Reserve vs provision distinction controls capital computation; unclaimed dividends cannot be treated as reserve.

Amounts set apart out of profits or surpluses are reserves only if they are not intended to meet known liabilities or diminution in assets; amounts appropriated against existing liabilities are provisions. Applying that commercial distinction under the Second Schedule to the Super Profits Tax Act, the capital reserve, stocks and stores reserves, bad and doubtful debts reserves, obsolescence reserve, loans and insurance reserves, and investment reserve were includible in capital. The forfeited monies account, however, represented unclaimed dividends and similar sums referable to an existing liability to shareholders, so it was not a reserve and was excluded from capital computation.

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Issues: Whether the specified accounts, including capital reserve, stocks and stores reserves, bad and doubtful debts reserves, obsolescence reserve, loans and insurance reserves, investment reserve, and forfeited monies reserve, were to be included in the computation of capital under the Second Schedule to the Super Profits Tax Act, 1963.

Analysis: The statutory scheme charged super profits tax on chargeable profits in excess of the standard deduction, and the standard deduction was linked to the company's capital computed under the Second Schedule. The term "reserve" was not defined in the Act, so its commercial meaning had to be applied: amounts set aside out of profits or surpluses not intended to meet known liabilities, contingencies, or diminution in assets are reserves, whereas amounts set aside to meet existing liabilities are provisions. On that basis, the capital reserve, stocks and stores reserves, bad and doubtful debts reserves, obsolescence reserve, loans and insurance reserves, and investment reserve were treated as reserves. The forfeited monies account stood on a different footing because it represented unclaimed dividends and similar amounts referable to an existing liability to shareholders, payable when claimed, and therefore could not be treated as a reserve.

Conclusion: The question was answered in the affirmative for items (a) to (f) and in the negative for item (g); the forfeited monies reserve account was not includible as reserve, while the other specified accounts were includible.

Final Conclusion: The reference was disposed of by applying the commercial distinction between reserve and provision, resulting in inclusion of the first six disputed items in capital and exclusion of the forfeited monies account.

Ratio Decidendi: An amount is a reserve only if it is set apart out of profits or surpluses and is not intended to meet a known liability, whereas amounts appropriated against existing liabilities are provisions and cannot be included as reserves in the computation of capital.

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