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TMI Blog1971 (12) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... ax 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 capital and of its reserve, if any, created under the proviso (b) to clause (vib) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922, or under sub-section (3) of section 34 of the Income-tax Act, 1961, and of its other reserves in so far as the amounts credited to such other reserves have not been allowed in computing its profits for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce. 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 as dividend by a resolution of the shareholders. The court held that on April 1, 1946, the amount remained a mass of undistributed profits which was available for distribution and was not earmarked as a reserve. As a mass of undistributed profits on that date, it could not automatically become a reserve. It was explained that while the directors had recommended the distribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous 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 one built out of profits, and that reserves built up from other sources were also admissible. The court reiterated the view expressed in earlier decisions that to constitute a " reserve " the amount must be specifically kept apart for future use or for a specific occasion. It observed that in the United States the accumulated profits at the end of the accounting year were not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncerned, 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 during the year. From the contention made on behalf of the assessee before the Tribunal, one gathers that the provision was made for taxation in anticipation of quantification of the tax liability. It was a provision and not a reserve. It was provision made for current liability, the liability having already accrued when the income was earned and awaited merely quantification by as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um 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 providing for proposed allocations, viz., dividend, bonus or reserves." The balance in the profit and loss account is referred to as the "surplus", and, as the head " Reserve and surplus " clearly indicates, a surplus is not a reserve. Therefore, the balance in the profit and loss account cannot be treated as a reserve. Then, in the same clause a proposed allocation for dividend is spoken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to April 1, 1963, on which date the accounting year commenced. The Supreme Court repelled the contention urged on behalf of the revenue that those appropriations could be taken into account only in respect of the subsequent year commencing on April 1, 1964. It seems to us that the question which arose in that case does not arise before us. As we have already pointed out, none of the items under ..... X X X X Extracts X X X X X X X X Extracts X X X X
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