Reserve versus provision under super profits tax: tax and bonus liabilities excluded, gratuity provision included in capital computation.

Amounts set aside to meet known present liabilities are provisions, not reserves, for capital computation under Schedule II of the Super Profits Tax Act. A provision for income-tax liability was excluded from capital because tax was a present liability, even if later quantified. A gratuity provision was treated as a reserve because it was accumulated for a contingent liability arising on termination of employment and was includible in capital. A bonus provision was excluded because it reflected an agreed, present liability under an operative bonus formula and was not contingent.

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Issues: (i) Whether provision for tax liability could be treated as a reserve for inclusion in capital under Paragraph 1 of Schedule II of the Super Profits Tax Act, 1963; (ii) Whether provision for gratuity to employees constituted a reserve; (iii) Whether provision for bonus payable to employees constituted a reserve.

Issue (i): Whether provision for tax liability could be treated as a reserve for inclusion in capital under Paragraph 1 of Schedule II of the Super Profits Tax Act, 1963.

Analysis: An amount set aside to meet a known liability is a provision, not a reserve. Liability to pay income-tax is a present liability even though quantification may follow later. The sum set apart towards tax liability was not shown to be any excess provision available for use as reserve.

Conclusion: The provision for tax liability was not a reserve and was correctly excluded from capital, against the assessee.

Issue (ii): Whether provision for gratuity to employees constituted a reserve.

Analysis: The gratuity amount was accumulated year after year without being shown to correspond to any ascertained liability in a particular year. It was directed to meet a contingent liability arising only on termination of employment, and an amount set aside for such a contingent liability is treated as a reserve.

Conclusion: The gratuity provision constituted a reserve and had to be included in capital, in favour of the assessee.

Issue (iii): Whether provision for bonus payable to employees constituted a reserve.

Analysis: The bonus amount was computed under an operative bonus formula agreed between the management and the union representative. It represented a present and known liability rather than an unforeseen or contingent liability.

Conclusion: The bonus provision was not a reserve and was correctly excluded from capital, against the assessee.

Final Conclusion: The reference was answered partly in favour of the assessee and partly against it, with only the gratuity provision qualifying for inclusion in capital.

Ratio Decidendi: Amounts set aside to meet known present liabilities are provisions, while sums set apart for contingent liabilities may constitute reserves for the relevant capital computation.

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