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TMI Blog1987 (3) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... gate of the amounts, as on the first day of the previous year relevant to the assessment year, of (i) its paid-up share capital ; (ii) its reserves, if any, created under the proviso (b) to clause (vib) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922 (11 of 1922), or under sub-section (3) of section 34 of the Income-tax Act, 1961 (43 of 1961) ; (iii) its other reserves as reduced by the amounts credited to such reserves as have been allowed as a deduction in computing the income of the company for the purposes of the Indian Income-tax Act, 1922 (11 of 19221, or the Income-tax Act, 1961 (43 of 1961) .... .. In this case, we are concerned with the assessment years 1969-70 and 1970-71. The assessee has been adopting a procedure of providing depreciation in its accounts far in excess of the depreciation allowable under the Income-tax Act, which it was calling " depreciation reserve ". This was with a view to provide for unforeseen contingencies. Such reserves, in commercial parlance, are known as " secret reserves ". These reserves are created out of the profits of the company after deduction of tax and are meant for being used for purposes of the company in f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puting the profits of the assessee for purposes of income-tax. In February 1946, the directors of the company recommended that out of the said amount, a sum of Rs. 4,92,426 should be distributed as dividend and the balance carried forward to the next year's account. This recommendation was accepted by the shareholders in their meeting on April 3, 1946, and the amount was distributed shortly thereafter. In computing the capital of the assessee-company as on April 1, 1946, the assessee claimed that the said sum of Rs. 5,08,637 should also be treated as "reserve ". The High Court agreed with the same; but, on appeal, the Supreme Court held that the said amount did not constitute " reserve " for the simple reason that no one with authority had allocated the said sum as " reserve " on the relevant date and that on the relevant date it remained merely as mass of undistributed profits. It observed further that on the relevant date, i. e., on April 1, 1946, there was a recommendation by the directors, which shows that far from treating it as a " reserve ", they had decided to earmark it for distribution as dividend indeed, the shareholders accepted the said recommendation and the amount wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business. It was also observed that merely because any retention or appropriation of a sum is not a provision, that is, it is not designated to meet depreciation, renewals or diminution in the value of the assets or any known liability, it does not necessarily amount to a reserve. The question whether the concerned amounts constitute " reserves " or not has to be decided having regard to the true nature and character of the sums so appropriated, depending upon the surrounding circumstances, particularly the intention with which and the purpose for which such appropriations had been made. The said propositions were reaffirmed by the Supreme Court in the recent case in CIT v. Elgin Mills Ltd. [1986] 161 ITR 733 (SC). Applying the said test, let us examine the facts of the case before us. In this case, the assessee has set apart certain amounts as a reserve, calling it " depreciation reserve ". This amount is set apart from out of the profits of the company after meeting the tax liability. The amount so set apart is over and above the depreciation amount allowed under the provisions of the Income-tax Act. This amount is known in commercial parlance as " secret reserve ", and is me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be included in the computation of the capital base under the Super (Profits) Tax Act, the provisions of which Act are in pari materia with the provisions concerned herein. The other case relied upon by learned counsel for the assessee is CIT v. Otis Elevator Company (India) Ltd. [1977] 107 ITR 241. In this case, the Board of Directors resolved, during the previous year, to appropriate out of the profits a sum of Rs. 2,10,000 towards " General reserve ". This was approved by the shareholders at their meeting held on March 31, 1964. The Income-tax Officer refused to treat the said amount as part of the, capital base on the ground that the said allocation does not relate back to and, therefore, cannot be taken into account on the first day of the previous year. The Bombay High Court, following the decision of the Supreme Court in CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566 (SC), negatived the said contention and also held with reference to the CBDT Circular dated January 11, 1971, that the " excessive development rebate reserve " can be treated as a " reserve " and included in the capital of the company. Though this decision dealt with the " development rebate res ..... X X X X Extracts X X X X X X X X Extracts X X X X
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