1967 (9) TMI 12 - HC - Income Tax

Whether the sum under Reserves and Surplus in the balance-sheet, is to be taken into consideration in computing the capital of the applicant-company for the purpose of determining the standard deduction as contemplated in sub-s. (9) of section 2 of the Super Profits Tax Act, 1963, and the Schedules mentioned therein - held, no

Summary

Issues:
1. Interpretation of the term "reserve" in the context of determining standard deduction for a company under the Super Profits Tax Act, 1963.

Detailed Analysis:
The judgment pertains to a reference made by the Income-tax Appellate Tribunal, Madras Bench, at the request of the assessee, a public limited company named Aluminium Industries Limited, Kundara, concerning the assessment year 1963-64. The main issue revolves around whether a specific sum mentioned under 'Reserves and Surplus' in the balance sheet should be considered in computing the capital of the company for determining the standard deduction under the Super Profits Tax Act, 1963. The Act's charging section, Section 4, imposes a tax on companies based on their chargeable profits exceeding the standard deduction. The definition of "chargeable profits" and "standard deduction" are crucial in this context, with the latter being defined as 6% of the company's capital or Rs. 50,000, whichever is greater. The capital of a company includes paid-up share capital, certain reserves, and other specified components as per the Second Schedule of the Act.

The judgment emphasizes the significance of reserves in determining a company's capital and, subsequently, the standard deduction. Rule 1 of the Second Schedule outlines the components of a company's capital, including reserves created under specific provisions of income tax laws. The term "reserve" is not explicitly defined in the Act, leading to a reliance on its ordinary meaning. Referring to previous judicial interpretations, the court highlights that a reserve involves setting aside funds for future use or specific purposes, distinct from undistributed profits. In this case, the court found that the sum in question did not meet the criteria of being classified as a reserve but rather constituted undistributed profits as of a certain date.

Ultimately, the court ruled against the assessee, concluding that the sum under consideration did not qualify as a reserve and, therefore, should not be factored into the computation of the company's capital for standard deduction purposes under the Super Profits Tax Act, 1963. The judgment underscores the importance of clear indications to differentiate between reserves and undistributed profits, aligning with established legal principles and precedents. The decision was made without any specific order regarding costs, bringing closure to the interpretation of the term "reserve" in the context of tax assessment for the company in question.