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TMI Blog1961 (1) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... ed chargeable accounting periods has to be computed for the purpose of allowing the " abatement " under the Act. The appellant contended that in computing the amount for the purpose of abatement, it was entitled to include what is termed in the United States " Undivided Profits ", the contention being that this item falls within the word " reserves " in rule 2(1) of Schedule II of the Act which provides : "Where the company is one to which 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 (XI of 1922), diminished by the cost to it of its investments or other property the income from which is not includible in the profits, so far as that cost exceeds any debt for money borrowed by it." It is not necessary to give the details of all the years; but it will be sufficient as an illustration if we were to confine ourselves to the " Undivided Profits " in the balance sheet as on December 31, 1946, wherein the relevant entries were as follows : Capital ... ... $ 77,500,000.00 Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1946, can be treated as reserves and added to the capital, as required by rule 2(1) of Schedule II to the Business Profits Tax Act for the chargeable accounting period December 25, 1946, to December 24, 1947 ?" In its order the Tribunal said that the Treasury Rules in the United States divided capital account into four different heads, Capital, Reserve, Surplus and the Undivided Profits. The reserves are really reserves for liabilities including the reserves for dividends. " The general reserves as shown by the balance sheet in India is equivalent to the Surplus. " " The Undivided Profits is equivalent to the balance of profit and loss account." In the statement of the case submitted to the High Court, the Appellate Tribunal stated that the question whether the Undivided Profits meant the same thing as balance of the profit and loss account was a question of fact and it did not matter what name was given to it. But this was the very question which was referred to the High Court. The High Court, after referring to the directors' report to the shareholders, held that the Undivided Profits of $ 29,534,614.21 did not constitute " reserves " because no direction had been given in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred stock). The following reserves came under item 28 : " (a) Reserve for dividends payable in common stock. (b) Reserves for other undeclared dividends. (c) Retirement account for preferred stock. (d) Reserves for contingencies, etc." Item 29 was as follows : "Total capital accounts". This item is the sum of items 25 to 28, inclusive. Along with this the appellant has placed a copy of the letter from the Deputy Controller of Currency, Washington, the relevant portion of which is as follows : In connection with this matter we wish to assure you that your position as stated is in complete accord with that of the Office of the Comptroller of the Currency. In the United States, the 'Undivided Profits' as reflected in the accounting of a bank actually represents a part of its capital funds. All of the other bank supervisory agencies in the United States consider the 'Undivided Profits' of a bank as a part of its capital funds. In any calculation for the purpose of determining the adequacy of capital in a commercial bank in the United States, the supervisor authorities include 'Undivided Profits' as an integral part of the capital structure as it would not be possible o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Appellate Tribunal as well as the High Court to arrive at an erroneous conclusion. In India at the end of an year of account the unallocated profit or loss is carried forward to the account of the next year, and such unallocated amount gets. merged in the account of that year. In the system of accounting in the U. S. A. each year's account is self-contained and nothing is carried forward. If after allocating the profits to diverse heads mentioned above any balance remains, it is credited to the " Undivided Profits " which become part of the capital fund. If in any year as a result of the allocation there is a loss the accumulated Undivided Profits of the previous years are drawn upon and if that fund is exhausted the banking company draws upon the surplus. In its very nature the Undivided Profits are accumulation of amounts of residue on hand at the end of year of successive periods of accounting and these amounts are by the prevailing accounting practice and the Treasury directions regarded as a part of the capital fund of the banking company. The nature of " Undivided Profits " was considered by the Supreme Court of America in Fedelity Title and Trust Co. v. United States. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the 1st January, 1946, cannot automatically make it a reserve .... A reserve in the sense in which it is used in rule 2 can only mean profit earned by a company and not distributed as dividend to the shareholders but kept back by the directors for any purpose to which it may be put in future ......." Applying this test to the disputed sum, it cannot be said that the amount is not "reserve" within the meaning of the rules. As is shown by the instructions under section 5211 of the Revised Statute of the United States and the letter of the Deputy Controller referred to above, the appellant bank was required to keep a certain sum of money under the head "Undivided Profits" and that is an integral part of the capital structure. Under these circumstances it would be erroneous not to treat the amount of " Undivided Profits " as a part of the capital fund. In our opinion therefore the amount designated as " Undivided Profits " is a part of the reserves and has to be taken into account when computing the capital and reserves within rule 2(1) of Schedule II of the Act. The question which was referred by the Tribunal should have been decided in the affirmative and in favour of the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X
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