1957 (3) TMI 20 - HC - Companies Law

Summary

Issues Involved:
1. Whether the sum of Rs. 13,73,504 or any lesser sum brought forward on 1st April, 1946, forms part of the company's capital within the meaning of rule 2(1) of Schedule II of the Business Profits Tax Act for the chargeable accounting period 1st April, 1946, to 31st December, 1946.
2. Whether the sum of Rs. 5,25,000 brought forward on 1st January, 1947, forms part of the company's capital within the meaning of rule 2(1) of Schedule II of the Business Profits Tax Act for the chargeable accounting period 1st January, 1947, to 31st March, 1947.

Analysis of Judgment:

Issue 1: Sum of Rs. 13,73,504 or Lesser Sum for Period 1st April, 1946, to 31st December, 1946
The primary question was whether the sums shown in the balance sheets as reserves or provisions for taxes should be included in the capital computation under rule 2(1) of Schedule II of the Business Profits Tax Act. The assessee company claimed that Rs. 2,00,000 appropriated to the reserve account and Rs. 9,00,000 provisioned for taxes should be included in the reserves for computing its capital. Additionally, they claimed Rs. 2,73,504 from the profit and loss account.

The court examined whether there was a valid allocation before the crucial dates, 1st April, 1946, and 1st January, 1947. The directors had the requisite authority to allocate funds to reserves, as supported by Section 131 and Section 131A of the Companies Act. The board of directors' resolution on 15th March, 1946, effectively allocated Rs. 11,00,000 before 1st April, 1946. The shareholders' subsequent approval on 15th April, 1946, did not affect the validity of this allocation.

Thus, the court concluded that the sum of Rs. 11,00,000 was validly set apart as reserves before 1st April, 1946, and should be included in the company's capital for the chargeable accounting period from 1st April, 1946, to 31st December, 1946.

Issue 2: Sum of Rs. 5,25,000 for Period 1st January, 1947, to 31st March, 1947
For the chargeable accounting period starting 1st January, 1947, the allocation of Rs. 5,25,000 was made by the directors on 15th April, 1947, which was after the material date of 1st January, 1947. Therefore, this allocation could not be considered effective for the purpose of rule 2(1) of Schedule II.

The court held that the factual appropriation was made only after the material date, and hence, the sum of Rs. 5,25,000 could not be included in the company's capital for the chargeable accounting period from 1st January, 1947, to 31st March, 1947.

Additional Contention on Nature of Funds Set Apart
The Department argued that the sums set apart for tax liabilities (Rs. 9,00,000 and Rs. 4,75,000) should not be considered reserves as they were meant for liquidation of tax liabilities. The court noted that this argument was not raised at any earlier stage of the proceedings and involved factual investigations that were not conducted.

Nevertheless, the court examined the nature of the allocation and concluded that a specified sum set apart for a specified purpose, such as payment of taxes, could constitute a reserve within the meaning of rule 2(1). The court upheld the assessee's claim that Rs. 9,00,000 constituted a reserve for the period from 1st April, 1946, to 31st December, 1946.

Conclusion
The court answered the first question affirmatively, holding that the sum of Rs. 11,00,000 formed part of the company's capital for the period from 1st April, 1946, to 31st December, 1946. The second question was answered negatively, ruling that the sum of Rs. 5,25,000 did not form part of the company's capital for the period from 1st January, 1947, to 31st March, 1947. No order as to costs was made since neither side wholly succeeded in its contentions.