Reserve computation under super profits tax excludes undistributed profits and provisions for liabilities, while fresh appellate grounds may be allowed.

For capital computation under rule 1 of the Second Schedule to the Super Profits Tax Act, only amounts validly appropriated as reserves in the relevant accounting year can be included; Rs. 8 lakhs remained undistributed profits because the reserve transfer was made later and did not operate retrospectively. Amounts set apart as provision for taxation and provision for dividends were treated as provisions for known liabilities, not reserves, and were excluded from capital. Rule 11 of the Income-tax (Appellate Tribunal) Rules also permits the Tribunal to allow a fresh ground at the appellate stage if the other side has an opportunity of being heard.

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Issues: (i) Whether Rs. 8 lakhs out of accumulated profits could be treated as reserves as on 1 April 1962 for computation of capital under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963; (ii) whether the Tribunal could permit the assessee to raise an additional ground for the first time at the appellate stage; (iii) whether the amounts standing as provision for taxation and provision for dividends could be treated as reserves for computation of capital under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963.

Issue (i): Whether Rs. 8 lakhs out of accumulated profits could be treated as reserves as on 1 April 1962 for computation of capital under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963.

Analysis: The amount was not transferred to any reserve account during the relevant accounting year ending 31 March 1962. The shareholder resolution transferring Rs. 8 lakhs to general reserve was passed later and did not state that the transfer was to relate back to 1 April 1962. The balance-sheet for the relevant year did not show the amount as reserve, and the entry was made only in the following year. On these facts, the amount remained part of undistributed profits on 1 April 1962 and could not be treated as reserve with retrospective effect.

Conclusion: The amount of Rs. 8 lakhs was not a reserve as on 1 April 1962. The issue is answered against the assessee and in favour of the revenue.

Issue (ii): Whether the Tribunal could permit the assessee to raise an additional ground for the first time at the appellate stage.

Analysis: Rule 11 of the Income-tax (Appellate Tribunal) Rules, 1963 gives the Tribunal discretion to allow a new ground to be raised, subject to the opposite party having an opportunity of being heard. The Tribunal's power is not confined to the grounds set out in the memorandum of appeal, and the rule permits consideration of a fresh ground where the procedural safeguards are met.

Conclusion: The Tribunal was right in allowing the additional ground to be raised. The issue is answered in favour of the assessee and against the revenue.

Issue (iii): Whether the amounts of Rs. 71,808 shown as provision for taxation and Rs. 1,24,974 shown as provision for dividends could be treated as reserves under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963.

Analysis: A reserve is an amount set apart for an uncertain contingency, whereas a provision is made for a known liability. The amounts in question were set apart for taxation and dividends, both representing liabilities of the relevant year. They were not shown as amounts separated from the general mass of profits as reserves, and the surrounding circumstances did not support such a characterisation.

Conclusion: The amounts were not reserves and could not be included in the capital computation. The issue is answered in favour of the revenue and against the assessee.

Final Conclusion: The reference was disposed of by upholding the revenue's position on the reserve computation issues while sustaining the assessee's right to raise an additional ground before the Tribunal.

Ratio Decidendi: For capital computation under the relevant schedule, only amounts shown to have been validly appropriated as reserve in the relevant accounting year can be included as reserves, and sums earmarked for known liabilities remain provisions rather than reserves; the Tribunal may also permit a new ground under the appellate rules where procedural fairness is maintained.

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