Reserve versus provision distinction excludes tax and proposed dividend appropriations from surtax capital computation.

Amounts set apart for taxation and proposed dividends are provisions for specific liabilities, not reserves available for the company's future use, and therefore do not enter capital computation under the Second Schedule to the Companies (Profits) Surtax Act, 1964. The balance-sheet classification under the Companies Act, 1956 supports this distinction, as taxation and dividend appropriations are treated separately from reserves. A Supreme Court ruling in the wealth-tax context on dividend proposals did not alter this surtax analysis. The disputed amounts were accordingly excluded from the capital base for surtax purposes.

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Issues: Whether amounts set apart as provision for taxation and proposed dividends are reserves includible in the computation of capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: Amounts appropriated for taxation and proposed dividends were treated as provisions for specific liabilities and not as sums available for the future use of the company. The earlier binding view that such amounts do not partake of the character of reserves was reaffirmed. The classification under the balance-sheet provisions of the Companies Act, 1956 also showed that taxation and proposed dividends are treated separately from reserves. The court further held that the Supreme Court decision on dividend proposals in the wealth-tax context did not require a different conclusion for surtax computation.

Conclusion: The amounts were not reserves and were not includible in capital computation under the Second Schedule. The answer was against the assessee and in favour of the revenue.

Final Conclusion: The reference questions were answered by applying the settled distinction between reserves and provisions, and the disputed amounts remained outside the capital base for surtax purposes.

Ratio Decidendi: Sums earmarked for taxation and proposed dividends, being provisions for specific liabilities rather than amounts retained for the company's future use, are not reserves for capital computation under the surtax law.

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