Undistributed profits are not reserves unless appropriated for a reserve purpose, so the Section 23A proviso did not apply.

Undistributed profits carried forward in a profit and loss account do not constitute reserves unless they are specifically appropriated or earmarked for a reserve purpose. The proviso to Section 23A(1) of the Income-tax Act, 1922 applied only where reserves representing accumulations of past profits exceeded paid-up capital. On the accepted figures, the company's reserve balances did not cross that threshold, and the profit and loss account balance remained unappropriated profit rather than reserve. The proviso was therefore not attracted, and the reference was answered in favour of the assessee and against the Revenue.

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Issues: Whether the balance standing to the credit of the profit and loss account constituted reserves representing accumulations of past profits so as to attract the proviso to Section 23A(1) of the Income-tax Act, 1922 for the assessment years 1953-54 and 1954-55.

Analysis: The proviso applied only if the company's reserves representing accumulations of past profits exceeded its paid-up capital. The company's paid-up capital stood at Rs. 5,00,000. The amounts in the general reserve, taxation reserve and dividend reserve, even when taken at their accepted figures, did not cross that threshold. The decisive question was whether the sums shown in the profit and loss account were reserves. The balance in that account was merely undistributed profit carried forward and had not been appropriated or earmarked to any specific reserve fund. Prior authority had already treated such unappropriated balances as not constituting reserves for the purpose of Section 23A.

Conclusion: The profit and loss account balance did not amount to reserves representing accumulations of past profits. The proviso to Section 23A(1) was not attracted, and the answer was against the Revenue and in favour of the assessee.

Final Conclusion: The company was not liable to be treated as falling within the proviso for the relevant assessment years, and the reference was answered accordingly.

Ratio Decidendi: Undistributed profits shown in a profit and loss account do not become reserves unless they are specifically appropriated or earmarked for a reserve purpose.

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