TMI Blog1957 (8) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... argeable accounting period exceed the abatement allowable in respect of that period. That is laid down in section 2(17) of the Act. Under section 2(1) abatement means a sum computed by a rather complicated process by reference to the capital of the company on the first day of the chargeable accounting period in accordance with Schedule II of the Act, but as the Act originally stood, the provision was only for chargeable accounting periods ending on or before the 31st day of March, 1947. The Finance Act of 1948 amended section 2(1) of the Business Profits Tax Act so as to provide that in respect of any chargeable accounting period beginning after the 31st day of March, 1947, the amount of the abatement shall be such sum as may be fixed by the annual Finance Act. The same Act provided by section 11(2) that in respect of any chargeable accounting period beginning after the 31st day of March, 1947, the amount of the abatement shall be a sum computed by reference to the capital in accordance with Schedule II of the Act. The provision for computation in accordance with Schedule II of the Act was thus maintained even with respect to chargeable accounting periods beginning after the 31st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not a reserve of the assessee mentioned in rule 2(1) of Schedule II? When the reference came up for hearing before Lahiri, J., and myself, it appeared to us that if the actual fact was as stated by the Appellate Assistant Commissioner and if the amount claimed by the assessee as a reserve had in fact been allowed as contained in a larger amount, the true nature of payments under section 18A of the Income- tax Act would not fall to be considered. The reference was at the instance of the assessee and if the assessee had already got credit for the payments made under section 18A of the Act, its claim could be disposed of on the short ground that it could not expect the same allowance twice. The Tribunal, however, had not adverted at all to the reason given by the Appellate Assistant Commissioner in support of the view taken by him and, therefore, we were left in doubt as to what the actual fats were. Accordingly, we remanded the case under section 66(4) of the Act with a direction to the Tribunal to submit a further statement of case. The Appellate Assistant Commissioner had pointed out that in the balance-sheet of the assessee company showing the financial position as on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 18A. There was thus a total of R. 13,54,054 standing to the debit of advance payment of tax account on 31st March, 1948. Similarly, ₹ 36,67,481 stood to the credit of taxation reserve account on that date. The ₹ 13,54,054 debit has no direct connection with ₹ 36,67,481 credit. It cannot be said that ₹ 13,54,054 has come out of or is included in ₹ 36,67,481. The Appellate Assistant Commissioner was wrong in holding that ₹ 13,54,054 was included in the ₹ 36,67,481.' I shall have something to say about the conclusion drawn by the Tribunal, but shall for the moment proceed on the footing that the smaller and the larger sums were two separate sums and that the smaller was not included in the larger. The general question, therefore, is whether it can be said that when a company makes advance payments of tax under section 18A of the Income-tax Act, it creates a reserve as the term is understood in company law. In the case of Commissioner of Income-tax v. Century Spinning and Manufacturing Co. Ltd. [1953] 24 I.T.R. 499 the Supreme Court had occasion to point out how and when reserves were created. They observed that someone posse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any against the contingency of being required to pay the tax under the assessment to be made. Even if the reserve was created under compulsion, it was still a reserve, because what was compelled was only the parting with the physical possession of the money and not its actual application to or expenditure on the payment of the tax liability. In support of the above line of reasoning Mr. Iyengar, who appeared before us for the assessee, referred to sub-section (11) of section 18A and pointed out that credit for the payments was to be given to the assessee only in the regular assessment which according to him showed that till such credit was given the money continued to remain the property of the assessee. He sought to reinforce that argument by referring to sub- section (5) of the section which provides for payment of some interest by Government from the date of payment up to the date of the provisional or the final assessment. According to Mr. Iyengar payments made under section 18A of the Income-tax Act were in no way different from compulsory reserves under the provisions of other Acts, such as in particular the Banking Companies Act, and their true nature was that they were inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the tax paid by him falls short of the 80 per cent. Again under sub-section (4), the assessee may, in certain circumstances, defer payment of tax on income of the nature of commission which is due, but has not yet been received, but if the payment of tax is wrongly deferred by him, sub- section (7)(b) makes him liable to pay interest for the period during which payment of tax was wrongly deferred on the amount of which the payment was so deferred. If, as Mr. Iyengar contended, payments under section 18A were only investments made by the assessee, they could be so only if the amounts paid remained the assessee's property even after the payments had been made and if the amount of the tax to the payment of which the monies paid were intended to be applied had not yet become due and payable and if by such payments they were not actually paid also on Mr. Iyengar's theory the amount by which the tax is under-estimated and which remains in the hands of the assessee, it being withheld, cannot be said to have become the property of Government. If so, it is impossible to see on what basis the assessee is required to pay interest to Government on the amount by which the actual p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a reserve or reserves which shall, at the discretion of the directors, be applicable for meeting contingencies, or for equalizing dividends, or for any other purpose to which the profits of the company may be properly applied, and pending such application may, at the like discretion, either be employed in the business of the company or be invested in such investments (other than shares of the company) as the directors may from time to time think fit. What is important to notice is that a reserve is created out of the profits. It appears to me that in the case of payments under section 18A made by a company, it may well happen that when some at least of these payments are made there are yet no profits out of which the tax can be paid and, therefore, the money has to be procured from other sources. I am not thinking of what happened in this particular case, but in judging the true nature of payments under section 18A as made by a company, it is pertinent to bear in mind the possibility which I have indicated, If, for example, when the first or the second instalment has become due the company has not yet made any profits in the current year or if even when the fourth instalment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 948, the payments had all been made, the moneys had gone out of the funds of the company into the hands of Government. They could not be recalled and they could not be available to the company for application or use according to its pleasure. I am not overlooking the assessee's argument that since the final appropriation would not be made till the regular assessment, the moneys would continue to belong to the company, although their local habitation might change. The point, however, is that the disposing power of the company over the moneys had completely and irretrievably gone, and if it had gone it is not possible to say that the moneys were still lying as a part of the company's reserve. The foregoing reasons appear to me to be conclusive that payments under section 18A as made by a company cannot be regarded as payments made by way of creating a reserve. I observed at the beginning of this judgment that I would have something to say about the Tribunal's interpretation of the book-keeping or accounting procedure of the company and the manner in which its funds were handled. It appears to me that in a broader sense the Appellate Assistant Commissioner was not wrong ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of it kept apart, it is true, for the time being, but assimilated at a subsequent stage, The Appellate Assistant Commissioner, it seems to me, was right, if the matter is looked at broadly, in holding that regarded from the point of view of a reserve, the sum of ₹ 13,54,054 was really included in the larger sum of ₹ 36,67,481 and that the smaller sum was not intended for an application with which the larger sum had no concern. As however at the beginning of the chargeable accounting period the two funds were still standing separate, I would not like to rest my decision on the ground I have just stated, but I think it would be right to point out what as a matter of accounting and as a matter of the final adjustment of the company's affairs, the true position was. But, as I have said, I would rest my answer to the question asked on the general grounds which I have previously given. On those grounds I hold that the answer to the question referred must be in the affirmative. The Commissioner of Income-tax, West Bengal, will get the costs of this reference as also the costs reserved by the order of the 19th of August, 1954. GUHA, J.--agree. Question answered ..... X X X X Extracts X X X X X X X X Extracts X X X X
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