General reserves and doubtful debt balances remained reserves for surtax capital computation, despite later bonus share capitalisation.

General reserves standing to the credit of the company on the first day of the previous year were not reduced in surtax capital computation merely because they were later capitalised for bonus shares, since no present liability or provision arose until shareholder approval; the reserves retained their character on the relevant valuation date. The reserve for bad and doubtful debts was also treated as a reserve, not a provision, because it was carried separately for years, actual bad debts were written off as they arose, and it did not meet any known existing liability, contingency, or diminution in asset value at the balance-sheet date. The reference was therefore answered substantially for the assessee.

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Issues: (i) Whether the amount standing to the credit of general reserves on the first day of the previous year had to be reduced in capital computation under the Companies (Profits) Surtax Act, 1964, because it was subsequently capitalised for issue of bonus shares. (ii) Whether the amount standing to the credit of the reserve for bad and doubtful debts was a reserve or a provision for inclusion in capital computation.

Issue (i): Whether the amount standing to the credit of general reserves on the first day of the previous year had to be reduced in capital computation under the Companies (Profits) Surtax Act, 1964, because it was subsequently capitalised for issue of bonus shares.

Analysis: Liability for bonus shares did not arise merely because the directors decided to issue them. Until the shareholders passed the relevant resolution, the amount remained part of general reserves and did not become a provision or an accrued liability. The subsequent capitalisation did not retrospectively reduce the reserve position on the first day of the previous year. The alternative authorities relied upon did not alter this position on the facts found.

Conclusion: The issue was answered in the affirmative, in favour of the assessee and against the Department.

Issue (ii): Whether the amount standing to the credit of the reserve for bad and doubtful debts was a reserve or a provision for inclusion in capital computation.

Analysis: The amount had been carried forward as a separate account for several years, and actual bad debts were written off directly to profit and loss when they arose. The amount was not maintained to meet any known existing liability, contingency, commitment, or diminution in asset value at the balance-sheet date. On these facts it retained the character of a reserve.

Conclusion: The issue was answered in the affirmative, in favour of the assessee.

Final Conclusion: The reference was substantially answered for the assessee on the two issues actually decided, while the alternative question on the quantum of reduction did not survive for independent determination.

Ratio Decidendi: An amount remains a reserve for surtax capital computation unless it has become a present liability or provision on the relevant valuation date; a mere recommendation or later capitalisation for bonus shares does not retrospectively convert general reserves into a provision.

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