Reserve vs provision in surtax capital computation: surplus credited to accounts was treated as reserve and included in capital base.

For surtax capital computation, an amount standing to the credit of profit and loss account is treated as a reserve only if, in substance, it has been appropriated for business use and is not retained as a provision for a known liability or anticipated loss. The distinction turns on the substance, purpose, and the directors' intention as reflected in the accounts. On the facts, the first year's surplus was an unallocated balance after specific provisions, with no earmarking for any contingency, while the second year's surplus had been merged with general reserve in the directors' report and accounts, showing appropriation from the start of the new accounting period. The surplus was therefore included in capital computation.

---

---

Issues: Whether the surplus standing to the credit of the profit and loss account for the relevant accounting years could be treated as a reserve for computing the capital base under the Surtax law.

Analysis: The decisive question was whether the amount was merely unallocated surplus or had been appropriated as a provision or reserve. The Court applied the distinction between reserve and provision in commercial accountancy, holding that a sum which is not set apart to meet a known liability or anticipated loss is not a provision, and that if it is not a provision, its true character must still be determined from its substance, purpose, and the intention of the directors as reflected in the accounts. For the first year, the amount was shown as surplus after specific provisions and appropriations, and the directors had not earmarked it for any particular contingency or liability. For the second year, the surplus had been merged with general reserve in the directors' report and accounts, indicating appropriation effective from the beginning of the new accounting period.

Conclusion: The surplus constituted a reserve and was to be included in the capital computation. The questions were answered in the negative, in favour of the assessee.

Ratio Decidendi: For surtax capital computation, an amount is a reserve if, in substance, it has been appropriated for business use and is not retained as a provision for a known liability or merely left as unallocated surplus.

---