Proposed dividend is not a reserve for capital computation when it remains earmarked for distribution as dividend.

An amount earmarked as proposed dividend does not become a reserve for capital computation under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963. A reserve requires a clear appropriation showing that the sum is kept apart for future use or a specified purpose; where the amount is intended for distribution as dividend in the same year and is shown as provision for dividend, it remains undistributed profit rather than reserve. The substance of the appropriation, not the accounting label, determines its character. Accordingly, proposed dividend could not be included in the capital computation.

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Issues: Whether the amount set apart as proposed dividend constituted a reserve within rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, for inclusion in the capital computation.

Analysis: The relevant scheme treated capital as including reserves, and the question turned on whether the sum earmarked for dividend had been truly set apart as a reserve or merely remained part of undistributed profits. The decisive consideration was that a reserve requires a clear act of appropriation showing that the amount is kept apart for future use or a specified purpose. An amount which is proposed to be distributed as dividend in the same year, and is shown in the accounts as provision for dividend, remains earmarked for distribution and does not acquire the character of a reserve merely because it is carried in a separate account head. The Court applied the principle that the true nature of the amount must be determined from its substance and the surrounding circumstances, not from accounting labels alone.

Conclusion: The amount of proposed dividend did not constitute a reserve and could not be included in the capital computation under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963.

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