1968 (11) TMI 5 - HC - Income Tax

Whether profits lying unutilised and not specially set apart for any purpose do not constitute a reserve within meaning of proviso to section 23A(1) - Held, yes

Issues Involved:
1. Applicability of the proviso to section 23A(1) prior to its amendment by the Finance Act of 1955.
2. Determination of company's capital and reserves representing accumulations of past profits.
3. Consideration of specific items as reserves, including general reserve, reserve for taxation, reserve for dividends, and profit & loss account.
4. Tribunal's refusal to consider certain departmental contentions.

Issue-wise Detailed Analysis:

1. Applicability of the proviso to section 23A(1):
The core question was whether the proviso to section 23A(1) before its amendment by the Finance Act of 1955 applied to the assessee for the assessment years 1953-54 and 1954-55. The respondent company, Messrs. Kores (India) Private Ltd., had distributed more than 60% of its assessable income as dividends. However, the department contended that the proviso required 100% distribution. The court concluded that the proviso did not apply to the company for the assessment years in question.

2. Determination of Company's Capital and Reserves:
The company's paid-up capital was Rs. 5,00,000 during the relevant assessment years. The Tribunal's finding that the company's capital was Rs. 5,00,000 was not challenged. The main issue was determining the reserves representing accumulations of past profits. The court needed to assess whether these reserves exceeded the capital, which would necessitate the application of the proviso.

3. Consideration of Specific Items as Reserves:
- General Reserve: There was no dispute that the general reserve constituted a reserve representing accumulation of past profits.
- Reserve for Taxation: The Tribunal agreed with the Appellate Assistant Commissioner that only the difference between the amount set aside for taxation and the actual tax payable should be considered as a reserve. Thus, Rs. 35,686 for 1953-54 and Rs. 29,863 for 1954-55 were taken as reserves.
- Reserve for Dividends: The figures were Rs. 2,25,000 for 1953-54 and Rs. 1,75,000 for 1954-55.
- Profit & Loss Account: The principal question was whether the amounts in the profit and loss account (Rs. 2,98,676 for 1953-54 and Rs. 4,26,248 for 1954-55) should be considered reserves. The Tribunal held that these amounts were merely undistributed profits and not reserves, referencing the decision in Nanubhai Naneklal & Co. Ltd. v. Commissioner of Income-tax.

4. Tribunal's Refusal to Consider Certain Departmental Contentions:
The department argued that the Tribunal unjustifiably refused to consider certain contentions regarding other items as reserves. However, the court found it unnecessary to address this supplementary question, as it concluded that the Tribunal's decision was correct. The court heard the department's arguments on all items and determined that the reserves did not exceed the paid-up capital, thus the proviso to section 23A(1) did not apply.

Conclusion:
The court answered the original question in the negative, stating that the assessee was not a company to which the proviso to section 23A(1) applied for the assessment years 1953-54 and 1954-55. The supplementary question regarding the Tribunal's refusal to consider the departmental arguments was deemed unnecessary. The Commissioner was ordered to pay the costs of the reference.

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