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Issues:
1. Whether the assessee-company is entitled to include specific amounts under 'provision for taxation' and 'proposed dividends' in the computation of reserves for the purpose of determining super profits tax liability. Analysis: The judgment by the High Court of Himachal Pradesh dealt with a reference made by the Income-tax Appellate Tribunal regarding the inclusion of certain amounts in the computation of reserves by an assessee-company. The company, during assessment proceedings under the Super Profits Tax Act, claimed Rs. 2,98,035 as provision for taxation and Rs. 70,000 as proposed dividends in the computation of its capital. The Income-tax Officer rejected the claim, which was upheld in subsequent appeals. The key issue was whether these amounts could be considered as reserves for the purpose of calculating the super profits tax liability. The court delved into the definition and distinction between reserves and provisions in commercial accountancy. It highlighted that reserves are amounts set apart for future use, while provisions are made against anticipated losses or contingencies. The judgment cited various cases to establish the criteria for determining reserves, emphasizing that reserves are earmarked for future use and not for present liabilities. It was clarified that to constitute a reserve, the amount must be earmarked as such by someone with authority. Regarding the specific items in question, the court analyzed the provision for taxation and proposed dividends separately. It concluded that the provision for taxation could be considered a reserve only to the extent that it exceeded the tax liability already accrued. On the other hand, the amount earmarked for proposed dividends was not deemed a reserve as it had been specifically set aside for a known purpose and was not available for future use by the company. The judgment also addressed the argument that the provisions of the Companies Act should not dictate the treatment of these amounts for super profits tax purposes. It emphasized that the treatment of these amounts in the balance sheet was relevant in determining the intention behind categorizing them as reserves. Additionally, it clarified that the absence of the term "provision" in the Super Profits Tax Act did not preclude its consideration in distinguishing between reserves and provisions. In conclusion, the court held that the provision for taxation could be partially treated as a reserve, while the proposed dividends amount could not. The decision provided clarity on the interpretation of reserves for the purpose of calculating super profits tax liability, emphasizing the need for amounts to be earmarked for future use to qualify as reserves.
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