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TMI Blog1951 (3) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... provision for taxation and for compulsory excess profits tax deposit ; and a sum of ₹ 5,08,637 was carried over as balance to the balance sheet. Now the question that falls to be determined is whether this sum of ₹ 5,08,637 can be called a reserve for the purpose of Rule 2(1) in Schedule II of the Business Profits Tax Act. That Rule provides that "Where a company is one to which clause (a) of Rule 3 of Schedule I applies, its capital shall be the sum of the amounts of its paid up share capital and of its reserves in so far as they have not been allowed in computing the profits of the company for the purposes of the Indian Income-tax Act, 1922". Therefore in order to determine the capital of the company for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He says that this sum of ₹ 5,08,637 would be a reserve provided it had been appropriated for some specific purpose, or for some general purpose. Our attention is drawn to the fact that other amounts have been appropriated for specific purposes, e.g., machinery, building, provision for taxation etc., but no purpose has been mentioned as far as this sura of ₹ 5,08,637 is concerned. Therefore, the contention of the Advocate-General is that this sum is not a reserve at all. I do not see any reason at all why in order that a certain amount should be a reserve it should be appropriated for a specific purpose. It was open to the Directors to distribute the sum of ₹ 5,08,637 as dividends. They did not choose to do so and have kept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot;reserves" as if the term was synonymous with "reserve fund". If the Legislature had used the term "reserve fund" instead of "reserves", there would have been considerable force in the argument of the Advocate-General; but considering that the Legislature has used the term "reserves" and not "reserve fund" we must give that expression its plain natural meaning. Therefore, the sum of ₹ 5,08,637 shown in the profit and loss account as balance carried to the balance sheet must be deemed to be a reserve for the purposes of Rule 2 of the second Schedule. The second question that arises on this reference is with regard to the profits of the assessee company from the 1st of January, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these profits is kept back that it constitutes reserves. We are told that these profits were used in business and, therefore, they constitute reserves. But, what makes a part of the profits reserves is not the fact that they are used in the business but that they are consciously kept back and not distributed amongst the shareholders as dividends. No question of distributing any of the profits between the 1st of January and the 1st of April, 1946, to the shareholders ever arose or could arise and, therefore, no question could arise of these profits constituting reserves during this period. The directors were never called upon to consider the question and in fact they did not consider the question as to whether part of the profits earned duri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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