1953 (10) TMI 4 - SC - Income Tax

Whether the amount of ₹ 5,08,637 is a part of the reserves of the assessee company as on 1st April, 1946, within the meaning of rule 2(1) of the Rules in Schedule II to the Business Profits Tax Act? Whether the profits of the assessee company from 1st January to 1st April, 1946, should be included in the said reserves as on 1st April, 1946? Held that - The nature of the amount which was nothing more than the undistributed profits of the company, remained unaltered. Thus the profits lying unutilized and not specially set apart for any purpose on the crucial date did not constitute reserves within the meaning of Schedule II, rule 2(1).The balance sheet drawn up by the assessee as showing the profits was prepared in accordance with the provisions of the Indian Companies Act. These provisions also support the conclusion as to what is the true nature of a reserve shown in a balance sheet. We are of the opinion that the view taken by the Bombay High Court is erroneous and must be set aside. The appeal of the Commissioner of Income-tax is allowed As regards the second question, Mr. Kolah, the learned counsel for the company, frankly conceded that the view taken by the High Court on this part of the case is not open to challenge and is correct. The High Court held that the profits for three months from the 1st January, 1946, to the 1st April, 1946, were not reserves which would attract the application of rule 2 of Schedule II. With this conclusion we agree. The assessee s appeal is, therefore, dismissed

Summary

Issues:
1. Whether the amount of Rs. 5,08,637 is part of the 'reserves' of the assessee company as on 1st April, 1946, within the meaning of the Business Profits Tax Act.
2. Whether the profits of the assessee company from 1st January to 1st April, 1946, should be included in the said reserves as on 1st April, 1946.

Analysis:
The judgment by the Supreme Court involved two connected appeals arising from the Bombay High Court's decision on a reference made by the Income-tax Appellate Tribunal. The High Court answered the first question affirmatively and the second negatively. The case revolved around whether a specific amount should be considered a reserve for tax purposes under the Business Profits Tax Act. The company's profits, provisions for depreciation and taxation, and the treatment of the balance amount were key factors in the assessment.

The Court examined the definition of "reserve" under the Act and established that for an amount to qualify as a reserve, it must not have been allowed in computing profits for tax purposes and must meet the criteria of being set aside for future use or enjoyment. The judgment scrutinized the company's actions regarding the disputed sum, emphasizing that on the crucial date, there was no clear indication that the amount was earmarked as a reserve. The Court delved into the company's balance sheet, director recommendations, and shareholder resolutions to determine the nature of the amount in question.

Additionally, the judgment referenced relevant sections of the Indian Companies Act pertaining to dividend recommendations, reserve funds, and balance sheet disclosures. The Court highlighted that the directors' recommendation for dividend distribution did not automatically classify the amount as a reserve, as the shareholders had the final authority in accepting the recommendation. The judgment concluded that the disputed sum did not meet the criteria to be considered a reserve under the Act, overturning the High Court's decision.

Regarding the second issue, the Court concurred with the High Court's ruling that the profits for the specified period were not reserves attracting the application of the relevant rule. The company's appeal was dismissed, while the Commissioner of Income-tax's appeal was allowed. The judgment provided a detailed analysis of the legal principles, factual circumstances, and statutory provisions to arrive at a conclusive decision on the issues raised in the appeals.