Surtax capital computation treats reserves by true character, including post-opening appropriations and gratuity reserve balances.

For surtax capital computation, an appropriation to general reserve made after the accounting year opened was treated as effective from the start of the year and included in capital. Excess reserve created beyond the statutory requirement was treated as falling within "other reserves" under the Second Schedule to the Companies (Profits) Surtax Act, 1964. The amount credited to gratuity reserve was treated as a reserve, not a provision, because its true character depended on the nature of the appropriation and there was no actuarial valuation of a known liability. On each issue, the amounts were included in capital.

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Issues: (i) Whether Rs. 4,00,000 appropriated to general reserve after the opening of the accounting year could be included in capital computation for surtax; (ii) Whether excess reserve created over the statutory requirement fell within "other reserves" under the Second Schedule to the Companies (Profits) Surtax Act, 1964; (iii) Whether the amount standing to the credit of gratuity reserve was a "reserve" and not a "provision" for capital computation.

Issue (i): Whether Rs. 4,00,000 appropriated to general reserve after the opening of the accounting year could be included in capital computation for surtax.

Analysis: The appropriation to reserve, though made by resolution after the opening date of the accounting year, was treated by binding precedent as effective from the beginning of the accounting year for surtax capital computation. The amount had been credited to general reserve and the issue was covered by earlier authority applying the same principle.

Conclusion: The amount was includible in the capital computation and the issue was answered in favour of the assessee.

Issue (ii): Whether excess reserve created over the statutory requirement fell within "other reserves" under the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The excess created over the required reserve was held to be within the scope of "other reserves" for surtax purposes. The court followed its earlier view that such a reserve, though arising from an excess over the required amount, could be treated as part of capital in the computation under the Second Schedule.

Conclusion: The excess amount qualified as "other reserves" and the issue was answered in favour of the assessee.

Issue (iii): Whether the amount standing to the credit of gratuity reserve was a "reserve" and not a "provision" for capital computation.

Analysis: The decisive test was the true nature of the appropriation, not the label used in the balance-sheet. As there was no material showing scientific or actuarial valuation of a known liability, the amount was treated as an ad hoc setting apart for a contingent liability rather than a provision for an existing liability.

Conclusion: The gratuity amount was a reserve and not a provision, and the issue was answered in favour of the assessee.

Final Conclusion: All the referred questions were answered in favour of the assessee, with the result that the amounts in dispute formed part of capital for surtax computation.

Ratio Decidendi: For surtax capital computation, an appropriation credited to reserve is to be treated according to its real character; a reserve created after the accounting year begins may relate back to the start of the year, and an amount set apart without actuarial determination of a known liability is a reserve rather than a provision.

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