Law:

Section:

Second Schedule to the Super Profits Tax Act, 1963 - Capital - Computation of - Assessment Year 1963-64 - Whether provisions for bonus, for taxation and for proposed dividends were entitled to be treated as "reserves" for purposes of rule 1 of Second Schedule and could be included in computation of capital under that provision - Held, yes Words and Phrases " Reserve" appearing in Second Schedule to Super Profits Tax Act, 1963 FACTS During assessment proceedings under the Super Profits Tax Act, for the assessment year 1963-64, the assessee claimed that provision for bonus, provision for taxation and provision for proposed dividends should be considered while computing its capital investment. The ITO rejected the claim on the ground that these amounts were designed to meet a contingent liability and, therefore, could not be treated as reserves. The AAC affirmed the decision. On second appeal, the Tribunal directed that the three items should be treated as "reserves" and included in the computation of the capital of the assessee for the purposes of super profits tax. On reference : HELD The term "reserve" means a sum specifically kept apart for future use or for a specific occasion. The reservation must be effected by some one having authority to do so, and it must be of a specified sum for a specified use. Where it arises out of the surplus profits of the company, it should be set apart before the distribution of dividends to the shareholders. It is a sum laid by or stored for use or application in a future contingency which is anticipated, a fund which is created and maintained for the purpose of being drawn upon in future. In the instant case it was clear that the three items, provision for bonus, for taxation and for proposed dividends represented amounts specifically set apart for meeting future liabilities. It did not appear that the revenue ever contended before the Tribunal that the amounts represented liabilities which had already arisen during the relevant previous year and were not intended for a future contingency. Nor was it questioned that the provision was made by the requisite authority. There was no dispute that the three items had actually been…

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