Reserve versus provision for capital computation: amounts for taxation, dividend and bonus were held not to qualify as reserves.

For capital computation under the Super Profits Tax Act, a reserve requires a clear appropriation of profits for future use, while amounts set aside for known or accrued liabilities are provisions. On that principle, proposed dividend remained part of undistributed profits and did not qualify as a reserve. Provision for taxation and provision for bonus, being made to meet existing liabilities, also could not be treated as reserves under rule 1 of the Second Schedule. The deduction issue was treated as covered by the assessee's own earlier reference, and the restriction on the annual deduction was not sustained.

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Issues: (i) Whether the claim for deduction of the annual sum of Rs. 4 lakhs was rightly restricted in the corresponding income-tax appeal. (ii) Whether provision for taxation, proposed dividend and provision for bonus could be treated as 'reserve' under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963 while computing capital.

Issue (i): Whether the claim for deduction of the annual sum of Rs. 4 lakhs was rightly restricted in the corresponding income-tax appeal.

Analysis: The question was treated as governed by the earlier reference in the assessee's own case, and the same reasoning was applied here. The restriction imposed by the Tribunal on the deduction could not be sustained on that basis.

Conclusion: The question was answered in the negative, against the department and in favour of the assessee.

Issue (ii): Whether provision for taxation, proposed dividend and provision for bonus could be treated as 'reserve' under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963 while computing capital.

Analysis: A reserve must be something specifically set apart for future use or for a specific occasion and must show a clear appropriation out of profits. Proposed dividend remained part of undistributed profits and was not a reserve. Provision for taxation and provision for bonus were made to meet existing or accrued liabilities and, under the commercial and statutory distinction between reserve and provision, could not be treated as reserves. Amounts set aside for known liabilities do not answer the description of reserve for capital computation under the Second Schedule.

Conclusion: The question was answered in the affirmative, in favour of the revenue and against the assessee.

Final Conclusion: The reference was disposed of with one issue answered for the assessee and the other against the assessee, and the disputed items relating to taxation, dividend and bonus were held not to form part of reserves for capital computation.

Ratio Decidendi: For computing capital under the Super Profits Tax Act, a reserve requires a clear appropriation of profits for future use, whereas sums set apart to meet known or accrued liabilities are provisions and not reserves.

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