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Issues: Whether the sum of Rs. 26,342 shown as provision for contingencies was to be treated as a reserve for the purpose of computation of capital under the Companies (Profits) Surtax Act, 1964.
Analysis: The amount was set apart for unknown contingencies and no contingent or ascertained liability existed against which it could be adjusted. The mere description of the item as a provision did not conclude the matter, because its true character had to be determined from the substance of the appropriation. An amount that remained available to the company during the accounting year and was not required to meet any liability could be treated as a reserve, even if it appeared under the heading of current liabilities and provisions. The statutory explanation only clarifies the legal position and does not exclude inquiry into the real nature of the item.
Conclusion: The amount of Rs. 26,342 was correctly treated as a reserve and was includible in the capital computation; the question was answered in the affirmative and in favour of the assessee.
Ratio Decidendi: For surtax capital computation, the true nature of an appropriation prevails over its balance-sheet label, and an amount set apart for unknown or unascertained liabilities, with no existing liability to absorb it, is a reserve rather than a provision.
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