Reserve computation under super profits tax: board appropriation may relate back, but provisions for tax and dividends are not reserves.

For capital computation under rule 1 of the Second Schedule to the Super Profits Tax Act, a reserve created by a valid board appropriation may relate back to the relevant accounting year, so the transfer of Rs. 8,00,000 was treated as reserve. A later transfer of Rs. 3,00,000 made after the balance-sheet date was not part of the reserve on the crucial date and was excluded. A pure legal ground on treatment of provision for taxation and dividends could be raised for the first time before the Tribunal, and the amounts provided for taxation and dividends were held to be provisions, not reserves, for capital computation.

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Issues: (i) whether a sum of Rs. 8,00,000 transferred from the profit and loss account to the reserve fund account pursuant to a board resolution could be treated as reserve for computation of capital under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963; (ii) whether a sum of Rs. 3,00,000 transferred later could be treated as reserve for the same purpose; (iii) whether an additional ground relating to provision for taxation and provision for dividends could be raised for the first time before the Tribunal; and (iv) whether provision for taxation and provision for dividends could be treated as reserves under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963.

Issue (i): whether a sum of Rs. 8,00,000 transferred from the profit and loss account to the reserve fund account pursuant to a board resolution could be treated as reserve for computation of capital under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963.

Analysis: The board of directors had resolved to credit the accumulated profits to reserve, and the later accounting entry was held to relate back to the beginning of the relevant accounting year. The statutory scheme under rule 1 treated reserves as part of capital for the purpose of standard deduction, and no requirement of shareholder approval for creation of reserve was accepted.

Conclusion: The amount of Rs. 8,00,000 was a reserve and was to be included in the capital computation, in favour of the assessee.

Issue (ii): whether a sum of Rs. 3,00000 transferred later could be treated as reserve for the same purpose.

Analysis: The resolution for this amount was passed only after the relevant balance-sheet date and after the accounting position for the relevant year had already been settled. It could not, therefore, be regarded as part of the reserve existing on the crucial date for capital computation.

Conclusion: The amount of Rs. 3,00,000 was not a reserve, in favour of the revenue.

Issue (iii): whether an additional ground relating to provision for taxation and provision for dividends could be raised for the first time before the Tribunal.

Analysis: A pure legal ground going to the computation of capital could be entertained at the appellate stage, and the Tribunal was entitled to permit its raising for the first time before it.

Conclusion: The additional ground was rightly allowed, in favour of the assessee.

Issue (iv): whether provision for taxation and provision for dividends could be treated as reserves under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963.

Analysis: The amounts set apart as provision for taxation and provision for dividends were treated as provisions and not as reserves within the meaning of rule 1. The Court declined to follow the contrary view relied on by the assessee and preferred the line of authority holding that such amounts do not form part of reserves for capital computation.

Conclusion: The amounts of Rs. 2,40,966 and Rs. 2,09,999 were not reserves, in favour of the revenue.

Final Conclusion: The references were disposed of by holding that the Rs. 8,00,000 transfer qualified as reserve, the Rs. 3,00,000 transfer did not, the additional ground was properly entertained, and the items described as provision for taxation and provision for dividends were excluded from reserves for capital computation.

Ratio Decidendi: For capital computation under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, a reserve created by a valid board appropriation may relate back to the relevant accounting date, but amounts merely provided for taxation or dividends are not reserves unless they are shown to be so in substance and in law.

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