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TMI Blog1968 (12) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... the works provident fund, namely, Rs. 77,79,221, being the amount contributed by the employees, constitute "reserves" within the meaning of rule 2 of Schedule II of the Business Profits Tax Act. The question arises under the following circumstances: We are concerned with two "chargeable accounting periods" ending on March 31, 1947, and March 31, 1949. Under section 4 of the Business Profits Tax Act the charge of tax is in respect of any business to which the Act applies "on the amount of the taxable profits during any chargeable accounting period. . . ""Taxable profits" is defined in section 2(17) as meaning the amount by which the profits during a chargeable accounting period exceed the abatement in respect of that period. Therefore, the tax is leviable on the amount by which the profits during the chargeable accounting period exceed " the abatement " in respect of that period. "Abatement" is defined in section 2(1) to mean "in respect of any chargeable accounting period ending on or before the 31 st day of March, 1947, a sum which bears to a sum equal to- (a) in the case of a company, not being a company deemed for the purposes of section 9 to be a firm, six per cent. of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able accounting periods referred to as contribution from outside parties for capital expenditure were, it appears, received by the assessee as a contribution from the Central Government for certain capital purposes. The assessee by virtue of its special position as a manufacturer of steel was receiving certain bounties from the Government of India and other parties for capital purposes, and the two amounts of Rs. 9,56,838 and 10,15,242 were shown by the company in their balance-sheet on the "capital and liabilities" side with the narration "contribution from outside parties for capital expenditure". The question was whether these amounts constitute "reserves" and should, therefore, be included in the computation of the capital of the company. If they are so included the abatement to be deducted from the total profits of the company will to that extent increase and correspondingly reduce the tax burden upon the assessee. If, however, they are not included in the reserves in so far as they have not been allowed in computing the profits of the company, then to that extent the abatement will decrease with the corresponding result that the taxable profits will increase. On this questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the word "reserve" in other contexts, in the context in which it is used in rule 2 of. Schedule II, the word "reserve" only shows that it must be a reserve which arises out of profits. In this context counsel for the department stressed that in rule 2(1) the word "reserves" is immediately followed by the words "in so far as they have not been allowed in computing the profits." Therefore, he urged that "reserve" must necessarily have reference to the computation of profits and in the particular context in which the word is used it can only mean "reserves" arising out of profits. Another contention of counsel has been that even having regard to the ordinary connotation of the word "reserve" to be found in the cases to which we shall refer, viz., a specific amount set apart for a specific purpose, upon the facts and circumstances of this case, there is nothing to show that this amount was in fact set apart for a specific purpose. All that has been established in the present case is that the Central Government and other parties paid a certain subsidy or contribution to the company. For what purpose it is paid has not been established and, therefore, there is no specification of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the very same argument which counsel for the department has advanced in the present case and it is stated at page 693 as follows : ". . . . that reserves contemplated by rule 2(1) are only those which are built out of profits processed for the purpose of taxation under the Indian Income-tax Act. The Supreme Court negatived this contention pointing out that in their earlier decision in Commissioner of Income-tax v. Century Spinning and Manufacturing Co. Ltd., they had already indicated what was the definition of "reserve". "In its ordinary meaning the expression 'reserve' means something specifically kept apart for future use or for a specific occasion, and they held that upon that meaning the amounts in the "capital paid in surplus" account were reserves as also the amounts in the "earned surplus" account. The profit of the company being allocated to the "earned surplus" account was intended to designate a fund to be utilized for the purpose of the business of the company which retained its identity year after year and so represented "reserves". So far as rule 2 is concerned the Supreme Court pointed out that two essential characteristics must be present before the assessee can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have to add to it the reserves and you have to add only those reserves which have been subjected to taxation'. With great resect to his Lordship I cannot see why reserves must necessarily have been subjected to taxation before they can be added to the paid-up share capital of the company to determine the abatement permissible under the Act. If for instance a company had certain reserves created before the Indian Income-tax Act, 1922, came into force, I see no reason why the company cannot claim to add the same to its paid-up capital for finding out the abatement allowable.... After the Indian Income-tax Act of 1922 came into force, it would be open to the company to create reserves out of allowable deductions under section 10(2) of the Indian Income-tax Act as well as out of net profits after payment of the tax. Rule 2(1) would exclude the first kind of reserves but not those of the second kind." It was this decision which was before the Supreme Court in 59 I.T.R. 685. The decision of the Calcutta High Court was affirmed by the Supreme Court, and they did not disapprove of the above remarks by the Calcutta High Court. On the other hand, it seems that in addition they pointed out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in Commissioner of Income-tax v. Standard Vacuum Oil Co. That decision as we have said is now affirmed by the Supreme Court in [1966] 59 I.T.R. 685 and for the reasons which we have stated we think that the decision of the Tribunal as regards the amounts entered in the books of the assessee as "contribution from outside parties for capital expenditure" in the two chargeable accounting periods must be treated as "reserve" within the meaning of rule 2 of Schedule II of the Business Profits Tax Act. If it is held to be a reserve it will be regarded as capital within the meaning of rule 2(1), and if it is capital it will go to swell the figure of "abatement " under section 2(1) and that in turn win reduce the figure of "taxable profits" under section 4. Accordingly, the question No. I must be answered in favour of the assessee, in the affirmative. Then we turn to question No. 2. In the books of account of the assessee an amount of Rs. 1,55,58,441 was found credited to the works provident fund account with a note in brackets "assets earmarked as per contra Rs. 1,52,24,220". The amount earmarked against employees' accounts came to a total of Rs. 1,52,57,331, though the total amount o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n purposes. They found that that amount was held as a trust for the employees. The Tribunal, therefore, directed the exclusion of the investments referable to that portion of the contribution made by the employees to the provident fund. The investments of the funds standing to the credit of the provident fund account is no longer left to the volition of a company. They are bound to invest these funds in certain stated securities under section 282B(2) of the Companies Act. The amount of the provident fund in the hands of the company would undoubtedly be in the nature of a trust, the amount being held for the benefit of the employees. Rule 2 speaks of the "capital" which includes two items, namely, the paid-up share capital and the reserves in so far as they have not been allowed in computing the capital of the company. The capital thus computed taking into account the said two items has to be diminished by the cost to the assessee of its investments. Reading the rule we cannot conceive that the entire investments of the provident fund account bad to be taken into account in diminishing the amount of the capital to be computed while some part of the provident fund amount may not be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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