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TMI Blog1953 (10) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... al of the Commissioner of Income-tax is allowed As regards the second question, Mr. Kolah, the learned counsel for the company, frankly conceded that the view taken by the High Court on this part of the case is not open to challenge and is correct. The High Court held that the profits for three months from the 1st January, 1946, to the 1st April, 1946, were not reserves which would attract the application of rule 2 of Schedule II. With this conclusion we agree. The assessee's appeal is, therefore, dismissed - - - - - Dated:- 8-10-1953 - Judge(s) : GHULAM HASAN., N. H. BHAGWATI., PATANJALI SASTRI., S. R. DAS., VIVIAN BOSE JUDGMENT The Judgment of the Court was delivered by GHULAM HASAN, J.---These two connected appeals, one by the Commissioner of Income-tax, Bombay, and the other by the Century Spinning and Manufacturing Co. Ltd., arise out of the judgment and order of the Bombay High Court delivered on a reference made by the Income-tax Appellate Tribunal, Bombay. The two questions of law referred by the Tribunal were as follows :--- " (1) Whether the amount of Rs. 5,08,637 is a part of the ' reserves ' of the assessee company as on 1st April, 1946, wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oom years of the war. It was revived, as it were, after a year in the shape of the present Act, though in a modified form. Section 4 which is the charging section, so far as it is material for our purposes, permits the levying on the amount of the taxable profits " during any " chargeable accounting period ", a tax called the " business profits tax " which shall be equal to sixteen and two-thirds per cent of the taxable profits. " Taxable profits " means the amount by which the profits during a chargeable accounting period exceed the abatement in respect of that period [Section 2(17)]. " Abatement ", according to Section 2(1) means, in respect of any chargeable accounting period ending on or before the 31st day of March, 1947, a sum which bears to a sum equal to--- " (a) in the case of a company, not being a company deemed for the purposes of Section 9 to be a firm, six per cent. of the capital of the company on the first day of the said period computed in accordance with Schedule II, or one lakh of rupees, whichever is greater......... the same proportion as the said period bears to the period of one year ......................... " Accounting period " according to Section 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... :--- Payment of a final dividend at the rate of Rs. 18 per share (making Rs. 28 per share for the whole year) free of income-tax absorbing ... Rs. 4,92,426-0-0 Balance to be carried forward to next year's account ... Rs. 16,211-6-8 This recommendation was accepted by the shareholders in their meeting on the 3rd April, 1946, by a resolution passed to that effect. The dividend was made payable on the 15th April, 1946, and it is not denied that it was actually distributed. These being the facts, the question arises whether the amount in question can be called a " reserve. " The term " reserve " is not defined in the Act and we must resort to the ordinary natural meaning as understood in common parlance. The dictionary meaning of the word " reserve " is :--- " I (a) To keep for future use or enjoyment ; to store up for some time or occasion ; to refrain from using or enjoying at once. (b) To keep back or hold over to a later time or place or for further treatment. 6. To set apart for some purpose or with some end in view ; to keep for some use. II. To retain or preserve for certain purposes " (Oxford Dictionary, Vol. VIII, P. 513). In Webster's New Internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit earned by a company and not distributed as dividend to the shareholders but kept back by the directors for any purpose to which it may be put in future. Therefore, giving to the ' reserves ' its plain natural meaning it is clear that the sum of Rs. 5,08,637 was kept in reserve by the company and not distributed as profits and subjected to taxation. Therefore, it satisfied all the requirements of rule 2 ". The directors had no power to distribute the sum as dividend. They could only recommend, as indeed they did, and it was upto the shareholders of the company to accept that recommendation in which case alone the distribution could take place. The recommendation was accepted and the dividend was actually distributed. It is, therefore, not correct to say that the amount was kept back. The nature of the amount which was nothing more than the undistributed profits of the company, remained unaltered. Thus the profits lying unutilized and not specially set apart for any purpose on the crucial date did not constitute reserves within the meaning of Schedule II, rule 2(1). Reference was made to Sections 131(a) and 132 of the Indian Companies Act. Section 131(a) enjoins upon the d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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