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Issues Involved:
1. Whether the sum of Rs. 8,64,961 was a reserve for the purpose of rule 1 of Schedule II of the Super Profits Tax Act, 1963. Issue-Wise Detailed Analysis: 1. Whether the sum of Rs. 8,64,961 was a reserve for the purpose of rule 1 of Schedule II of the Super Profits Tax Act, 1963. The core issue was whether the proposed dividend amounting to Rs. 8,64,961 could be classified as a "reserve" under rule 1 of Schedule II of the Super Profits Tax Act, 1963. - Background and Arguments: - The assessee, a limited company, had claimed the amount of Rs. 8,64,961 as a reserve for the assessment year 1963-64. - The Income-tax Officer initially included this amount in the standard deductions but was later overruled by the Commissioner of Income-tax, who excluded it, referencing the Supreme Court decision in Commissioner of Income-tax v. Century Spinning and Manufacturing Company Ltd. - The assessee appealed to the Appellate Tribunal, which ruled that the proposed dividend amount should be treated as a reserve, distinguishing it from the Century Spinning case on the grounds that the amount was not merely earmarked but set apart and stored up for future use. - Tribunal's Observations: - The Tribunal noted that unlike in the Century Spinning case, the proposed dividend in this case was not merely earmarked but kept apart and stored up as evident from the profit and loss account and the balance-sheet. - It emphasized that the proposed dividend had been given a definite treatment, indicating it was a reserve. - Arguments Before the High Court: - The department argued that the amount could not be considered a reserve, relying on the definitions and provisions of the Super Profits Tax Act and the precedent set by the Century Spinning case. - The assessee contended that once an amount is separated from the mass of profits and given a distinct entity, it becomes a reserve. - High Court's Analysis: - The court referred to the Supreme Court's ruling in Century Spinning, which established that for an amount to be considered a reserve, it must be separated from the mass of profits and not earmarked for distribution as a dividend. - The court highlighted that the mere earmarking of funds does not constitute a reserve unless it is specifically set apart for future use or a specific purpose. - It noted that the directors' recommendation for dividend distribution and the shareholders' subsequent approval indicated the amount was intended for immediate distribution, not as a reserve. - Conclusion: - The court concluded that the Tribunal erred in treating the proposed dividend as a reserve. It emphasized that the reservation of profits for distribution in the same year as a dividend is inconsistent with the concept of a reserve. - The court agreed with the Allahabad High Court's decision in Commissioner of Income-tax v. Hind Lamps Ltd., which held that a proposed dividend cannot be included in the computation of capital under the Super Profits Tax Act. - Final Judgment: - The High Court answered the question in the negative, ruling in favor of the department and against the assessee. The proposed dividend of Rs. 8,64,961 was not considered a reserve under rule 1 of Schedule II of the Super Profits Tax Act, 1963. Separate Judgments: - PRITAM SINGH PATTAR J. concurred with the judgment, agreeing with the analysis and conclusion. Outcome: - The question was answered in the negative, favoring the department. The parties were directed to bear their own costs.
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