Capital base classification turns on substance: additional depreciation reserve counts, while tax, gratuity, and dividend provisions do not.

In computing capital base under the Second Schedule to the Super Profits Tax Act, amounts are classified by substance and a commercial, common-sense test: sums available for future business use are reserves, while sums earmarked for known or immediate liabilities are provisions. The additional depreciation reserve was treated as a reserve and included in the capital base. The provision for taxation was treated as a liability, not a reserve, because it was not shown to be an excess provision. The provision for gratuity and proposed dividend were both regarded as sums set apart for immediate obligations and were excluded from the capital base.

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Issues: Whether, in computing the capital base for standard deduction under the Second Schedule to the Super Profits Tax Act, 1963, the amounts set apart as additional depreciation reserve, provision for taxation, provision for gratuity, and proposed dividend were to be treated as reserves or provisions.

Analysis: The deciding test was whether the amounts, judged by their substance and on a commercial/common-sense view, were available for future use in the business as reserves or were set apart to meet known or immediate liabilities as provisions. The additional depreciation reserve was found to be an amount kept apart over and above normal depreciation for use in the business in future, and therefore partook of the character of a reserve. The provision for taxation was treated as a liability and not as a reserve, since it was not shown to be an excess provision. The provision for gratuity, made under a regular gratuity scheme, was held to be meant for immediate business contingencies and not for future use in the business. The proposed dividend was likewise regarded as a sum earmarked for an imminent known obligation and not as a reserve.

Conclusion: The additional depreciation reserve was includible in the capital base, while the provision for taxation, provision for gratuity, and proposed dividend were rightly excluded.

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