Provision for taxation is not a reserve for capital computation, but may be deductible from investment cost under surtax rules.

A provision for taxation is not a reserve, surplus or fund for inclusion in capital under rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964, because the Explanation does not expand those terms to cover such a provision. The court followed its earlier view and rejected the assessee's claim on capital computation. However, the same provision may qualify as a fund deductible from the cost of investments under clause (ii) of rule 2 of the Second Schedule. A question of law raised before the Tribunal can still be examined in reference even if not expressly dealt with in its order, and the assessee succeeded on this issue.

---

---

Issues: (i) Whether a provision for taxation could be treated as a reserve or surplus or fund for inclusion in capital under rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964. (ii) Whether the assessee was entitled to deduction of the provision for taxation from the cost of its investments under clause (ii) of rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Issue (i): Whether a provision for taxation could be treated as a reserve or surplus or fund for inclusion in capital under rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The earlier decision of the same court had already held that a provision for taxation is not a reserve for the purpose of computing capital. That view was followed. The court held that the Explanation introduced in the First Schedule did not permit the provision for taxation to be treated as reserve, surplus, or fund for computation under rule 1.

Conclusion: The issue was answered against the assessee and in favour of the revenue.

Issue (ii): Whether the assessee was entitled to deduction of the provision for taxation from the cost of its investments under clause (ii) of rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The court held that this aspect had been raised before the lower authorities and remained part of the controversy even though the Tribunal did not deal with it expressly. Applying the principle that a question of law raised before the Tribunal but not expressly dealt with can still arise out of the order, the court answered the reframed question on merits. It further followed its earlier decision that provision for taxation qualifies as a fund within rule 2(ii), and rejected the revenue's narrower accounting-based construction.

Conclusion: The issue was answered in favour of the assessee and against the revenue.

Final Conclusion: The reference was disposed of by affirming the revenue's position on reserve treatment under the capital-computation rule, while allowing the assessee's claim for deduction of the provision for taxation from investment cost under the second schedule.

Ratio Decidendi: For surtax computation, a provision for taxation is not a reserve for inclusion in capital under rule 1 of the First Schedule, but it may still be treated as a fund deductible from the cost of investments under rule 2(ii) of the Second Schedule; a question of law raised before the Tribunal may be examined in reference even if not expressly dealt with in the Tribunal's order.

---