Law:

Section:

Second Schedule to the Super Profits Tax Act, 1963 - Capital - Computation of - Whether capital reserve, stocks and store reserves, bad and doubtful debts reserve, loans and insurance reserve, investment reserve, rehabilitation reserve, gratuity reserve, reserve for special survey, reserve for contingencies, fleet replacement reserve, reserve for exempted profits, reserve for investment depreciation and dividend equalization reserve are all to be treated as 'reserves' and included in the capital base - Held, yes - Whether forfeited moneys reserve and obsolescence reserve are not so includible - Held, yes Facts In the relevant assessment year, the Tribunal accepted the assessee-company's claim, inter alia, that the following reserves are includible in the capital base : (a) capital reserve, (b) stocks and stores reserves, (c) bad and doubtful debts reserves, (d) loans and insurance reserve, (e) investment reserve, (f) obsolescence reserve, (g) forfeited moneys reserve, (h) rehabilitation reserve, (i) gratuity reserve, (j) reserve for contingencies, (k) fleet replacement reserve, (l) reserve for exempted profits, (m) reserve for investment depreciation, and (n) dividend equalization reserve. On reference, the High Court also upheld the Tribunal's order. On appeal: Held Where the liability has actually arisen or anticipated legitimately by the assessee, though the quantum of the liability has been determined, a provision to meet such present liability cannot be treated as 'reserve'. A fund, however, created for payment of a liability which has not already arisen or fallen due but only a provision with regard to the sum that may become liable to be paid is 'other reserve' within the meaning of rule (1) of Second Schedule and should be taken into account in computing the capital of the company for the purpose of the Companies (Profits) Surtax Act, 1964. In the present case, the capital reserves, the High Court had rightly observed, that it represented reserve as it was not earmarked for any existing liability for being utilised by the company. The next item of stocks and stores reserves also did not represent any existing provision for existing liability to meet any…

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