividend could be treated as reserves within rule 1 of the Second Schedule to the Super Profits Tax Act, 1963; (ii) Whether the provision for taxation and gratuity could be treated as reserves to the extent of any excess over the actual liabilities under those heads.

Issue (i): Whether the provision for proposed dividend and bonus in the nature of dividend could be treated as reserves within rule 1 of the Second Schedule to the Super Profits Tax Act, 1963.

Analysis: In light of the binding Supreme Court decision relied upon by the parties, provisions made for dividend and bonus were not regarded as reserves for the purpose of capital computation under the Second Schedule.

Conclusion: The issue was answered in the negative and against the assessee.

Issue (ii): Whether the provision for taxation and gratuity could be treated as reserves to the extent of any excess over the actual liabilities under those heads.

Analysis: Only the portion of a provision that exceeds the actual liability can assume the character of a reserve. As the record did not show whether, or to what extent, the amounts provided for taxation and gratuity exceeded the actual liabilities, a factual determination was necessary before the correct capital computation could be made.

Conclusion: The matter was sent back for determination of the excess, if any, and only such excess was to be treated as reserve.

Final Conclusion: The answer was partly adverse to the assessee on dividend and bonus, while the issues relating to taxation and gratuity required factual re-examination for capital computation.

Ratio Decidendi: A provision is not a reserve unless it represents an amount in excess of the actual liability; provisions for dividend and bonus are not reserves, and only any excess provision for taxation or gratuity can be included as reserve for capital computation.

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