Surtax capital computation distinguishes provisions from reserves, while excess depreciation fund balances may qualify as reserve.

Under the Companies (Profits) Surtax Act, 1964, omission to consider the Explanation to rule 1 of the Second Schedule was treated as an error apparent from the record, so rectification of the Tribunal's earlier order was upheld. For capital computation, amounts set apart for contingent liabilities, proposed dividend, profit-sharing bonus and pension scheme were treated as provisions, not reserves, because they reflected liabilities or appropriations for known obligations rather than free reserves. The excess credited to the depreciation fund over depreciation actually allowed was treated as a reserve and included in capital. The Supreme Court thus accepted the distinction between provisions and reserves for surtax purposes.

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Issues: (i) Whether the Tribunal was justified in rectifying its earlier order on the ground of a mistake apparent from the record for not taking note of the Explanation to rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. (ii) Whether the amounts set apart for contingent liabilities, proposed dividend, profit-sharing bonus, pension scheme, and the excess credited to the depreciation fund were to be treated as reserves or provisions for computing capital under rule 1 of the Second Schedule.

Issue (i): Whether the Tribunal was justified in rectifying its earlier order on the ground of a mistake apparent from the record for not taking note of the Explanation to rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The Explanation to rule 1 was material to the computation of capital and directly bore on the classification of amounts shown in the balance-sheet. Omission to consider that clarificatory provision in the earlier order amounted to an error apparent from the record, justifying rectification.

Conclusion: The rectification was valid and the issue was answered against the assessee and in favour of the Revenue.

Issue (ii): Whether the amounts set apart for contingent liabilities, proposed dividend, profit-sharing bonus, pension scheme, and the excess credited to the depreciation fund were to be treated as reserves or provisions for computing capital under rule 1 of the Second Schedule.

Analysis: Amounts shown for contingent liabilities, proposed dividend, profit-sharing bonus, and pension scheme were held to be provisions and not reserves, because they represented liabilities or appropriations for known obligations rather than free reserves. By contrast, the excess credited to the depreciation fund over the depreciation actually allowed in assessment constituted a reserve and was includible in capital. The distinction between reserves and provisions was applied in light of the settled principles governing balance-sheet classification under the surtax schedule.

Conclusion: The four items described above were provisions and not reserves, while the excess depreciation fund was a reserve; the issue was therefore decided partly against the assessee and partly in its favour.

Final Conclusion: The appeals were disposed of by upholding rectification, excluding the specified provision items from capital computation, and including the excess depreciation fund as a reserve, with the net result that both appeals failed.

Ratio Decidendi: For surtax capital computation, amounts representing current liabilities or provisions are not reserves, whereas an excess depreciation fund not absorbed by actual depreciation allowance may constitute a reserve.

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