Advance tax payments are not a reserve for capital computation under the Business Profits Tax framework.

Advance tax payments under section 18A of the Income-tax Act, 1922 were not a "reserve" for inclusion in capital under rule 2(1) of Schedule II of the Business Profits Tax Act. The court reasoned that a reserve is a sum voluntarily set apart out of profits for future use or contingency, whereas these payments were statutory instalments made towards an existing tax liability and were subject to interest and penalty provisions. They were not retained as the assessee's free property and were not necessarily paid out of profits. As the sums had already gone out of the company's control before the relevant accounting date, they could not form part of capital.

---

---

Issues: Whether advance payments of tax made under section 18A of the Income-tax Act, 1922 could be treated as a reserve of the assessee for inclusion in capital under rule 2(1) of Schedule II of the Business Profits Tax Act.

Analysis: A reserve, in company law, is something set apart out of profits for future use or contingency. Payments under section 18A were not voluntary appropriations out of profits, but statutory payments made towards an existing tax liability. They were subject to interest and penalty provisions, which showed that they were not investments or sums retained as the assessee's free property. The payments were also not necessarily made out of profits, since tax instalments might be paid even before profits existed. On the special facts, the sums paid in advance had already gone out of the company's control before the relevant accounting date and could not be regarded as lying as part of capital on that date.

Conclusion: Advance payments of tax under section 18A were not a reserve of the assessee within rule 2(1) of Schedule II, and the question was answered in the affirmative, against the assessee and in favour of the Revenue.

---