Contingency reserve treated as capital reserve where it covered general future contingencies, not a known liability.

A contingency reserve created under the Electricity (Supply) Act, 1948 for general future contingencies was held to be a reserve, not a provision, because it was not earmarked for any known liability or specific existing expenditure. Applying the distinction between a reserve and a provision, the court treated the amount as available for general contingencies permitted by the Sixth Schedule and therefore includible in capital computation under the Second Schedule to the Companies (Profits) Surtax Act, 1964. The assessee succeeded on that issue.

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Issues: Whether the reserve for contingencies of Rs. 2,26,610 was includible as reserve in the computation of capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The contingency reserve was created under the statutory scheme of the Electricity (Supply) Act, 1948 and was meant to meet general contingencies permitted by the Sixth Schedule. Applying the distinction between provision and reserve, a sum earmarked and set apart for future contingencies not known to exist when the reserve was created is not a provision for a known liability. The material showed that the reserve was not created for any specific or existing liability and was intended to be available for contingencies of a general nature.

Conclusion: The reserve for contingencies of Rs. 2,26,610 was rightly treated as a reserve and taken into account in computing capital. The answer is in favour of the assessee.

Ratio Decidendi: A statutory contingencies fund earmarked for general future contingencies, and not for a known liability or specific expenditure, is to be treated as a reserve and included in capital computation, whereas an appropriation for a known liability is a provision.

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