Law:

Section:

Rule 1, Schedule I to the Super Profits Tax Act, 1963 - Computation of Capital - Assessment year 1963-64 - Whether amount standing in provision for taxation account, is an amount set apart for meeting liabilities known to exist and hence, it should not be included as part of reserves in computing capital of company - Held, yes - Whether however, where on date of balance-sheet there was no existing liability for dividend, amount transferred to proposed dividend account amounted to reserve and was includible in computing capital of company - Held, yes FACTS The assessee-company by its resolution of its board of directors transferred certain amounts to 'taxation provision' and 'proposed dividend' account. The assessee contended that the provision for taxation and the amount set apart for the proposed dividend should be included as part of the reserves in the computation of the capital base of the company for standard deduction under rule 3 in the Second Schedule. The Super Profits Tax Officer rejected the contention of the assessee-company regarding both the claims. The AAC affirmed the order of the ITO but the Tribunal allowed the appeal and directed that both the items should be included in the computation of the capital of the company. On reference : HELD If amount is set apart to meet a present liability or liability which is known at present, it would be a provision as distinguished from a reserve. If, however, the amount is set aside out of profits or other surpluses and is not designed to meet a liability known to exist at the date of the balance-sheet, it would be a reserve. So far as provision for taxation reserve was concerned, the amount was set apart for meeting liabilities known to exist and it was a provision as distinguished from a reserve. It is true, that it is the substance and not the form that matters and if there is no existing liability as at the date of the balance-sheet, i.e. 31-12-1961, in the instant case, the amount set apart for the dividend could not be said to be an amount set apart for meeting a present liability. Though, therefore, under the Companies Act, 1956 the proposed dividend has to be shown under the heading "provisions", in…

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