Provisions for known liabilities are not reserves, so they cannot be included in capital for surtax computation.

Amounts set aside to meet known or anticipated business liabilities, even where the precise figure is uncertain, are provisions and not reserves. The High Court treated provisions for breakages, damages, contingencies and bonus as current liabilities reflected in the accounts as provisions, with no earmarking or destination showing appropriation to reserve. They were therefore excluded from capital computation under the Super Profits Tax Act, 1963 and the Companies (Profits) Surtax Act, 1964. The disputed amounts could not be included as reserves for surtax or super profits tax purposes, and the references were answered against the assessee.

---

---

Issues: (i) Whether the amounts shown as provision for breakages and damages on sales and provision for contingencies and bonus were "other reserves" includible in capital for super profits tax under the Super Profits Tax Act, 1963. (ii) Whether the amounts shown as reserves for breakages and damages and contingencies were includible in capital for surtax under the Companies (Profits) Sur-tax Act, 1964.

Issue (i): Whether the amounts shown as provision for breakages and damages on sales and provision for contingencies and bonus were "other reserves" includible in capital for super profits tax under the Super Profits Tax Act, 1963.

Analysis: The expressions "reserve" and "provision" had to be distinguished by their commercial and legal character. A reserve is an amount set apart out of profits for future use and not to meet a known liability, whereas a provision is made against an anticipated or known liability, even if the amount cannot be determined with substantial accuracy. The company itself had shown both items under current liabilities and provisions, not under reserves, and the liabilities related to normal and recurring business contingencies. No authority had earmarked them as reserves or indicated any destination for them.

Conclusion: The amounts were provisions and not reserves. The question was answered against the assessee and in favour of the department.

Issue (ii): Whether the amounts shown as reserves for breakages and damages and contingencies were includible in capital for surtax under the Companies (Profits) Sur-tax Act, 1964.

Analysis: Under the 1964 Act, the Second Schedule and its Explanation excluded items in the nature of current liabilities and provisions as shown in Schedule VI of the Companies Act, 1956. The same factual position applied: the amounts were set apart to meet known business liabilities and were treated in the accounts as provisions. They therefore fell outside "reserve" for capital computation purposes.

Conclusion: The amounts could not be included as reserves in the capital computation. The question was answered against the assessee and in favour of the department.

Final Conclusion: On both references, the disputed amounts were held to be provisions made for known liabilities and not reserves for capital computation under the relevant surplus tax statutes.

Ratio Decidendi: An amount set aside to meet a known liability, even if its precise quantification is uncertain, is a provision and not a reserve, and only amounts clearly appropriated as reserves can be included in capital for surplus tax purposes.

---