Reserve versus liability in surtax capital computation: taxation provisions excluded, proposed dividends treated as reserve until approval.

For surtax capital computation under the Second Schedules, a provision made for taxation was treated as an accrued and existing liability, so it was not a reserve and could not be included in capital. By contrast, sums set apart for proposed dividends were treated as amounts earmarked for a contingent liability that had not matured because shareholder approval was still pending, so they retained the character of reserve and were includible in capital. The reference was therefore answered against the assessee on the taxation provision and in the assessee's favour on proposed dividends, with the capital computation to be adjusted accordingly.

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Issues: (i) Whether provision for taxation could be treated as a reserve and included in the capital computation under the relevant Second Schedules; (ii) Whether sums set apart as proposed dividends could be treated as reserve and included in the capital computation under the relevant Second Schedules.

Issue (i): Whether provision for taxation could be treated as a reserve and included in the capital computation under the relevant Second Schedules.

Analysis: Provision for taxation was held to represent a specific liability that had already accrued. A sum earmarked for an accrued tax liability does not answer the description of reserve for the purpose of computing capital under the statutory scheme governing surtax.

Conclusion: The provision for taxation was not a reserve and was not includible in the capital computation; the finding was against the assessee and in favour of the revenue.

Issue (ii): Whether sums set apart as proposed dividends could be treated as reserve and included in the capital computation under the relevant Second Schedules.

Analysis: Amounts appropriated towards proposed dividends were found to be sums set apart for a contingent liability which had not matured on the relevant date because shareholder approval had not yet been obtained. Such amounts could therefore retain the character of reserve for capital computation purposes.

Conclusion: The proposed dividend amounts were reserves and were includible in the capital computation; the finding was in favour of the assessee and against the revenue.

Final Conclusion: The reference was answered partly against the assessee on provision for taxation and in the assessee's favour on proposed dividends, with the capital computation to be made accordingly.

Ratio Decidendi: For surtax capital computation, an amount set apart for an accrued and existing liability is not a reserve, but a provision for a proposed dividend remains a reserve until the liability matures by shareholder approval.

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