Reserve classification for taxation and proposed dividend depends on balance-sheet facts and existing liability, with remand for fresh findings.

Amounts set aside as provision for taxation and proposed dividend are treated as reserves under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963 only if the balance-sheet and surrounding facts show they are not meeting existing liabilities. A tax provision may count as a reserve only to the extent it exceeds tax liability already accrued on the relevant date. A proposed dividend amount depends on whether it was earmarked for an existing obligation or only for a future contingency. Because the necessary factual findings were missing, the matter was remitted to the Tribunal for fresh determination.

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Issues: Whether the amounts shown as provision for taxation and proposed dividend could be treated as reserves for computing capital under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963.

Analysis: The character of the amounts depended upon the facts shown by the balance-sheet and surrounding circumstances. A provision for taxation could be treated as a reserve only to the extent it exceeded tax liability that had already accrued by the relevant date. Likewise, the proposed dividend amount could be treated as a reserve only after examining how the assessee had dealt with dividend declaration and whether the amount had been earmarked for an existing liability or only for a future contingency. As the necessary findings on these factual matters were absent, the legal question could not be finally answered on the material then available.

Conclusion: The reference was sent back to the Tribunal for fresh decision after recording appropriate findings on the relevant factual issues.

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