Reserve classification for surtax capital computation upheld where appropriation preceded any enforceable statutory liability.

Amount appropriated before any enforceable statutory liability arose remained a reserve, not a provision, for computation of capital under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The court held that a Bill alone creates no liability, contingent or otherwise, and that later retrospective enactment of the tax did not change the character of the earlier appropriation. The sum was therefore includible in capital as a reserve, and the issue was decided in favour of the assessee.

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Issues: Whether the sum of Rs. 9 lakhs set apart as reserve for super profits tax was a reserve within the meaning of rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 and was includible in the computation of capital for the purposes of the Act.

Analysis: The amount was earmarked when only a Bill had been introduced and before the enactment received presidential assent. A Bill, by itself, did not create any liability, contingent or otherwise. The fact that the eventual statute operated retrospectively did not convert an amount already appropriated as reserve into a provision for a known liability. The earlier appropriation retained its character as reserve and could not be treated as a provision merely because the levy was later enacted with retrospective effect.

Conclusion: The sum of Rs. 9 lakhs was correctly treated as a reserve and had to be included in the computation of capital under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964; the answer was therefore in favour of the assessee.

Ratio Decidendi: An amount appropriated before the creation of any enforceable statutory liability remains a reserve, and retrospective operation of a later taxing statute does not by itself convert that reserve into a provision for a known liability.

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