Provision versus reserve in capital computation: contingent tax liability set aside as a charge against profits was excluded from capital.

Amounts set aside for a contingent tax liability were treated as a provision, not a reserve, under the commercial accountancy distinction applied to capital computation. A provision is a charge against profits made for anticipated liabilities or contingencies, whereas a reserve represents profits retained as part of capital employed in the business. Because the assessee itself described the amount as a provision and it was earmarked to meet a possible tax obligation, it could not be included in capital merely because no final levy had yet been made. The amount was therefore excluded from the capital base.

---

---

Issues: Whether the amount set apart by the assessee for contingent tax liability under section 23A of the Indian Income-tax Act, 1922 was a provision or a reserve for inclusion in capital under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963.

Analysis: The governing distinction in commercial accountancy is that a provision is a charge against profits made for anticipated liabilities or contingencies, while a reserve is an appropriation of profits retained as part of the capital employed in the business. The assessee had set apart the amount to meet a possible tax liability arising from proceedings under section 23A, and the amount was treated by the assessee itself as a provision in its books. On that basis, and applying the settled test, the amount could not be treated as a reserve merely because no final order of levy had been made by the relevant date.

Conclusion: The amount was a provision and not a reserve, and was therefore not includible in the assessee's capital.

Final Conclusion: The appeal was rejected, and the Revenue's view that the disputed amount did not form part of the capital base was upheld.

Ratio Decidendi: Amounts set apart in respect of an anticipated tax liability are provisions, not reserves, where they are charged against profits and are intended to meet a contingent obligation rather than to remain part of the capital employed.

---