Reserve for capital computation requires specific appropriation; proposed dividends, tax provisions and surplus balances do not qualify.

Amounts can be treated as "reserves" for capital computation under the Super Profits Tax Act, 1963 only if they are specifically appropriated and kept apart for future use on the relevant valuation date. On that test, proposed dividends remained undistributed profits and not reserves; provision for taxation reflected an accrued liability and was only a provision; a credit balance in the profit and loss account was merely surplus; and a depreciation reserve, not shown to have been earmarked for future use, was also outside the reserve concept. The balance-sheet distinction between reserve, surplus, current liabilities and provisions under the Companies Act, 1956 supported that approach.

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Issues: Whether proposed dividends, provision for taxation, credit balance of the profit and loss account, and depreciation reserve constituted "reserves" includible in the capital computation under the Super Profits Tax Act, 1963.

Analysis: The capital for super profits tax had to be computed with reference to the first day of the relevant previous year, and only amounts answering the legal concept of "reserve" could be included. Applying the ordinary meaning of reserve and the principles drawn from prior authority, an amount earmarked for dividend remained undistributed profit and not a reserve. Provision for taxation was a provision for an accrued and known liability, not a reserve. A credit balance in the profit and loss account, without any appropriation to future use, was merely surplus. A depreciation reserve representing excess of book depreciation over income-tax allowed depreciation, described as a secret reserve, was also not shown to have been specifically set apart for future use. The balance-sheet scheme under the Companies Act, 1956, including the distinction between reserve and surplus and the treatment of proposed dividends and provision for taxation as current liabilities and provisions, supported this conclusion.

Conclusion: None of the four items constituted a reserve for purposes of the Super Profits Tax Act, 1963, and they could not be included in the capital computation.

Final Conclusion: The reference was answered against the assessee and in favour of the Revenue, leaving the disputed items outside the capital base for surtax purposes.

Ratio Decidendi: For the purpose of computing capital under the Super Profits Tax Act, only amounts specifically appropriated and kept apart for future use qualify as reserves; undistributed profits, proposed dividends, provisions for taxation, and similar balances for known liabilities do not.

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