Excess tax provision treated as reserve for capital computation when it exceeded the amount reasonably necessary at the opening date.

Excess provision for taxation existing on the first day of the previous year was treated as a reserve for capital computation under Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The text applies the principle that a provision for a known liability, to the extent it exceeds what is reasonably necessary, assumes the character of reserve and is not excluded merely because it is later written back. Rule 1A is cited as supporting the same approach, since adjustment for a short or absent provision implies that an excess provision remains part of capital at the opening date. The excess amount was therefore includible in general reserve and in the assessee's capital computation.

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Issues: Whether excess provision for taxation, written back during the accounting year, had to be treated as part of general reserve and included in capital computation under Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: Rule 1 of the Second Schedule requires capital to be determined as on the first day of the previous year relevant to the assessment year. The excess provision for tax existed on that date and, applying the Supreme Court principle that provision for a known liability made in excess of the amount reasonably necessary is to be treated as reserve, the surplus could not be excluded merely because it was later written back. Rule 1A also supports the converse position that where provision is short or absent, capital is adjusted downward, which implies that an excess provision retains the character of reserve for capital computation.

Conclusion: The excess provision for taxation was required to be treated as part of general reserve and included in the assessee's capital computation; the issue was decided in favour of the assessee.

Ratio Decidendi: An excess provision for a known liability, to the extent it is more than reasonably necessary, is to be treated as reserve and included in capital computation as on the relevant opening date of the previous year.

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