Reserve versus provision test determines whether forfeited dividend counts as capital under surtax law.

Forfeited dividend, having been specifically segregated from the mass of profits and carried under a distinct head, was treated as a reserve rather than a provision. Because it was not set apart against any known, existing, general, specific, or contingent liability in the relevant accounting year, its character depended on the real purpose of the appropriation and the surrounding circumstances. The fact that its ultimate use had not yet been fixed did not make it a provision for liability. It was therefore includible in the computation of capital under the Companies (Profits) Surtax Act, 1964, and the issue was answered in favour of the assessee.

---

---

Issues: Whether the amount shown as forfeited dividend constituted a reserve and was includible in the computation of capital under the Companies (Profits) Surtax Act, 1964.

Analysis: The amount had been specifically segregated from the mass of profits and carried under a distinct head. It was not set apart against any known, existing, general, specific, or contingent liability in the relevant accounting year. The distinction between a reserve and a provision turns on the real character of the appropriation, judged by its purpose and surrounding circumstances. On that footing, the amount could not be treated as a provision for liability merely because its ultimate use had not yet been fixed.

Conclusion: The forfeited dividend was a reserve and was includible in the computation of the assessee's capital. The question was answered in favour of the assessee and against the Revenue.

---