Reserve for taxation treated as capital reserve, not provision, because no existing tax liability arose on the balance-sheet date.

An amount set apart for taxation was treated as a reserve, not a provision, for capital computation under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963. The court reasoned that, on the balance-sheet date, there was no existing real or contingent tax liability in respect of incomplete contracts, since the assessee was taxed on completed contracts and estimated future tax did not correspond to a known present liability. A provision requires an identifiable liability or contingency existing at that date, whereas a reserve is an appropriation of profits not earmarked to meet such liability. The amount was therefore includible in capital, and later adjustment of part of it did not change its character.

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Issues: Whether the sum standing as a reserve for taxation was a reserve within the meaning of rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, so as to be included in capital computation for super profits tax.

Analysis: The amount was found, on the facts, to have been kept apart without relation to any liability for taxation existing on the balance-sheet date. The assessee was taxed on completed contracts, so estimated future tax on incomplete contracts did not create any present real or contingent liability. A provision requires a liability or contingency known to exist at the balance-sheet date, whereas a reserve is an appropriation of profits not meant to meet such a known liability. The authorities below had therefore correctly treated the amount as a reserve, and the later adjustment of a part of it did not alter its character at the relevant date.

Conclusion: The amount was a reserve and not a provision, and it was includible in the capital computation. The question was answered in the affirmative and in favour of the assessee.

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