Reserve classification under surtax law: provision for retiring gratuity was includible in capital computation.

An amount shown as provision for labour retiring gratuity was held to retain the character of a reserve for capital computation under the Second Schedule to the Companies (Profits) Surtax Act, 1964. The Court applied the exclusionary Explanation to rule 1 and held that a balance-sheet description as "current liabilities and provisions" does not by itself exclude the item unless it falls within the specified statutory exclusions. It also was not a contingent liability capable of being ascertained with substantial accuracy. The amount was therefore includible in the capital computation.

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Issues: Whether the amount shown as provision for labour retiring gratuity was a reserve eligible for inclusion in the capital computation under the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The amount was required to be tested against the exclusionary Explanation introduced to rule 1 of the Second Schedule. The Explanation excludes amounts standing to the credit of specified items under reserves and surplus and current liabilities in the prescribed balance-sheet form. The item in question did not fall within the listed items under reserves and surplus, and the Court held that the provisions shown under the balance-sheet heading "Current liabilities and provisions" were not automatically excluded merely because they were described as provisions. The amount was also not one capable of being treated as a contingent liability as it could not be ascertained with substantial accuracy. On the proper construction of the statutory scheme, the item retained the character of a reserve.

Conclusion: The amount was a reserve and was includible in the capital computation under the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Ratio Decidendi: For purposes of capital computation under the Companies (Profits) Surtax Act, 1964, an amount is not excluded from reserve merely because it is described as a provision in the balance-sheet unless it falls within the specific statutory exclusions or represents a truly ascertained contingent liability.

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