Advance Tax Payments are statutory tax liabilities, not company reserves, and must be excluded from capital for abatement.

Advance payments under section 18A are statutory payments on account of a present tax liability and not voluntary allocations of surplus profits; consequently they do not constitute a company reserve for purposes of rule 2(1) of Schedule II and are excluded from capital for abatement computation. The court applied the principle that reserves must be funds set aside out of profits and be existing and available on the first day of the chargeable accounting period, noting statutory interest, penalty and recall limitations and possible absence of profits at the time of payment; accounting assimilation on finalisation does not alter their intrinsic character as tax payments.

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Issues: (i) Whether advance payments of tax under section 18A of the Income-tax Act constitute a reserve of the company within the meaning of rule 2(1) of Schedule II of the Business Profits Tax Act for inclusion in capital for abatement computation.

Analysis: The question requires examination of (a) the nature of a reserve as a fund set aside out of profits for future contingencies; (b) the statutory scheme of section 18A which mandates periodic advance payments, provides for provisional and final assessment, and imposes interest and penalty consequences for underpayment or false statements; and (c) the accounting treatment and timing relevant to capital computation under section 2(1)(a) and rule 2(1) of Schedule II, where only reserves existing and available on the first day of the chargeable accounting period form part of capital. Payments under section 18A are compulsory payments on account of a present statutory liability, not voluntary allocations of surplus profits. The statutory provisions permit interest and penalties against the assessee and limit any government interest; advance payments are not freely recallable or available for company application and may be made when no profits exist to create a reserve. Accounting entries that later assimilate advance payments into a taxation reserve on final adjustment do not change the intrinsic nature of the advance payments as payments on account of tax liabilities rather than reserves created out of profits.

Conclusion: Issue (i) is answered in the negative for the assessee and in favour of the revenue - advance payments under section 18A are not company reserves within rule 2(1) of Schedule II and are not to be treated as part of capital for abatement computation.

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