Profit and loss surplus and tax provision are not reserves unless clearly earmarked or shown to exceed scientific liability estimates.

A surplus standing to the credit of the profit and loss account is not a reserve unless it is clearly separated from profits and earmarked for a specific future purpose by competent authority; on that basis, the surplus was excluded from capital computation under the Super Profits Tax Act, 1963. A provision for taxation is not a reserve because it represents a known liability, and only a demonstrable excess over a scientifically estimated liability can be treated as such; since no such excess was established, the tax provision was also excluded. Both points were decided against the assessee.

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Issues: (i) Whether the surplus of Rs. 25,81,671 in the profit and loss account was includible in the capital computation as a reserve under the Super Profits Tax Act, 1963. (ii) Whether the provision for taxation of Rs. 52,68,486, or any part of it as alleged excess provision, was includible in the capital computation as a reserve under the Super Profits Tax Act, 1963.

Issue (i): Whether the surplus of Rs. 25,81,671 in the profit and loss account was includible in the capital computation as a reserve under the Super Profits Tax Act, 1963.

Analysis: A mere surplus standing to the credit of the profit and loss account does not automatically become a reserve. To qualify as a reserve, the amount must be clearly separated from the general mass of profits by the requisite authority and shown by the surrounding circumstances to have been set apart for a specific future purpose. Here, the amount was shown under reserves and surpluses, but it was not made part of the general reserves and was not earmarked for any specific use.

Conclusion: The amount of Rs. 25,81,671 was not includible in the capital computation and the finding was against the assessee.

Issue (ii): Whether the provision for taxation of Rs. 52,68,486, or any part of it as alleged excess provision, was includible in the capital computation as a reserve under the Super Profits Tax Act, 1963.

Analysis: A provision for a known and existing liability is not a reserve. Only an excess, if a provision has been made on an ad hoc basis when the liability could have been fairly estimated on a scientific basis, may be treated as a reserve. On the record, it had not been determined that the taxation provision was ad hoc, that it exceeded the crystallised liability by Rs. 24,17,116, or that the provision lacked a scientific basis. The liability for tax remained a provision and did not become a reserve merely because final assessments quantified it later.

Conclusion: No part of the sum of Rs. 52,68,486 was includible in the capital computation and the finding was against the assessee.

Final Conclusion: Both referred questions were answered against the assessee and the capital computation excluded both amounts from the reserve base under the statutory scheme.

Ratio Decidendi: An amount in the profit and loss account is not a reserve unless it is clearly earmarked as such by competent authority for a specific future purpose, and a provision for taxation remains a provision for a known liability unless a demonstrable excess over a scientifically estimated liability is established.

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