General reserves under section 36(1)(viii) exclude share premium, profit and loss balances, and special-purpose reserves

For the ceiling under section 36(1)(viii), "general reserves" must be given its ordinary commercial meaning and confined to freely distributable revenue reserves. Share premium is not a revenue reserve, a balance in the profit and loss account is not a reserve unless appropriated, and a special reserve created for a specific statutory purpose is not a general reserve. On that interpretation, share premium, profit and loss balance, and special reserve opening balance could not be included in general reserves for the proviso. The disallowance was therefore upheld and the claim for a higher deduction failed.

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Issues: Whether, for computing the ceiling under section 36(1)(viii), the expression "general reserves" includes share premium, balance in profit and loss account, and special reserve opening balance.

Analysis: The deduction under section 36(1)(viii) is limited by the proviso to twice the amount of paid up share capital and general reserves. The Tribunal held that the expression "general reserves" must be understood in its ordinary commercial sense and not expanded to include amounts that are not freely distributable through the profit and loss account. Share premium account is not a revenue reserve, the balance in profit and loss account is not a reserve unless appropriated to reserve, and a special reserve created for a specific statutory purpose is not a general reserve.

Conclusion: The assessee was not entitled to treat share premium, profit and loss balance, or special reserve opening balance as part of general reserves for the purpose of the proviso to section 36(1)(viii).

Final Conclusion: The disallowance was upheld and the assessee's claim for a higher deduction under section 36(1)(viii) failed.

Ratio Decidendi: For the purpose of the ceiling under section 36(1)(viii), "general reserves" means only reserves having the character of freely distributable revenue reserves and does not extend to share premium, profit and loss balances, or special reserves created for specific purposes.

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