Whether proposed additions to reserves as on first day of relevant previous year will have to be treated as "reserves" as on such first day in computing capital of company - Income Tax - 76/1972

Circular no 76 Dated 2/2/1972 Second Schedule - Capital computation Whether proposed additions to reserves as on first day of relevant previous year will have to be treated as "reserves" as on such first day in computing capital of company 1. Attention is invited to the decision of the Supreme Court in the case of CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566 which has an important bearing on the provisions of the Explanation to rule 1 of the Second Schedule. The aforesaid Explanation, inter alia, provides that any amount standing to the credit of an account under the heading "Proposed addition to reserves" as on the first day of the relevant previous year will not be regarded as a "reserve" for the purposes of computing the capital of the company. The Supreme Court has held that appropriation to reserves by the directors of a company out of the profits of a particular previous year, even though made after the first day of the next succeeding year, would relate back to such first day and will have to be treated as effective from that day. By enunciating this general principle, the Supreme Court has approved the decision of the Bombay High Court in the case of CIT v. Aryodaya Ginning Mfg. Co. Ltd. [1957] 31 ITR 145 and overruled the decision of the Madras High Court in the case of CIT v. Vasantha Mills Ltd. [1957] 32 ITR 237. In view of this enunciation by the Supreme Court, the additions to reserves out of the profits of a particular "previous year" proposed by the directors of a company would, on being approved in the annual general meeting, shed their characters as proposed additions to reserves and will become part of the reserves of the company with effect from the first day of the immediately following "previous year". Accordingly, these will have to be treated as "reserves" as on such first day in computing the capital of the company for the purposes of the Surtax Act. 2 . The Board desire that all relevant departmental reference applications/appeals before the various High Courts and Tribunals may be withdrawn and pending relevant reference applications/appeals filed by the assessees may be conceded. Circular : No. 76 [F. No. 279/24/72-ITJ], dated 2-2-1972.