Reserve versus provision in surtax capital computation: contingency reserve and excess depreciation were treated as includible reserves.

For surtax capital computation, the substance of an appropriation determines whether it is a reserve or a provision. Amounts set apart for a reasonably anticipated future contingency, and not earmarked for any known liability, may be treated as reserves and included in capital. On the facts, the development and contingency reserve was held to have the character of a general reserve. Excess depreciation separately reflected in the accounts was also treated as a reserve, not a secret reserve or revaluation item, because no asset revaluation was shown and the entry was not tied to a known liability.

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Issues: (i) Whether the development and contingency reserve of Rs. 1 lakh was includible in the capital computation for surtax purposes; (ii) Whether the difference between the written down value as per income-tax records and the books of account, representing excess depreciation, was to be treated as a reserve for capital computation under the surtax law.

Issue (i): Whether the development and contingency reserve of Rs. 1 lakh was includible in the capital computation for surtax purposes.

Analysis: The distinction between a provision and a reserve was applied on the basis of the true nature of the appropriation and its purpose. An appropriation made to meet a reasonably anticipated future contingency is a reserve, while an amount set apart for a known existing liability is a provision. On the facts, the amount shown as development and contingency reserve bore the same character as the admitted general reserve and was not shown to be earmarked against any specific liability.

Conclusion: The amount of Rs. 1 lakh was a reserve and was includible in the capital computation, in favour of the assessee and against the Revenue.

Issue (ii): Whether the difference between the written down value as per income-tax records and the books of account, representing excess depreciation, was to be treated as a reserve for capital computation under the surtax law.

Analysis: The excess depreciation shown in the books was treated as an excess provision for depreciation and not as a mere secret reserve. The decisive consideration was that the assessee had depreciated the assets at a higher figure than that allowed for tax purposes, and the amount was separately reflected in the balance-sheet. The alleged revaluation objection was rejected because the facts disclosed no revaluation of assets. The earlier decision involving the assessee was distinguished on its factual basis.

Conclusion: The excess depreciation amount was a reserve and was includible in the capital computation, in favour of the assessee and against the Revenue.

Final Conclusion: Both reference questions were answered in favour of the assessee, and the Revenue's objections to inclusion of the disputed amounts in the capital computation failed.

Ratio Decidendi: For surtax capital computation, the true character of an appropriation or excess depreciation entry must be determined by its substance and purpose; an amount appropriated for a future contingency or an excess depreciation provision separately reflected in the accounts can be treated as a reserve unless it is shown to be a provision for a known liability or a revaluation item.

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