1971 (4) TMI 2 - SC - Income Tax

Capital Reserve - department s argument that the determination of the Directors to appropriate the amounts to the three items of reserve in August had to be related to 1st April and had to be treated as effective from that day cannot be accepted - Revenue s appeal dismissed

Summary

Issues:
Whether the sums appropriated by the directors towards reserves should be added to compute the capital of the company as on a specific date in accordance with the Companies (Profits) Surtax Act, 1964.

Analysis:
The judgment in question pertains to the interpretation of the Companies (Profits) Surtax Act, 1964, specifically focusing on the computation of a company's capital for the purpose of surtax. The central issue revolves around the inclusion of three sums appropriated by the directors towards reserves in the capital calculation as of a particular date. The Act imposes a special tax on the profits of certain companies, with the tax becoming chargeable based on the company's chargeable profits exceeding the statutory deduction. The definition of "chargeable profits," "assessment year," and "statutory deduction" under the Act are crucial in determining the tax liability of the company.

The Second Schedule to the Act outlines the rules for computing the capital of a company for surtax purposes. Rule I of the Second Schedule specifies the components of a company's capital, including paid-up share capital, reserves, debentures, and borrowed moneys for specific purposes. The reserves in question, namely plant modernisation and rehabilitation reserves, loan redemption reserves, and development rebate reserve, were appropriated by the directors out of the profits of the previous year. The appellant contests the inclusion of these appropriations in the capital computation as of the beginning of the previous year.

The appellant argues that the appropriations made by the directors on a date subsequent to the commencement of the previous year should not be considered part of the company's capital as of the beginning of that year. However, the court rejects this argument, emphasizing that the directors' determination to appropriate the sums to reserves on a later date should be related back to the beginning of the previous year. The court draws parallels to a similar case before the Bombay High Court, where retrospective effect was given to resolutions regarding reserves, aligning with the principle that allocations made after the start of a year should be deemed effective from the beginning of that year.

Ultimately, the court upholds the decision of the High Court, affirming that the appropriations towards reserves should be included in the computation of the company's capital for surtax purposes. The appeal is dismissed, with the appellant directed to bear the costs of the respondent. The judgment provides clarity on the treatment of reserves and appropriations in determining a company's capital under the Companies (Profits) Surtax Act, 1964, setting a precedent for similar cases in the future.