1954 (8) TMI 41 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Profit and Loss account balances of Rs. 44,233/- and Rs. 14,553/- can be considered as reserves under Rule 2(1) of Schedule II of the Business Profits Tax Act, 1947.
2. Whether the sums of Rs. 11,89,183/- and Rs. 11,80,489/- were correctly disallowed as reserves for the purposes of capital computation under the Business Profits Tax Act.
3. Whether the advance payment of tax under Section 18A of the Income Tax Act can be considered a reserve under Rule 2(1) of Schedule II of the Business Profits Tax Act.

Detailed Analysis:

Issue 1: Profit and Loss Account Balances as Reserves
The first issue concerns whether the amounts of Rs. 44,233/- and Rs. 14,553/- shown in the Profit and Loss account can be treated as reserves for the purposes of Rule 2(1) of Schedule II of the Business Profits Tax Act, 1947. The Tribunal had allowed these amounts as reserves. However, the High Court referenced the Supreme Court's decision in 'I.T. Commr., Bombay City v. Century Spinning and Manufacturing Co. Ltd.', which established that for an amount to be considered a reserve, it must be allocated to a specific purpose by an authority. Since the amounts in question were merely carried forward without any specific allocation, the High Court concluded that these amounts could not be treated as reserves. Therefore, the answer to the first question was in the negative.

Issue 2: Disallowance of Larger Sums as Reserves
The second issue pertains to whether the sums of Rs. 11,89,183/- and Rs. 11,80,489/- could be treated as reserves. The Tribunal had disallowed these amounts, and the High Court upheld this decision. The Court reiterated that for an amount to qualify as a reserve, it must be allocated to a specific purpose by the requisite authority. Since the larger sums were not allocated for any specific purpose and were merely carried forward, they did not acquire the character of reserves. Thus, the High Court answered the second question in the affirmative.

Issue 3: Advance Payment of Tax as Reserve
The third issue was whether the advance payment of Rs. 13,54,054/- under Section 18A of the Income Tax Act could be considered a reserve. The Tribunal had disallowed this amount, arguing that it was a payment towards a present statutory liability and not a reserve. However, the High Court found discrepancies in the facts as stated by the Tribunal and the Appellate Assistant Commissioner. The Assistant Commissioner had noted that the amount was shown on both the capital and liabilities side and the assets side of the balance sheet, suggesting a double allowance. The Tribunal, however, did not address this discrepancy and dealt with the issue on a general basis. Consequently, the High Court referred the case back to the Tribunal for a correct statement of facts to reconcile these discrepancies.

Conclusion:
The High Court answered the first question in the negative, the second question in the affirmative, and referred the third question back to the Tribunal for further clarification. The Court emphasized the need for accurate and consistent statements from the Tribunal to facilitate judicial review.