Dividend equalisation reserve qualifies as capital reserve and is includible in tax capital computation under the statutory scheme.

Dividend equalisation reserve was treated as a reserve, not a provision, for capital computation under the super profits tax or surtax framework. The statutory scheme and balance-sheet classification under the Companies Act distinguished reserves, being appropriations of profits kept for future use, from provisions made for known liabilities, contingencies, or commitments. Applying that commercial-accountancy distinction and Supreme Court authority, the amount credited to dividend equalisation reserve was not a charge against profits for a known liability. It was therefore includible in the capital computation for the relevant tax assessments in favour of the assessee.

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Issues: Whether the amount credited as dividend equalisation reserve was a reserve, and therefore includible in the capital computation for super profits tax or surtax purposes, or merely a provision excluded from such computation.

Analysis: The statutory scheme under the relevant Second Schedules distinguished between reserves and provisions. The Companies Act, 1956 and the balance-sheet provisions in Schedule VI recognised that amounts set aside out of profits for equalising dividends are reserves, whereas provisions are amounts retained to meet known liabilities, contingencies, or commitments. The Court relied on the commercial-accountancy distinction and on Supreme Court authority to hold that a dividend equalisation reserve is an appropriation of profits retained for future use and not a charge against profits for a known liability.

Conclusion: The dividend equalisation reserve was held to be a reserve and was includible in the capital computation for the relevant tax assessments, in favour of the assessee.

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