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Issues: Whether the credit balance in the profit and loss account on the first day of the chargeable accounting period could be treated as a reserve and included in the company's capital for computing abatement under Rule 2 of Schedule II of the Business Profits Tax Act, 1947.
Analysis: The relevant scheme of the Business Profits Tax Act, 1947 required abatement to be computed with reference to the company's capital on the first day of the chargeable accounting period, and Schedule II directed that capital should include paid-up share capital and reserves not already allowed in computing profits for income-tax purposes. The expression "reserves" was held to bear its technical meaning, not a loose commercial meaning. Reference was made to the Companies Act provisions dealing with reserves and balance-sheet treatment, which showed that an amount is not a reserve merely because it stands to the credit of the profit and loss account. Here, the balance-sheet and directors' report described the amount as surplus profits available and as balance of profit and loss account, and no formal appropriation to reserve had been made. The fact that dividends were later declared from the amount did not change its character on the relevant date, but the absence of appropriation meant that the amount could not be treated as reserve.
Conclusion: The credit balance of Rs. 1,02,161 was not a reserve within Rule 2 of Schedule II and was not includible in the company's capital; the question was answered against the assessee and in favour of the Revenue.
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