TMI Blog1971 (12) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... d were to be included in the computation of capital under the Super Profits Tax Act, 1963 ?" The assessee is a limited company. It was assessed under the Super Profits Tax Act, 1963, for the assessment year 1963-64 of which the relevant account year ended on December 31, 1962. Section 4 of the Super Profits Tax Act provides for the levy of super profits tax on a company for an assessment year in respect of so much of its chargeable profits of the previous year as exceed the standard deduction at the specified rate. The first assessment year to which the Act applies is the year commencing April 1, 1963. The expression "standard deduction" has been defined by section 2(8) of the Act to mean an amount equal to six per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule or an amount of Rs. 50,000, whichever is greater. The Second Schedule sets out the rules for computing the capital of the company. Rule 1 declares : " Subject to the other provisions contained in this Schedule, the capital of a company shall be the sum of the amounts, as on the first day of the previous year relevant to the assessment year, of its paid up share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of Income-tax, the Tribunal has now made this reference. What is a " reserve " ? The expression was considered by the Supreme Court in a case arising out of the Business Profits Tax Act. In Commissioner of Income-tax v. Century Spinning and Manufacturing Co. Ltd. the Supreme Court referred to the ordinary natural meaning of the word, as it is understood in common parlance. The court relied on the dictionary meaning of the word " to keep for future use or enjoyment, to set apart for some purpose or with some end in view; to keep for some use; to retain or preserve for certain purposes ". In that case, the question arose whether a sum of Rs. 5,08,637 could be called a "reserve" on April 1, 1946, the relevant date under the Act. It was found that on January 1, 1946, the amount was simply brought from the profit and loss account to the next year, and nobody with any authority on that date made or declared a reserve. On February 28, 1946, the directors of the company earmarked the same for distribution as dividend and did not choose to make it a reserve. Nor did the company, in its meeting of April 3, 1946, decide that it was a reserve. On the contrary, it was actually distributed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the capital structure. When losses occurred in banks it was the usual practice to charge them against the " undivided profits " account. The letter further declared that the term " undivided profits " followed a banking accounting nomenclature used in the United States to designate profits set aside, after provision for expenses, taxes, dividends and reserves, for continuous future use in the business of the bank. Upon this material, the Supreme Court rejected the contention of the revenue that the amount could not be treated as a reserve. It referred to the earlier decision in Century Spinning Manufacturing Co. Ltd., and, applying the test laid down there to the disputed sum, held it to be a "reserve" on the ground that under the statutory instructions the assessee was required to keep a certain sum of money under the head "undivided profits" and that was an integral part of the capital structure. Then follows the decision of the Supreme Court in Commissioner of Income-tax v. Standard Vacuum Oil Co. Ltd. It was held there that it was not necessary that a reserve admissible in the computation of capital under Schedule II, rule 2(1) of the Business Profits Tax Act should be o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of directors of the assessee made a proposal to the shareholders that the amount be distributed among the shareholders by way of dividends and made a provision for that amount in the balance-sheet of the year ending December 31, 1961. Apparently, therefore, the amount was earmarked for payment of dividend and was not treated by the directors as a reserve. So far as this item is concerned, the case, in our opinion, falls within the rule laid down in Century Spinning Manufacturing Co. Ltd. It remained a mass of undistributed profits liable to be distributed as dividend upon the acceptance of the recommendation by the shareholders. It was not set apart as a reserve for any purpose, and, therefore, could not be treated on January 1, 1962, the first day of the relevant previous year, as a reserve for the purposes of Schedule II, rule 1 of the Super Profits Tax Act. Reference may be made to Regulation 87 of Table A of the First Schedule to the Companies Act, 1956. The next item is Rs. 19,16,028 shown as provision for taxation. This consists of Rs. 12,41,028 representing the provision for taxation during the preceding accounting year and Rs. 6,75,000 representing the provision made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anged. In Century Spinning Manufacturing Co. Ltd., the Supreme Court relied upon Regulation 99 of Table " A " of the First Schedule of the Indian Companies Act, 1913, which provided that before recommending any dividend the directors may set aside out of the profits of the company such sums as they thought proper as a reserve. It was emphasised that according to the Regulation any sum out of the profits of the company which was to be made a reserve has to be set aside before the directors recommended any dividend. It is apparent from the corresponding Regulation 87 of Table "A" of the First Schedule to the Companies Act, 1956, that the position remains materially the same. It seems to us that if we refer to the Companies Act, 1956, the position which emerges is in no way inconsistent with what has been laid down by the Supreme Court in the cases mentioned above. Section 211 of the Act provides that the balance-sheet of a company shall be in the form set out in Part I of Schedule VI. In the form of balance-sheet set out in Part I of Schedule VI, item II is headed "Reserve and surplus" Clause (5) of item If reads: " Surplus, that is balance in profit and loss account after prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reserve for the purposes of computation of the capital of a company under the provisions of this Schedule." It is also urged that all the four items, with which we are concerned, or at least some of them, should be regarded according to the Indian practice as "general reserve" and we have been referred to the observation of the Supreme Court in that regard in Standard Vacuum Oil Co. In our opinion, when the Supreme Court made that observation, it referred to the head "earned surplus" in the balance-sheet of the American company, and the Supreme Court specifically treated it as referring to a fund to be utilised for the purposes of the business of the assessee. It was a distinct fund maintained for that purpose, and amounts allocated to it were used in the subsequent years in the business. The account in which the amount was carried retained its identity year after year. We have also been referred by learned counsel for the assessee to the decision of the Supreme Court in Commissioner of Income-tax v. Mysore Electrical Industries. The Supreme Court held in that case that the reserves created by the company by appropriations made on August 8, 1963, must be deemed to relate back ..... X X X X Extracts X X X X X X X X Extracts X X X X
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