Reserve for surtax capital base depends on true character of post-tax profit appropriation, not mere provision.

For surtax computation, an amount set apart out of post-tax profits is a reserve if its true character is an appropriation of profits retained for future business use, rather than a mere provision. Applying that test, the excess depreciation provision was treated as a reserve because it was created over and above allowable depreciation, had been used earlier for replacing machinery, and did not fall within the excluded Schedule VI categories under the Explanation to Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. It was therefore includible in the capital base as an other reserve.

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Issues: Whether the excess provision made for depreciation, over and above the depreciation allowable under the Income-tax Act, constituted a reserve forming part of the capital base for surtax purposes under Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The governing test is whether the amount was truly appropriated as a reserve, as distinct from a provision, having regard to its true nature, character, and the surrounding circumstances. An amount kept back for future use or enjoyment, including a secret reserve created out of profits after tax and intended for future business purposes, answers the description of a reserve. The amount in question was set apart from profits after tax, over and above the depreciation allowable under the Income-tax Act, and the evidence showed that similar reserves had been used earlier for replacing machinery. The Explanation to Rule 1 excluded only amounts of the specified kinds under Schedule VI to the Companies Act, 1956, and the amount here did not fall within those excluded categories.

Conclusion: The excess depreciation provision was a reserve and formed part of the capital base for surtax computation.

Final Conclusion: The reference was answered in favour of the assessee, holding that the disputed amount was includible in the capital base as an other reserve.

Ratio Decidendi: For surtax computation, an amount appropriated out of post-tax profits and retained for future business use is a reserve if its true character is that of an appropriation of profits, and not a mere provision or an excluded balance-sheet item.

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