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Rule 1 of second schedule to the Super Profits-tax Act, 1963 - Capital-Computation of-Whether excess amount of depreciation reserve over amount of depreciation allowed under the Income-tax act constitutes "reserve"-Held, on facts, yes Facts Over the years the assessee-company had debited in its books depreciation which exceeded the depreciation allowed under the income-tax Act by a sum of Rs. 58,85,850. The assessee claimed that this sum should be treated as a reserve and included in the computation of capital. Both the ITO and the AAC disallowed the assessee's claim. On second appeal, the Tribunal held that the depreciation provided in the books in excess of the depreciation allowed for Income-tax assessment should be treated as a reserve for computation of capital. On reference, the revenue contended, inter alia, (i) that there was no evidence of any decision on behalf of the board of directors of the assessee-company to keep the sum of Rs. 58,85,850 as a reserve ; on the contrary, they had treated this as a provision ; (ii) that this was excess depreciation and, therefore, it was really a provision for depreciation that the assessee-company had provided for in the balance sheet, and represented the depreciation which should normally be debited against the profits and not be set apart out of the profit; and (iii) that in view of Explanation 1 to the Second Schedule, this so-called depreciation could not be considered for computing the capital of the company for the purposes of the Act. Held The following tests could be formulated to decide whether a particular amount was a reserve or not : i.a mass of undistributed profits could not automatically become a reserve for the purpose of rule 1 of the Second Schedule and somebody possessing the requisite authority must clearly indicate that the amount had been separated from the general mass of profit in order to constitute it as a reserve ; ii.it should be apparent from the surrounding circumstances that the amount so set apart was infact a reserve to be utilised in future for a specific purpose on a specific occasion ; iii.clear conduct on the part of the directors in setting apart from the mass of undistributed…

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