Reserve versus provision governs super profits tax capital computation, excluding contingent liability provisions while including certain tax and gratuity items.

For super profits tax capital computation, proposed dividend was excluded from capital, while excess provision for taxation and provision for gratuity were included, following the authorities applied. The amount set apart for contingencies, however, was treated as a provision rather than a reserve because it was appropriated against a known contingent liability arising from a pending bonus dispute, and was therefore excluded from capital. The decision turns on the distinction between reserve and provision in capital computation, with the result divided between the assessee and the revenue.

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Issues: (i) whether the proposed dividend was includible in the capital computation for super profits tax purposes; (ii) whether the excess provision for taxation was includible in the capital computation; (iii) whether the provision for gratuity was includible in the capital computation; and (iv) whether the amount set apart as provision for contingencies was a reserve includible in the capital computation or a provision excluded from it.

Issue (i): whether the proposed dividend was includible in the capital computation for super profits tax purposes.

Analysis: The amount representing proposed dividend was treated as covered by the applicable precedent and, on that basis, was not regarded as part of the capital base.

Conclusion: The proposed dividend was not includible in the capital computation, against the assessee.

Issue (ii): whether the excess provision for taxation was includible in the capital computation.

Analysis: The item was governed by the applicable authority relied upon by the Court, under which the amount was treated as falling within capital for the relevant purpose.

Conclusion: The excess provision for taxation was includible in the capital computation, in favour of the assessee.

Issue (iii): whether the provision for gratuity was includible in the capital computation.

Analysis: The provision for gratuity was held to be governed by the earlier decision relied upon, under which it was treated as part of the capital computation.

Conclusion: The provision for gratuity was includible in the capital computation, in favour of the assessee.

Issue (iv): whether the amount set apart as provision for contingencies was a reserve includible in the capital computation or a provision excluded from it.

Analysis: An amount set aside to meet a known contingent liability falls within the concept of provision and not reserve. Applying the distinction between provision and reserve, and the statutory definition in the companies law, the amount had been appropriated against an existing contingent liability arising from the pending bonus dispute, so it could not be treated as a reserve for capital computation purposes.

Conclusion: The provision for contingencies was not includible in the capital computation, against the assessee.

Final Conclusion: The reference was answered partly for the assessee and partly for the revenue, with the core determination turning on the classification of the disputed amounts as reserve or provision for capital computation under the super profits tax scheme.

Ratio Decidendi: An amount set apart to meet a known contingent liability is a provision, not a reserve, and is excluded from capital computation for super profits tax purposes.

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