Reserve versus provision governs capital computation under the Super Profits Tax Act, with earmarked liabilities excluded and contingencies included.

Amounts appropriated for taxation and proposed dividend were treated as provisions for existing liabilities, not reserves, and were therefore excluded from capital computation for standard deduction under the Super Profits Tax Act, 1963. The distinction between reserve and provision depended on whether the sum was earmarked to meet a known liability, contingency, commitment, or diminution in asset value existing at the balance-sheet date. By contrast, an amount shown as provision for contingencies, where no specific known contingent liability was identified, retained the character of a reserve and was includible in capital.

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Issues: (i) Whether the amounts representing provision for taxation and proposed dividend were includible in the assessee-company's capital for determining the standard deduction under the Super Profits Tax Act, 1963; (ii) Whether the amount shown as provision for contingencies was includible in the assessee-company's capital for the same purpose.

Issue (i): Whether the amounts representing provision for taxation and proposed dividend were includible in the assessee-company's capital for determining the standard deduction under the Super Profits Tax Act, 1963.

Analysis: The amounts stood covered by prior decisions of the Court which treated such earmarked sums as provisions for existing liabilities and not as reserves for capital computation under the statutory scheme. The distinction between reserve and provision controlled the result, and amounts appropriated for taxation and dividend could not be treated as capital reserves.

Conclusion: The amounts of Rs. 38,86,145 and Rs. 15,49,700 were not includible in the assessee-company's capital and the finding was against the assessee.

Issue (ii): Whether the amount shown as provision for contingencies was includible in the assessee-company's capital for the same purpose.

Analysis: The amount was not shown to have been set apart for any specific known contingent liability. Applying the governing test, an amount is a reserve if it is not designed to meet a liability, contingency, commitment, or diminution in value of assets known to exist at the balance-sheet date, whereas a provision is made for a known liability of uncertain quantification. On the facts, the amount retained the character of a reserve and was distinguishable from cases where a specific liability had been identified.

Conclusion: The amount of Rs. 2,35,000 was includible in the assessee-company's capital and the finding was in favour of the assessee.

Final Conclusion: The reference was answered by excluding the taxation and proposed dividend amounts from capital computation while including the contingencies amount in the capital base for standard deduction under the Super Profits Tax Act, 1963.

Ratio Decidendi: An amount set aside out of profits is a reserve when it is not earmarked to meet a known liability, contingency, commitment, or diminution in value of assets existing at the balance-sheet date; if it is set aside to provide for a known liability, it is a provision and not includible as reserve in capital computation.

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