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Issues: Whether the amount shown as "reserve for taxation" in the company's balance-sheet was a reserve within Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 so as to be included in the capital computation for surtax purposes.
Analysis: The amount was specifically earmarked and described in the balance-sheet as "reserve for taxation". A reserve may be general or special, and once the amount is distinctly placed under the head of reserve, it is not to be treated as a mere mass of undistributed profits. The Explanation to Rule 1 excludes only amounts that fall within the specified heads in the balance-sheet form, and the amount in question did not fall within those excluded categories. The contention that the sum represented tax liability on accrued income was also rejected, since the assessee maintained accounts on the completed contract basis and the issue was already concluded by the earlier decision in the assessee's own case.
Conclusion: The amount was a reserve within the meaning of Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 and had to be included in the capital computation. The question was answered in favour of the assessee.
Ratio Decidendi: An amount expressly described in the balance-sheet as a reserve, and not falling within the exclusionary categories in the Explanation to Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, is includible in the capital computation for surtax purposes.
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