Reserve fund deduction applies only to actual depreciation or loss, not to merely anticipated losses on securities.

Amounts carried to an investment reserve fund are deductible under rule 30 only where the reserve corresponds to actual depreciation or actual loss on securities, because the rule contemplates expenditure in the character of amounts genuinely written off for earning business profits. A reserve created at directors' discretion to meet merely apprehended future contingencies does not satisfy that test. Read with rule 25 and section 10(2)(xii), the provision was construed as requiring actual, not anticipated, depreciation or loss, and the later schedule provision did not change that position for the relevant assessment year.

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Issues: Whether, under rule 30 of the Income-tax Rules, amounts carried to an investment reserve fund may be treated as exempt expenditure when the reserve is created to meet apprehended future depreciation or loss on securities, or only when it is formed to meet depreciation or loss actually suffered.

Analysis: Rule 30 treats amounts written off, or carried to a reserve fund formed for that sole purpose, as expenditure incurred solely for earning the profits of the business. Reading the rule with rule 25 and with section 10(2)(xii) of the Income-tax Act, the relevant expenditure must bear the character of actual expenditure, and the reserve fund must correspond to amounts that could properly have been written off against actual depreciation or actual loss. A reserve created at the discretion of directors to meet future contingencies does not satisfy that test. The later schedule provision relied upon did not alter the construction of rule 30 for the assessment year in question.

Conclusion: The reserve fund under rule 30 could be created only to meet depreciation or loss actually suffered, not merely apprehended depreciation or loss. The answer to the reference was therefore in the affirmative, in favour of the Revenue.

Ratio Decidendi: Amounts carried to a reserve fund are allowable under rule 30 only to the extent that they correspond to actual depreciation or actual loss on securities and thus answer the character of expenditure incurred solely for earning business profits.

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