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TMI Blog1957 (2) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... of Income-tax, Bombay City v. Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499 it is well settled as to what constitutes a reserve. A corporation might make profits and the directors of that corporation at the proper time have to consider how those profits should be dealt with. They might declare a dividend out of these profits if the profits can bear the declaration of a dividend. They might transfer certain amounts to a general or specific reserve and there would be a balance left over which will be carried forward to the credit of the profit and loss account. If the profits are not allocated or appropriated to a general or a specific reserve by a deliberate act on the part of the directors, these unappropriated profits canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of profits was transferred to undivided profits. What is strenuously urged is that in the system of book-keeping adopted by the assessee and also by other American banks in the United States, the balance of profit is not carried forward to the next profit and loss account, but it is set apart and transferred to an account known as undivided profits. It is clear that a mere nomenclature or a mere method of book-keeping cannot constitute unappropriated profits into a reserve. We must always look for, as the Supreme Court asks us to look for, some act, some clear direction, given by those in authority, ear-marking the profits or portion of them for a particular or specific purpose, and when we look at the accounts it is clear that this s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... redit of this account 29,534,614 Dollars. How it is possible to urge that this balance of 29,534,614 Dollars, with regard to which no direction has been given, which has never been transferred to any reserve which has never been earmarked for any particular purpose, constitutes a reserve is difficult to understand. Our attention was drawn by Mr. Palkhivala to a letter written by the Deputy Comptroller of the Currency to the Comptroller, National City Bank of New York, which sets out the practice followed by the bank with regard to these undivided profits, and that letter clearly supports the contention of the Department that undivided profits do not constitute a reserve within the meaning of the decision of the Supreme Court. Mr. Jenning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jennings also points out that the undivided profits constitute an integral part of the capital structure of the bank, and Mr. Palkhivala has also drawn our attention to reports of other banks of the United States where undivided profits are shown under the heading capital reserves. What we have to consider is not what description is given to undivided profits in the United States, but whether according to our law these profits constitute reserve, not reserve in any general popular sense but reserve in the sense in which the Supreme Court has defined this expression. It is true, as Mr. Palkhivala points out, that these large amounts remain with the bank, that the bank uses them, that business is carried on with the help of those funds, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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