Dividend appropriations are provisions, not reserves, while ad hoc debt and retirement provisions may count as reserves.

Amounts set apart on an ad hoc basis for bad and doubtful debts and retirement benefits were treated as reserves for capital computation under the Super Profits Tax Act, 1963, and were includible accordingly. By contrast, money appropriated out of profits for a proposed second interim dividend, having been earmarked by the directors for distribution and not for business use, was held to be only a provision and not a reserve. The reference was thus answered partly in favour of the assessee and partly against the assessee.

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Issues: (i) Whether the provision for bad and doubtful debts and the provision for retirement benefits were includible as reserves under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963; (ii) Whether the amount set apart towards proposed second interim dividend was a reserve or only a provision for the purpose of capital computation under the Super Profits Tax Act, 1963.

Issue (i): Whether the provision for bad and doubtful debts and the provision for retirement benefits were includible as reserves under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963.

Analysis: The amounts were treated by the parties as having been set apart on an ad hoc basis, and the Court accepted that they fell within the category of reserves for capital computation.

Conclusion: The two amounts were includible as reserves and the answer was in favour of the assessee.

Issue (ii): Whether the amount set apart towards proposed second interim dividend was a reserve or only a provision for the purpose of capital computation under the Super Profits Tax Act, 1963.

Analysis: An amount appropriated by the directors out of profits for payment of dividend is separated from the general mass of undistributed profits for distribution and is not available for business use. Applying that principle, the resolution and the balance-sheet entries showed that the amount was earmarked for dividend and related back to the accounting year, so it could not be treated as a reserve.

Conclusion: The amount was only a provision and not a reserve, and the answer was against the assessee.

Final Conclusion: The reference was answered partly in favour of the assessee and partly against the assessee, with the amounts for bad and doubtful debts and retirement benefits accepted as reserves, but the proposed second interim dividend excluded from reserves.

Ratio Decidendi: Amounts set apart from undistributed profits for declared or proposed dividend, where the directors have earmarked them for distribution and not for future business use, are provisions and not reserves for super profits tax capital computation.

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