Reserve computation turns on substance, not book entries, where amounts adjusted against losses are excluded from capital base

For capital computation under the Super Profits Tax Act, reserves must be assessed by substance on the relevant valuation date, not merely by the figure shown in accounts. An amount is not a reserve if the company's balance-sheet shows it has been adjusted against losses and is no longer retained for future use. The correct capital base is therefore the reduced balance-sheet figure after loss adjustment, because only amounts truly earmarked and preserved for future use qualify as reserves.

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Issues: Whether, for computing the capital base under the Super Profits Tax Act, 1963, the reserves of the assessee-company had to be taken at the figure shown in the accounts or at the reduced figure shown in the balance-sheet after adjusting the loss.

Analysis: The relevant date for computation under Rule 1 of the Second Schedule is the first day of the previous year, and the nature of the amount must be judged by its substance. A mere mass of undistributed profits does not automatically constitute a reserve. Where the company's balance-sheet, prepared under the authority of its management, shows that the amount has been adjusted against losses, it is not available for future use as reserve. The decisive test is whether the amount had been earmarked and retained for use in future, or had effectively been treated as adjusted against loss.

Conclusion: The reserves could not be taken at the higher figure shown in the accounts. The amount shown in the balance-sheet after adjusting the loss was the correct figure for capital computation, in favour of Revenue.

Ratio Decidendi: For capital computation under the Super Profits Tax Act, an amount is a reserve only if it is truly retained for future use and not effectively adjusted against losses; substance, not mere book presentation, controls.

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