TMI Blog1957 (3) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... of income-tax and excess profits tax. These sums the assessee claimed should be included in the reserves for computing its capital under rule 2(1) in Schedule II for the chargeable accounting period from 1st April, 1946, to 31st December, 1946. In addition, the assessee claimed the inclusion of a sum of Rs. 2,73,504 which stood to its credit in the profit and loss account on 1st April, 1946, and which represented the profits for the period 1st January, 1946, to 31st March, 1946. For the chargeable accounting period 1st January, 1947, to 31st March, 1947, the assessee's claim was with reference to two items shown in the balance sheet for the year of account ending with 31st December, 1946 (1) Rs. 50,000, the amount appropriated from that year's profit to the reserve account, and (2) Rs. 4,75,000, the provision made in that year for the payment of income-tax, business profits tax and excess profits tax. The assessee's claims which were disallowed by the departmental authorities were upheld by the Tribunal. At the instance of the Department the Tribunal referred the following questions to this court under section 66(1) of the Income-tax Act read with section 19 of the Business Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , for the chargeable accounting period 1st April, 1946, to 31st December, 1946, was unsustainable in view of the decision of the Supreme Court in Commissioner of Income-tax, Bombay City v. Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499 We shall first deal with the question, when was an effective and valid allocation made of the sums with reference to which the abatement was claimed under section 2(1) of the Act. As explained by the Supreme Court in CIT, Bombay City v. Century Spg. Mfg. Co. Ltd. [1953] 24 ITR 499 , what we have to examine is whether any one possessed of the requisite authority indicated on or before the crucial dates, 1st April, 1947, and 1st January, 1947, the manner of disposal or the destination of the funds of the company which constituted its profits. Was any portion of the profits specially set apart for any purpose on or before the date specified and so set apart by one having the requisite authority? We have to set out some more facts before we answer these questions. With reference to the year of account 1945, the relevant chargeable accounting period for which commenced on 1st April, 1946, the position was as follows. The re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance sheet a report with respect to the state of the company's affairs, the amount, if any, which they recommend should be paid by way of dividend and the amount, if any, which they propose to carry to the Reserve Fund, General Reserve or Reserve Account to be shown specifically in a subsequent balance sheet." Under this provision therefore while the directors "recommend" to the shareholders the amount to be paid by way of dividends, they are the authority competent to direct the allocation to reserves and they merely intimate to the shareholders what "they propose to do" In line with this, which merely embodied in statutory form the law as previously understood, article 127( t ) of the assessee company's articles of association showed as one of the items of powers that the directors were expressly declared to have before recommending any dividend "to set aside out of the profits of the company such sums as they may think proper for such other purpose as the directors may, in their absolute discretion, think conducive to the interests of the company. "What the annual report of the directors should contain was specified by article 152 of the articles of association, which proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter the material date 1st January, 1947. On that ground the second of the questions referred to this court has to be answered in the negative and against the assessee. The learned counsel for the assessee further contended that, whatever be the dates on which the directors allocated the profits in the manner referred to above, these allocations became 'effective from the last date of the year of account in question, and it was so shown in the balance sheets for 1945 and 1946. He urged that there was a valid and effective allocation to reserves, with reference to each of the chargeable accounting periods before the material date specified by section 2(1) of the Act for" each of them. The learned counsel relied on Commissioner of Income-tax v. Aryodaya Ginning and Manufacturing Company Limited [1957] 31 ITR 145 in support of this contention. In Commissioner of Income-tax v. Aryodaya Ginning and Manufacturing Company Limited [1953] 24 ITR 499 , the chargeable accounting period was from 1st January, 1949, to 31st March, 1949. The year of account ended on 31st December, 1948. The balance sheet of the company as on 31st December, 1948, showed an appropriation of a sum of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clear by the Supreme Court in Commissioner of Income-tax, Bombay City v. Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499. In Commissioner of Income-tax v. Aryodaya Ginning and Manufacturing Company Limited [1957] 31 ITR 145 the learned Chief Justice referred thus to the scope of the resolution of shareholders: "Therefore, the shareholders by passing a resolution on the 27th June, 1949, did not decide that these amounts should constitute reserves as from that date, but they accepted the recommendation of the directors that these amounts should constitute reserves of the company as on the 31st December, 1948." At page 151, the learned Chief Justice observed: " the body of shareholders who are the persons with the requisite authority do not merely determine that a certain amount should constitute reserve, but they also determine and have the necessary authority for determining that that amount should constitute reserve as from a particular date, and in this case there is no doubt that the general meeting of the shareholders was considering the accounts for the year ended 31st December, 1948, and passing resolutions with regard to those accounts." At ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apart for the liquidation of tax liabilities already incurred, the argument being that as the sums would be expended during the course of that year and would not be available for being carried over to the next period, they were not "reserves" on which abatement could be claimed. Mr. Viswanatha Ayyar, the learned counsel for the assessee, raised a preliminary objection to permitting this contention, even if sound, being raised, since that was not the Department's case at any stage of the proceedings. In our judgment this objection is sound and ought to prevail. In the first place, the point as regards the nature of the fund set apart (as distinguished from the date when this was effectively done) not answering to the requisites of a "reserve" within rule 2(1) of Schedule II was never raised by the Department at any stage. It is not a ground mentioned by the Income-tax Officer; nor does it figure in the order of the Appellate Assistant Commissioner or of the Tribunal. No trace of it is indicated even in the statement of the case, not to speak of its forming part of the questions referred to us for decision. Moreover, the point, even as formulated by Mr. Rama Rao Sahib, involves an in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal, and the correctness of that decision does not appear to have been challenged by seeking any reference to the High Court on that point. As pointed out by the Supreme Court in Commissioner of Income-tax, Bombay City v. Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499 at page 503, "the term 'reserve' is not defined in the Act and we must resort to the ordinary natural meaning as understood in common parlance." Their Lordships then set out the dictionary meaning of the word "reserve". One such meaning was: "To set apart for some purpose or with some end in view; to keep for some use." If that meaning were to prevail, it should be obvious that the sum of Rs. 9,00,000 was set apart for a specified purpose with a specified end in view, payment of taxes when they fell due. Reservation of a specified sum for a specified use, when the reservation has been validly made by a person having authority to do so, would appear to bring the sum so reserved within the meaning of the expression "reserve" in rule 2(1). We should, however, make it clear that we are concerned in this case only with the question, whether the allocation of a specified sum out of the profits of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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