Reserve classification under super profits tax: tax provisions and dividend provisions excluded, while excess depreciation may count as reserve.

Provision for taxation set aside against an ascertained liability is not a reserve under the Second Schedule to the Super Profits Tax Act, 1963; only any excess over the actual tax liability can qualify as reserve. Amounts provided for proposed dividends are likewise provisions for a specific liability and do not constitute reserves. By contrast, the excess depreciation credited beyond the amount allowed for tax purposes is treated as a reserve because it represents surplus available to the company after the permitted depreciation charge.

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Issues: Whether the provision for taxation, proposed dividends, and excess depreciation credited to the general reserve constituted reserves within the meaning of the Second Schedule to the Super Profits Tax Act, 1963.

Analysis: A sum set apart to meet an ascertained tax liability is not a reserve, because it is earmarked for discharge of a specific liability and not for the general use of the company. Only the excess, if any, over the actual tax liability can be treated as a reserve. On the same principle, an amount provided for proposed dividend is also a provision for a specific liability and cannot be regarded as a reserve. As regards the depreciation reserve, the excess amount over that allowed for tax purposes, being part of the amount available to the company beyond the permitted depreciation charge, is to be treated as a reserve.

Conclusion: The provision for taxation was not wholly a reserve, but only the excess over the actual tax liability could be treated as such; the provision for proposed dividends was not a reserve; and the excess depreciation amount was a reserve.

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