Undistributed profits are not a reserve for capital computation unless clearly appropriated as such for future use.

Undistributed profits shown under "Reserves and Surplus" do not constitute a reserve for computing company capital under the Super Profits Tax Act unless there is a clear indication that the was set apart as a reserve for future use. The term "reserve" is not defined in the Act and must be given its ordinary meaning, so only amounts genuinely appropriated as capital reserves can enter the capital computation under the Second Schedule. On the facts, the amount was merely undistributed profits and not a true reserve, so it could not be included in capital for standard deduction.

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Issues: Whether the sum shown under "Reserves and Surplus" in the balance-sheet was a reserve to be included in computing the company's capital for determining standard deduction under the Super Profits Tax Act, 1963.

Analysis: The charging provision made the tax payable with reference to chargeable profits exceeding the standard deduction. Standard deduction was defined as a percentage of the company's capital computed under the Second Schedule, and Rule 1 of that Schedule included reserves that were genuinely part of capital. The term "reserve" was not defined in the Act and had to be understood in its ordinary and natural sense. On the facts, there was no indication that the amount in question had been set apart as a reserve of any kind; it was only a mass of undistributed profits and did not acquire the character of a reserve merely by being described under "Reserves and Surplus".

Conclusion: The amount was not a reserve and could not be included in the company's capital for computing standard deduction. The answer to the reference was in favour of the Revenue and against the assessee.

Ratio Decidendi: An amount of undistributed profits does not become a reserve for tax computation purposes unless there is a clear indication that it has been set apart for future use as a reserve.

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