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Rule 1(iii) of the Second Schedule to the Super Profits Tax Act, 1963 - Capital - Computation of - Whether amounts set apart for general reserve, reserve for terminal pay, reserve for bad and doubtful debts, reserve for staff gratuity, proposed dividend and tax exempt dividend reserves constitute 'reserve' - Held that except the amount set apart for proposed dividend, all the amounts constitute reserves and are includible in the computation of capital for the purposes of super profits tax FACTS For the assessment year 1963-64, the previous year being 1-12-1961 to 30-11-1962, the Board of Directors of the assessee-company passed resolution in its meeting held on 15-4-1963 approving transfer of certain amounts to various reserves. The assessee-company claimed that the amounts set apart for general reserve, reserve for terminal pay, reserve for bad and doubtful debts, tax exempt dividend reserve, reserve for staff gratuity and proposed dividend should be taken into account for the purposes of computation of capital. The SPTO declined to treat the general reserve as a part of capital on the ground that it was not a reserve on 1-12-1961. He took the view that the amounts set apart for reserve for terminal pay, reserve for bad and doubtful debts, tax exempt dividend reserve and reserve for staff gratuity were appropriated for meeting specific liabilities and did not, therefore, constitute reserves. He also treated the amount set apart for the proposed dividend as a provision. The Tribunal held that when the directors or shareholders decided to transfer amount of reserve from a particular date, the reserve was constituted from that date and, therefore, the amount of general reserve must be treated as having been transferred to the reserve fund from 1-12-1961 and was to be taken into account for the purposes of computation of capital. The Tribunal further held that the amounts set apart for terminal pay, for bad and doubtful debts and for staff gratuity to meet gratuity payments falling due from time to time were retained for providing known liability of which the amounts could not be determined with substantial accuracy and were, therefore, 'provisions' and not…

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