Surtax capital computation: excess over reasonably estimated liability is reserve, while genuine provision remains excluded.

For surtax capital computation, an amount set aside for an anticipated liability is a provision only to the extent of the reasonably estimated liability; any excess remains a reserve. The additional depreciation reserve of Rs. 8,30,716 was treated as reserve because it was created for replacement needs and not as an accrued liability, so it was includible in capital. The additional taxation reserve of Rs. 13 lakhs was partly provision and partly reserve: the reasonably estimated super profits tax liability was accepted at Rs. 8 1/2 lakhs, and only the excess over that figure qualified as reserve for inclusion in capital.

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Issues: (i) Whether the additional depreciation reserve of Rs. 8,30,716 could be treated as reserve for computation of the assessee's capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964. (ii) Whether, and to what extent, the additional taxation reserve of Rs. 13 lakhs constituted reserve rather than provision for the same purpose.

Issue (i): Whether the additional depreciation reserve of Rs. 8,30,716 could be treated as reserve for computation of the assessee's capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The amount was created out of the company's own accounting treatment as an additional depreciation reserve, intended to meet replacement needs of machinery and plant and not as a liability earmarked for an accrued obligation. On the facts found, it bore the character of a reserve within the meaning of the surtax computation provisions.

Conclusion: The amount of Rs. 8,30,716 was rightly treated as reserve and included in the capital computation, in favour of the assessee.

Issue (ii): Whether, and to what extent, the additional taxation reserve of Rs. 13 lakhs constituted reserve rather than provision for the same purpose.

Analysis: The directors had set apart Rs. 13 lakhs to meet the anticipated super profits tax liability. The relevant legal approach required looking at the substance of the matter at the beginning of the accounting period and distinguishing between a provision for an estimated liability and any amount in excess of that reasonable estimate. The Court accepted that the reasonable estimate of liability was Rs. 8 1/2 lakhs and treated the excess over that figure as reserve.

Conclusion: Only the excess over Rs. 8 1/2 lakhs out of Rs. 13 lakhs was to be treated as reserve and included in the capital computation, in favour of the assessee to that extent.

Final Conclusion: The reference was answered by holding that the depreciation reserve was includible as reserve and that only the excess over the reasonably estimated taxation liability out of the additional taxation reserve qualified as reserve for surtax capital computation.

Ratio Decidendi: For surtax capital computation, an amount set apart for a known or anticipated liability is a provision to the extent of the reasonably estimated liability, but any excess not required for that liability is a reserve.

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