Taxation provision and proposed dividends are not reserves unless excess over accrued liability is retained for future use.

For capital computation under rule 1 of the Second Schedule to the Super Profits Tax Act, a provision for taxation is not a reserve to the extent it covers an accrued tax liability, because a reserve is an amount set apart for future use and a provision meets a known liability. Any excess in the taxation provision over the liability actually accrued may, however, qualify as a reserve if retained for future use. Amounts shown as proposed dividends do not constitute a reserve, whether or not formal appropriation has been made, because they are earmarked for shareholder payment and not for the company's future use.

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Issues: (i) Whether the amount shown as provision for taxation could be treated as a reserve in computing capital under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963; (ii) Whether the amount shown as proposed dividends could be treated as a reserve for the same purpose.

Issue (i): Whether the amount shown as provision for taxation could be treated as a reserve in computing capital under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963

Analysis: A reserve is an amount set apart for future use, whereas a provision is made against a known liability or anticipated charge. Amounts earmarked to meet a liability that has already accrued are not available for future use and therefore cannot ordinarily be treated as reserves. If, however, a provision includes an excess over the accrued liability and that excess is retained for future use, the excess may answer the description of a reserve.

Conclusion: The amount of provision for taxation can be treated as a reserve only to the extent, if any, that it exceeds the tax liability already accrued on the relevant date. The matter was remitted for inquiry on this aspect.

Issue (ii): Whether the amount shown as proposed dividends could be treated as a reserve for the same purpose

Analysis: Amounts set apart for proposed dividends are earmarked for payment to shareholders and are not retained for the company's future use. Where the amount is appropriated for that specific purpose, it remains outside the category of reserve. If no appropriation has yet been made, it continues as undistributed profits and still does not become a reserve merely because dividends are contemplated.

Conclusion: The amount shown as proposed dividends could not be treated as a reserve.

Final Conclusion: The reference was answered by holding that only any excess in the taxation provision beyond the accrued tax liability could qualify as reserve, while the proposed dividends amount did not qualify, and the matter was sent back for limited factual inquiry on the taxation item.

Ratio Decidendi: For purposes of computing capital under the Super Profits Tax Act, a provision for a liability already accrued is not a reserve, but any excess amount not required for that accrued liability may qualify as reserve if earmarked for future use; an amount appropriated for proposed dividends is not a reserve.

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