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TMI Blog1972 (7) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... n ". The assessee claimed that as many as fifteen accounts represented reserves which should be taken into account while determining the " standard deduction ". The Income-tax Officer disallowed the entire claim on the ground that the so-called reserves were not free reserves, but were meant to discharge existing liabilities or to safeguard against the diminution in the value of assets. On appeal the Appellate Assistant Commissioner of Income-tax allowed the claim of the assessee in part and held that the following accounts do not represent allowable reserve : (a) Out of capital reserve. (b) Investment reserve. (c) Future taxation reserve. (d) Forfeited monies. (e) Profit & loss account, account balance. (f) Provision for taxation. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in clause (9) of section 2 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 contains rules for computing the capital of a company for purposes of super profits tax. Rule 1 of the Schedule in effect, so far as is material for our purposes, provides that the capital of a company shall be the sum of amounts as on the first day of the previous year relevant to the assessment year of its paid up share capital and of its reserves except those which are allowed as deductions in computing the profits of the company for purposes of the Indian Income-tax Act, 1922, or the Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al accuracy." These definitions have been accepted by the chartered accountants in India and the terms " reserves " and " provisions " are known in that sense in the commercial world. This is evident from the Commentaries on the Indian Companies Act by A. Ramaiya (6th edition, at page 371). The learned author, after observing that the term " reserve " has not been defined in the Companies Act, sets out its meaning as given in various dictionaries. At the end it is observed : " The Institute of Chartered Accountants, England, has defined a 'reserve' as an amount set aside out of profits and other surpluses which are not designed to meet any liability, contingency, commitment or diminution in value of assets known to exist as at the date of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal in paragraph 17 of its appellate order has dealt with this account in the following words: " The forfeited monies amounting to Rs. 3,10,570 represents reserve in the sense that certain unclaimed dividends and other amounts have been transferred to the forfeited monies reserve account. The said amount has, therefore, to be considered for purposes of computation of capital base of the assessee-company. " The Tribunal has not set out detailed information with regard to the nature of this account. In paragraph 17 of his appellate order, the Appellate Assistant Commissioner of Income-tax has given the following facts with regard to this account: " Forfeited monies: Rs. 3,10,570. 17. The appellant had been transferring to this account div ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liability of the company would not cease ; only the remedy is barred. It is open to the company to waive the bar of limitation and to make payment of a belated claim. When such a payment is made, it would still be a payment made against an existing liability. In any view of the matter, this account, so far as it represents the unclaimed dividend, represents a provision in respect of an existing liability of a company and, as such, it cannot be called a reserve. We, accordingly, answer the question as under : " Our answer to items Nos. (a), (b), (c), (d), (e) and (f) is in the affirmative and in respect of item No. (g) 'forfeited monies reserve account' is in the negative. " In the circumstances of the case, there will be no order as to co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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