Reserves for capital computation include provisions set aside from profits for definite future liabilities under the Super Profits Tax Act.

A provision qualifies as a reserve for capital-computation purposes under the Super Profits Tax Act when it is specifically set apart out of profits by competent authority for a definite future purpose or contingency. Applying the ordinary commercial meaning of "reserve," the court treated provisions for bonus, taxation, and proposed dividends as reserves because they were earmarked for future liabilities, debited to the profit and loss account, and not merely accrued liabilities. They were therefore includible in the computation of capital under rule 1 of the Second Schedule.

---

---

Issues: Whether the provision for bonus, provision for taxation, and provision for proposed dividends constituted "reserves" includible in the computation of capital under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963.

Analysis: The expression "reserve" was applied in its ordinary commercial sense as something specifically kept apart for future use or for a specific occasion. A reserve must be created by a person having authority to do so, out of profits, and must be a sum set apart for a definite future purpose before dividend distribution. On the facts found, the three items were specifically earmarked to meet future liabilities, were debited to the profit and loss account, and had not been allowed as deductions for income-tax purposes. They were therefore not mere liabilities already accrued, but amounts kept back for anticipated future contingencies.

Conclusion: The three items were correctly treated as reserves and were includible in the computation of capital under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963.

Ratio Decidendi: A sum specifically set apart out of profits, by competent authority, for a definite future purpose or contingency is a reserve for capital-computation purposes under the Super Profits Tax Act.

---