Shareholders' Reserves Retroactively Approved by Court

Commissioner of Income-tax Versus Aryodaya Ginning and Manufacturing Co. Ltd.,

Commissioner of Income-tax Versus Aryodaya Ginning and Manufacturing Co. Ltd., - [1957] 31 ITR 145 Issues:
Capital computation for business profits tax assessment based on reserves recommended by directors but accepted by shareholders.

Analysis:
The case involved the assessment of a company to business profits tax for a specific accounting period. The company claimed that certain amounts recommended by the directors and accepted by the shareholders as reserves should be included in the computation of the company's capital for the accounting period. The Tribunal accepted this contention in part, recognizing two amounts as reserves but not the provision for payment of tax. The Commissioner challenged this decision, arguing that the reserves were not constituted until a later date when the shareholders passed a resolution. The key question before the court was whether the amounts recommended by the directors and accepted by the shareholders as reserves should be considered reserves as of the beginning of the accounting period.

The court emphasized that the shareholders' resolution had a retrospective effect, referring to the profits and appropriations made as of the end of the previous year. The court rejected the Commissioner's argument that the reserves were not constituted until the resolution date, highlighting that the shareholders' resolution merely affirmed the directors' recommendations made based on the previous year's profits and appropriations. The court clarified that the shareholders not only determined the amount to constitute a reserve but also decided the effective date for such reserves, which, in this case, was the end of the previous accounting period.

The court distinguished the case from previous judgments cited by the Advocate-General, noting that in those cases, the amounts in question were not earmarked as reserves by the directors and accepted by the shareholders. The court also rejected the Commissioner's argument on a notice of motion, finding it repetitive and lacking new arguments. Ultimately, the court upheld the Tribunal's decision, ruling in favor of the company and affirming that the recommended reserves should be considered as part of the company's capital for the accounting period in question.

In conclusion, the court held that the amounts recommended by the directors and accepted by the shareholders as reserves should be treated as reserves from the end of the previous accounting period, providing the company with the benefit of abatement under the business profits tax. The court directed the Commissioner to pay the costs of the reference and the notice of motion, upholding the Tribunal's decision in favor of the company.