Reserve treatment under super profits tax includes amounts set aside for uncertain liabilities, not known or crystallised obligations.

For rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, "reserve" bears its ordinary commercial meaning: an amount set apart out of profits or surplus for future use and not earmarked against a known liability. A mere mass of undistributed profits is not enough, and the accounting distinction between reserve and provision is not conclusive where the statutory context points otherwise. On the facts, the taxation contingency reserve, the bonus provision and the provident institution long service bonus amount all related to uncertain or uncrystallised obligations, so they were treated as reserves and included in capital computation, subject to exclusion of any amount already allowed in income-tax assessment.

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Issues: Whether the amounts styled as provision for provident institution long service bonus, provision for bonus, and taxation contingency reserve were to be treated as reserves for computing the capital of the assessee-company under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963.

Analysis: The expression "reserve" in rule 1 of the Second Schedule was construed in its ordinary and commercial sense, with emphasis on whether the amount had been set apart out of profits or surplus by competent authority for future use and was not earmarked to meet a known liability. A mere mass of undistributed profits does not automatically become a reserve. At the same time, the distinction between reserve and provision in accountancy is not controlling where the statutory context indicates a broader meaning. On the facts, the taxation contingency reserve did not meet any known liability and represented an amount set aside on prudent financial policy for future use. The provision for bonus also did not relate to any statutory or known liability, as the liability had not crystallised. The amount described as provision for provident institution long service bonus likewise related to an uncertain future obligation, the existence and quantum of which were not ascertainable with any substantial accuracy.

Conclusion: The three items were rightly treated as reserves and included in the capital computation, subject to exclusion of any portion already allowed in computing profits under the Income-tax Acts.

Final Conclusion: The reference was answered in favour of the assessee, affirming inclusion of the disputed items as reserves for super profits tax capital computation to the extent not already allowed in income-tax assessment.

Ratio Decidendi: For rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, "reserve" means an amount set apart out of profits or surplus for future use without relation to a known liability, and an uncertain or uncrystallised obligation does not become a provision so as to exclude it from reserve treatment.

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