Undivided Profits as reserves: banking account amounts treated as capital funds and included in business profits tax computation.

Amounts shown as "Undivided Profits" in a bank's accounts were treated as reserves for capital computation under rule 2(1) of Schedule II to the Business Profits Tax Act, 1947, because the decisive test was their real character, not their label. The accounting system and Treasury instructions required a separate head for these amounts, and the material showed they formed part of the bank's capital funds available for continuous business use. On that substance, the item was not merely unallocated profit in the Indian accounting sense but an integral component of the banking capital structure, and it was includible in capital.

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Issues: Whether amounts shown as "Undivided Profits" in the banking accounts could be treated as "reserves" and included in capital for computation under rule 2(1) of Schedule II to the Business Profits Tax Act, 1947.

Analysis: The decisive question was the true nature of the accounting item, not its label. The bank's accounting system and the Treasury instructions required a separate head for Undivided Profits, which formed part of the bank's capital funds and were available for continuous use in the business. The material showed that these amounts were not merely unallocated profits in the Indian accounting sense, but an integral component of the banking capital structure maintained under the applicable accounting regime. Applying the substance of the arrangement, the Court held that the item answered the description of reserves within the statutory rule.

Conclusion: The amounts described as "Undivided Profits" were held to be reserves and were includible in the capital computation under rule 2(1) of Schedule II.

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