Free reserves and capital computation: reserves for contingent or unascertained liabilities were included in surtax capital.

Reserves not earmarked for an ascertained existing liability and available for general corporate use were treated as free reserves and included in capital under rule 1 of Schedule II of the Companies (Profits) Surtax Act, 1964. Replanting, building and machinery reserve were not appropriated against any existing liability and had been absorbed into general reserve; the tax contingency reserve was created for possible future contingencies, not a present tax liability; and the pension reserve was not debited against an accrued liability and was ultimately transferred to general reserve for dividends. On that basis, the disputed reserves formed part of capital.

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Issues: Whether replanting, building and machinery reserve, tax contingency reserve and pension reserve were includible in the computation of capital under rule 1 of Schedule II of the Companies (Profits) Surtax Act, 1964.

Analysis: The reserves were examined on the basis of their character and actual treatment in the accounts. The replanting, building and machinery reserve had not been appropriated towards any existing liability and had been treated as part of the general reserve. The tax contingency reserve was created to meet possible future contingencies and not a present tax liability. The pension reserve also had not been debited against any accrued liability from inception and had ultimately been transferred to the general reserve and used for dividends. On these facts, each reserve was held to be a free reserve and not a mere provision for liability.

Conclusion: All three reserves were rightly included in the computation of capital.

Final Conclusion: The reference was answered in favour of the assessee, and the Tribunal's view that the disputed reserves formed part of capital was upheld.

Ratio Decidendi: Amounts maintained as reserves, which are not earmarked to meet an ascertained existing liability and are available as free reserves, are includible in capital computation under the surtax schedule.

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