Reserve for tax contingency treated as capital, while the disputed receipt remained part of chargeable profits.
Amounts shown in a reserve for tax contingency were held includible in capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964 because they were separately maintained as reserve, not used for tax payment, and later transferred to general reserve; alternatively, any excess over the amount reasonably required for tax liability had to be treated as reserve and counted in capital. The sum of Rs. 9,16,285 was not excluded from chargeable profits for the relevant year, the point being governed by earlier Division Bench authority. The reference was answered accordingly, in favour of the assessee on the capital issue and against it on the profits issue.
Issues: (i) Whether the amounts standing in the reserve for tax contingency account were includible in the computation of capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964 for the relevant assessment years; (ii) Whether the sum of Rs. 9,16,285 was to be excluded from the chargeable profits for the assessment year 1966-67.
Issue (i): Whether the amounts standing in the reserve for tax contingency account were includible in the computation of capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964 for the relevant assessment years.
Analysis: The amounts were separately shown as reserve for tax contingency, were not utilised for payment of tax, and were later transferred to general reserve. On those facts they had the character of reserve and not a provision. Even on the alternative footing that they represented provision for an existing liability, any excess over the amount reasonably necessary for taxation had to be treated as reserve and brought into capital computation.
Conclusion: The amounts were includible in the computation of capital and the issue was decided in favour of the assessee.
Issue (ii): Whether the sum of Rs. 9,16,285 was to be excluded from the chargeable profits for the assessment year 1966-67.
Analysis: The point was treated as covered by an earlier Division Bench decision and, following that view, the receipt was not to be excluded from chargeable profits.
Conclusion: The amount was not excluded from chargeable profits and the issue was decided against the assessee.
Final Conclusion: The reference was answered by holding that the reserve for tax contingency was includible in capital, while the amount of Rs. 9,16,285 remained part of chargeable profits.
Ratio Decidendi: A sum shown as reserve for tax contingency is includible in capital computation where it is a true reserve or, if a provision, the excess over the reasonably necessary liability is to be treated as reserve.