TaxTMI 
TaxTMI 
1968 (12) TMI 22
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....re" and the amount pertaining to half of the works provident fund, namely, Rs. 77,79,221, being the amount contributed by the employees, constitute "reserves" within the meaning of rule 2 of Schedule II of the Business Profits Tax Act. The question arises under the following circumstances: We are concerned with two "chargeable accounting periods" ending on March 31, 1947, and March 31, 1949. Under section 4 of the Business Profits Tax Act the charge of tax is in respect of any business to which the Act applies "on the amount of the taxable profits during any chargeable accounting period. . . ""Taxable profits" is defined in section 2(17) as meaning the amount by which the profits during a chargeable accounting period exceed the abatement in respect of that period. Therefore, the tax is leviable on the amount by which the profits during the chargeable accounting period exceed " the abatement " in respect of that period. "Abatement" is defined in section 2(1) to mean "in respect of any chargeable accounting period ending on or before the 31 st day of March, 1947, a sum which bears to a sum equal to- (a) in the case of a company, not being a company deemed for the purposes....
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....ly in dealing or holding of investments. The amounts in the two chargeable accounting periods referred to as contribution from outside parties for capital expenditure were, it appears, received by the assessee as a contribution from the Central Government for certain capital purposes. The assessee by virtue of its special position as a manufacturer of steel was receiving certain bounties from the Government of India and other parties for capital purposes, and the two amounts of Rs. 9,56,838 and 10,15,242 were shown by the company in their balance-sheet on the "capital and liabilities" side with the narration "contribution from outside parties for capital expenditure". The question was whether these amounts constitute "reserves" and should, therefore, be included in the computation of the capital of the company. If they are so included the abatement to be deducted from the total profits of the company will to that extent increase and correspondingly reduce the tax burden upon the assessee. If, however, they are not included in the reserves in so far as they have not been allowed in computing the profits of the company, then to that extent the abatement will decrease with the corresp....
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.... which we shall presently refer and contended that whatever may be the meaning of the word "reserve" in other contexts, in the context in which it is used in rule 2 of. Schedule II, the word "reserve" only shows that it must be a reserve which arises out of profits. In this context counsel for the department stressed that in rule 2(1) the word "reserves" is immediately followed by the words "in so far as they have not been allowed in computing the profits." Therefore, he urged that "reserve" must necessarily have reference to the computation of profits and in the particular context in which the word is used it can only mean "reserves" arising out of profits. Another contention of counsel has been that even having regard to the ordinary connotation of the word "reserve" to be found in the cases to which we shall refer, viz., a specific amount set apart for a specific purpose, upon the facts and circumstances of this case, there is nothing to show that this amount was in fact set apart for a specific purpose. All that has been established in the present case is that the Central Government and other parties paid a certain subsidy or contribution to the company. For what purpose it is ....
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....In that case one of the arguments advanced by counsel on behalf of the revenue was the very same argument which counsel for the department has advanced in the present case and it is stated at page 693 as follows : ". . . . that reserves contemplated by rule 2(1) are only those which are built out of profits processed for the purpose of taxation under the Indian Income-tax Act. The Supreme Court negatived this contention pointing out that in their earlier decision in Commissioner of Income-tax v. Century Spinning and Manufacturing Co. Ltd., they had already indicated what was the definition of "reserve". "In its ordinary meaning the expression 'reserve' means something specifically kept apart for future use or for a specific occasion, and they held that upon that meaning the amounts in the "capital paid in surplus" account were reserves as also the amounts in the "earned surplus" account. The profit of the company being allocated to the "earned surplus" account was intended to designate a fund to be utilized for the purpose of the business of the company which retained its identity year after year and so represented "reserves". So far as rule 2 is concerned the Supreme Cour....
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.... for the purpose of this Act you have got to take the paid-up share capital of the company, then you have to add to it the reserves and you have to add only those reserves which have been subjected to taxation'. With great resect to his Lordship I cannot see why reserves must necessarily have been subjected to taxation before they can be added to the paid-up share capital of the company to determine the abatement permissible under the Act. If for instance a company had certain reserves created before the Indian Income-tax Act, 1922, came into force, I see no reason why the company cannot claim to add the same to its paid-up capital for finding out the abatement allowable.... After the Indian Income-tax Act of 1922 came into force, it would be open to the company to create reserves out of allowable deductions under section 10(2) of the Indian Income-tax Act as well as out of net profits after payment of the tax. Rule 2(1) would exclude the first kind of reserves but not those of the second kind." It was this decision which was before the Supreme Court in 59 I.T.R. 685. The decision of the Calcutta High Court was affirmed by the Supreme Court, and they did not disapprove of the ab....
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....he rule. The Tribunal in paragraph 4 of its order relied clearly, upon the decision of the Calcutta High Court in Commissioner of Income-tax v. Standard Vacuum Oil Co. That decision as we have said is now affirmed by the Supreme Court in [1966] 59 I.T.R. 685 and for the reasons which we have stated we think that the decision of the Tribunal as regards the amounts entered in the books of the assessee as "contribution from outside parties for capital expenditure" in the two chargeable accounting periods must be treated as "reserve" within the meaning of rule 2 of Schedule II of the Business Profits Tax Act. If it is held to be a reserve it will be regarded as capital within the meaning of rule 2(1), and if it is capital it will go to swell the figure of "abatement " under section 2(1) and that in turn win reduce the figure of "taxable profits" under section 4. Accordingly, the question No. I must be answered in favour of the assessee, in the affirmative. Then we turn to question No. 2. In the books of account of the assessee an amount of Rs. 1,55,58,441 was found credited to the works provident fund account with a note in brackets "assets earmarked as per contra Rs. 1,52,24,220". ....