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TMI Blog1957 (3) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... on made in that year for the payment of income-tax and excess profits tax. These sums the assessee claimed should be included in the reserves for computing its capital under rule 2(1) in Schedule II for the chargeable accounting period from 1st April, 1946, to 31st December, 1946. In addition, the assessee claimed the inclusion of a sum of Rs. 2,73,504 which stood to its credit in the profit and loss account on 1st April, 1946, and which represented the profits for the period 1st January, 1946, to 31st March, 1946. For the chargeable accounting period 1st January, 1947, to 31st March, 1947, the assessee's claim was with reference to two items shown in the balance sheet for the year of account ending with 31st December, 1946--(1) Rs. 50,000, the amount appropriated from that year's profit to the reserve account, and (2) Rs. 4,75,000, the provision made in that year for the payment of income-tax, business profits tax and excess profits tax. The assessee's claims which were disallowed by the departmental authorities were upheld by the Tribunal. At the instance of the Department the Tribunal referred the following questions to this court under section 66(1) of the Income-tax Act read ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of rule 2(1). The learned counsel for the assessee conceded that the claim of the assessee, that the sum of Rs. 2,73,504 constituted a reserve on 1st April, 1946, for the chargeable accounting period 1st April, 1946, to 31st December, 1946, was unsustainable in view of the decision of the Supreme Court in Commissioner of Income-tax, Bombay City v. Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499 We shall first deal with the question, when was an effective and valid allocation made of the sums with reference to which the abatement was claimed under section 2(1) of the Act. As explained by the Supreme Court in CIT, Bombay City v. Century Spg. & Mfg. Co. Ltd. [1953] 24 ITR 499, what we have to examine is whether any one possessed of the requisite authority indicated on or before the crucial dates, 1st April, 1947, and 1st January, 1947, the manner of disposal or the destination of the funds of the company which constituted its profits. Was any portion of the profits specially set apart for any purpose on or before the date specified and so set apart by one having the requisite authority? We have to set out some more facts before we answer these questions. With referenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 131A dealing with the contents of the directors' report which should accompany the balance sheet enacts: "131A. (1) The directors shall make out and attach to every balance sheet a report with respect to the state of the company's affairs, the amount, if any, which they recommend should be paid by way of dividend and the amount, if any, which they propose to carry to the Reserve Fund, General Reserve or Reserve Account…………to be shown specifically in a subsequent balance sheet." Under this provision therefore while the directors "recommend" to the shareholders the amount to be paid by way of dividends, they are the authority competent to direct the allocation to reserves and they merely intimate to the shareholders what "they propose to do" In line with this, which merely embodied in statutory form the law as previously understood, article 127(t) of the assessee company's articles of association showed as one of the items of powers that the directors were expressly declared to have before recommending any dividend "to set aside out of the profits of the company such sums as they may think proper--for such other purpose as the directors may, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of Rs. 5,25,000 out of the profits was made by the directors at their meeting held on 15th April, 1947. They had the requisite authority to make that allocation, but they exercised it only after the material date 1st January, 1947. On that ground the second of the questions referred to this court has to be answered in the negative and against the assessee. The learned counsel for the assessee further contended that, whatever be the dates on which the directors allocated the profits in the manner referred to above, these allocations became 'effective from the last date of the year of account in question, and it was so shown in the balance sheets for 1945 and 1946. He urged that there was a valid and effective allocation to reserves, with reference to each of the chargeable accounting periods before the material date specified by section 2(1) of the Act for" each of them. The learned counsel relied on Commissioner of Income-tax v. Aryodaya Ginning and Manufacturing Company Limited [1957] 31 ITR 145 in support of this contention. In Commissioner of Income-tax v. Aryodaya Ginning and Manufacturing Company Limited [1953] 24 ITR 499, the chargeable accounting period was from 1st Ja ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds of the company available to it constitute only a mass of undistributed profits and no portion of such undistributed profits can be called a reserve. That was made clear by the Supreme Court in Commissioner of Income-tax, Bombay City v. Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499. In Commissioner of Income-tax v. Aryodaya Ginning and Manufacturing Company Limited [1957] 31 ITR 145 the learned Chief Justice referred thus to the scope of the resolution of shareholders: "Therefore, the shareholders by passing a resolution on the 27th June, 1949, did not decide that these amounts should constitute reserves as from that date, but they accepted the recommendation of the directors that these amounts should constitute reserves of the company as on the 31st December, 1948." At page 151, the learned Chief Justice observed: "………the body of shareholders who are the persons with the requisite authority do not merely determine that a certain amount should constitute reserve, but they also determine and have the necessary authority for determining that that amount should constitute reserve as from a particular date, and in this case there is no doubt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in regard to the first chargeable accounting period and Rs. 4,75,000 as regards the next, could not really be treated as "reserves", since they represent moneys set apart for the liquidation of tax liabilities already incurred, the argument being that as the sums would be expended during the course of that year and would not be available for being carried over to the next period, they were not "reserves" on which abatement could be claimed. Mr. Viswanatha Ayyar, the learned counsel for the assessee, raised a preliminary objection to permitting this contention, even if sound, being raised, since that was not the Department's case at any stage of the proceedings. In our judgment this objection is sound and ought to prevail. In the first place, the point as regards the nature of the fund set apart (as distinguished from the date when this was effectively done)--not answering to the requisites of a "reserve" within rule 2(1) of Schedule II was never raised by the Department at any stage. It is not a ground mentioned by the Income-tax Officer; nor does it figure in the order of the Appellate Assistant Commissioner or of the Tribunal. No trace of it is indicated even in the statement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 31 ITR 145 a sum of Rs. 12,50,000 was set apart for payment of taxes. The claim of the assessee that it constituted "reserve" was negatived by the Tribunal, and the correctness of that decision does not appear to have been challenged by seeking any reference to the High Court on that point. As pointed out by the Supreme Court in Commissioner of Income-tax, Bombay City v. Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499 at page 503, "the term 'reserve' is not defined in the Act and we must resort to the ordinary natural meaning as understood in common parlance." Their Lordships then set out the dictionary meaning of the word "reserve". One such meaning was: "To set apart for some purpose or with some end in view; to keep for some use." If that meaning were to prevail, it should be obvious that the sum of Rs. 9,00,000 was set apart for a specified purpose with a specified end in view, payment of taxes when they fell due. Reservation of a specified sum for a specified use, when the reservation has been validly made by a person having authority to do so, would appear to bring the sum so reserved within the meaning of the expression "reserve" in rule 2(1). We should, how ..... X X X X Extracts X X X X X X X X Extracts X X X X
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