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TMI Blog1968 (12) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... edule II, rule 2, in the assessment for the chargeable accounting period ended March 31, 1947?" Though the questions are couched in different forms the short question that we have to determine is whether the amount of the "contribution from outside parties for capital expenditure" and the amount pertaining to half of the works provident fund, namely, Rs. 77,79,221, being the amount contributed by the employees, constitute "reserves" within the meaning of rule 2 of Schedule II of the Business Profits Tax Act. The question arises under the following circumstances: We are concerned with two "chargeable accounting periods" ending on March 31, 1947, and March 31, 1949. Under section 4 of the Business Profits Tax Act the charge of tax is in respect of any business to which the Act applies "on the amount of the taxable profits during any chargeable accounting period. . . ""Taxable profits" is defined in section 2(17) as meaning the amount by which the profits during a chargeable accounting period exceed the abatement in respect of that period. Therefore, the tax is leviable on the amount by which the profits during the chargeable accounting period exceed " the abatement " in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 9,56,838 Rs. 10,15,242 2. Half of works provident fund. Rs. 77,79,221 Nil. It is an admitted position between the parties that the assessee-company is not one to whom rule 3 of Schedule I of the Act applies, in that its business does not consist wholly or partly in dealing or holding of investments. The amounts in the two chargeable accounting periods referred to as contribution from outside parties for capital expenditure were, it appears, received by the assessee as a contribution from the Central Government for certain capital purposes. The assessee by virtue of its special position as a manufacturer of steel was receiving certain bounties from the Government of India and other parties for capital purposes, and the two amounts of Rs. 9,56,838 and 10,15,242 were shown by the company in their balance-sheet on the "capital and liabilities" side with the narration "contribution from outside parties for capital expenditure". The question was whether these amounts constitute "reserves" and should, therefore, be included in the computation of the capital of the company. If they are so included the abatement to be deducted from the total profits of the company will to that extent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could be held to be "reserves". On behalf of the Commissioner Mr. Joshi has urged on the first question that the Tribunal erred in its interpretation of rule 2 and particularly in the interpretation of the word "reserve". He relied upon several authorities to which we shall presently refer and contended that whatever may be the meaning of the word "reserve" in other contexts, in the context in which it is used in rule 2 of. Schedule II, the word "reserve" only shows that it must be a reserve which arises out of profits. In this context counsel for the department stressed that in rule 2(1) the word "reserves" is immediately followed by the words "in so far as they have not been allowed in computing the profits." Therefore, he urged that "reserve" must necessarily have reference to the computation of profits and in the particular context in which the word is used it can only mean "reserves" arising out of profits. Another contention of counsel has been that even having regard to the ordinary connotation of the word "reserve" to be found in the cases to which we shall refer, viz., a specific amount set apart for a specific purpose, upon the facts and circumstances of this case, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "capital paid in surplus" and "earned surplus" could be treated as reserves within the meaning of rule 2(1) of Schedule II of the Act. The point for determination in this case, therefore, directly arose under the very provision with which we are concerned. In that case one of the arguments advanced by counsel on behalf of the revenue was the very same argument which counsel for the department has advanced in the present case and it is stated at page 693 as follows : ". . . . that reserves contemplated by rule 2(1) are only those which are built out of profits processed for the purpose of taxation under the Indian Income-tax Act. The Supreme Court negatived this contention pointing out that in their earlier decision in Commissioner of Income-tax v. Century Spinning and Manufacturing Co. Ltd., they had already indicated what was the definition of "reserve". "In its ordinary meaning the expression 'reserve' means something specifically kept apart for future use or for a specific occasion, and they held that upon that meaning the amounts in the "capital paid in surplus" account were reserves as also the amounts in the "earned surplus" account. The profit of the company being all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lcutta High Court a and in the latter decision the Calcutta High Court had expressly dissented from the remarks of Chief Justice Chagla. Justice Mitter observed : "The learned Chief justice said that 'in order to determine the capital of the company for the purpose of this Act you have got to take the paid-up share capital of the company, then you have to add to it the reserves and you have to add only those reserves which have been subjected to taxation'. With great resect to his Lordship I cannot see why reserves must necessarily have been subjected to taxation before they can be added to the paid-up share capital of the company to determine the abatement permissible under the Act. If for instance a company had certain reserves created before the Indian Income-tax Act, 1922, came into force, I see no reason why the company cannot claim to add the same to its paid-up capital for finding out the abatement allowable.... After the Indian Income-tax Act of 1922 came into force, it would be open to the company to create reserves out of allowable deductions under section 10(2) of the Indian Income-tax Act as well as out of net profits after payment of the tax. Rule 2(1) would exclude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hareholders but kept back by the directors for any purpose to which it may be put in future ......" and applying that test to the disputed sum in that case they held that it cannot be said that the amount is not "reserve" within the meaning of the rule. The Tribunal in paragraph 4 of its order relied clearly, upon the decision of the Calcutta High Court in Commissioner of Income-tax v. Standard Vacuum Oil Co. That decision as we have said is now affirmed by the Supreme Court in [1966] 59 I.T.R. 685 and for the reasons which we have stated we think that the decision of the Tribunal as regards the amounts entered in the books of the assessee as "contribution from outside parties for capital expenditure" in the two chargeable accounting periods must be treated as "reserve" within the meaning of rule 2 of Schedule II of the Business Profits Tax Act. If it is held to be a reserve it will be regarded as capital within the meaning of rule 2(1), and if it is capital it will go to swell the figure of "abatement " under section 2(1) and that in turn win reduce the figure of "taxable profits" under section 4. Accordingly, the question No. I must be answered in favour of the assessee, in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s concerned it was rightly held to be in the nature of "reserve", but that so far as the balance of the amount contributed by the employees was concerned, " it is not as if they intended that the money should belong to the assessee ", and, therefore, the investments represented by that amount were not part of the investments held by the assessee for its own purposes. They found that that amount was held as a trust for the employees. The Tribunal, therefore, directed the exclusion of the investments referable to that portion of the contribution made by the employees to the provident fund. The investments of the funds standing to the credit of the provident fund account is no longer left to the volition of a company. They are bound to invest these funds in certain stated securities under section 282B(2) of the Companies Act. The amount of the provident fund in the hands of the company would undoubtedly be in the nature of a trust, the amount being held for the benefit of the employees. Rule 2 speaks of the "capital" which includes two items, namely, the paid-up share capital and the reserves in so far as they have not been allowed in computing the capital of the company. The capita ..... X X X X Extracts X X X X X X X X Extracts X X X X
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