Provision versus reserve: a known liability remains a provision even after transfer to general reserve.

An amount labelled as a contingency reserve was treated as a provision where it was set aside to meet a known and existing liability for coal supplies. The substance of the amount, not its description, controlled the tax treatment. A provision for a definite liability does not become a reserve merely because it is written back to profit and loss account and later transferred to general reserve. Accordingly, the amount was excluded from capital computation for the earlier year, and the later transfer did not change its character into a reserve for surtax purposes, so the Revenue succeeded on that issue.

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Issues: Whether the amount described as contingency reserve was in substance a provision for a known and existing liability, and if so, whether its transfer to general reserve changed its character into a reserve for capital computation under the surtax law.

Analysis: The determining factor is the true nature of the amount and not the label attached to it. A sum set apart to meet a known liability is a provision, while a reserve is an appropriation of profits retained as capital for unknown contingencies. The assessee owed a definite amount towards coal supplies, and the contingency reserve substantially covered that liability. The unilateral write-back to profit and loss account, and later transfer to general reserve, did not extinguish the liability or alter the character of the amount. A provision does not become a reserve merely because it is merged into general reserve.

Conclusion: The amount was a provision and had to be excluded from capital computation for the earlier year, but it did not become a reserve on transfer to general reserve for the later year; the Revenue succeeded on that issue and the assessee failed on the earlier year issue.

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