Reserve classification and bonus share capitalisation affect surtax capital computation, with both inclusions upheld for the assessee.

Amounts appropriated as doubtful debts reserve, retirement gratuity reserve and contingency reserve were treated as reserves, not provisions, because they were not earmarked to meet any known existing liability at the balance-sheet date; they were therefore includible in capital for surtax computation. The issue of bonus shares was also held to enlarge paid-up capital, so the proportionate increase had to be included in the capital base for surtax purposes. Both questions were answered in favour of the assessee.

---

---

Issues: (i) Whether doubtful debts reserve, retirement gratuity reserve, and contingency reserve were includible in the computation of capital for the purpose of surtax; (ii) Whether proportionate increase in capital arising from the issue of bonus shares was includible in the computation of capital.

Issue (i): Whether doubtful debts reserve, retirement gratuity reserve, and contingency reserve were includible in the computation of capital for the purpose of surtax.

Analysis: Amounts retained as reserves are includible in capital where they are not earmarked to meet any known or existing liability at the balance-sheet date. A doubtful debts reserve, a gratuity reserve created without actuarial valuation, and a contingency reserve created out of abundant caution, where no excise or other liability had in fact arisen or been demanded, were treated as reserves and not provisions. The controlling distinction is whether the appropriation is designed to meet an existing liability or only a remote or unascertained possibility.

Conclusion: The amounts were includible in the computation of capital and the issue was answered in favour of the assessee.

Issue (ii): Whether proportionate increase in capital arising from the issue of bonus shares was includible in the computation of capital.

Analysis: The issue of bonus shares increases the paid-up capital of the company, and the proportionate increase in capital must be taken into account for computing capital under the relevant surtax computation rules.

Conclusion: The amount was includible in the computation of capital and the issue was answered in favour of the assessee.

Final Conclusion: Both referred questions were answered in favour of the assessee, with the disputed amounts treated as includible in capital for surtax computation.

Ratio Decidendi: An appropriation is a reserve, and not a provision, when it is not intended to meet a known existing liability at the balance-sheet date, and bonus share capitalization correspondingly enlarges paid-up capital for surtax computation.

---