TaxTMI 
TaxTMI 
1956 (8) TMI 62
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....ofits. They allocated a sum of Rs. 2,25,000 to depreciation fund, Rs. 12,50,000 towards provision for income-tax, corporation tax and business profits tax, Rs. 11,08,000 to reserve fund, and Rs. 1,50,000 to dividend reserve fund. This left a balance of Rs. 1,61,946 and this amount they recommended should be expended in payment of dividend, leaving a balance of Rs. 89,134 which they recommended should be carried forward to next year's account. The directors made their report on 27th April, 1949. A general meeting of the shareholders was held on the 27th June, 1949, and they accepted the report and the recommendations of the directors. The assessee company was assessed to business profits tax for the chargeable accounting period 1st Janua....
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....The contention of the Commissioner on the other hand is that this reserve was not sanctioned till the 27th June, 1949, and, therefore, prior to that date it could not be looked upon as reserve. Now, there is no doubt in this case that these amounts-and we will deal for the time being only with the reserve with regard to the amounts appropriated to the reserve fund and the dividend reserve fund-did constitute reserves. The only question is as to the date when they constituted reserves. It is undoubtedly true that the function of the directors under the Companies Act is to make a recommendation as to how the profits should be distributed or allocated and it is the right of the shareholders ultimately to decide at a general meeting. There w....
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.... and the dividend reserve fund. Therefore, the shareholders by passing a resolution on the 27th June, 1949, did not decide that these amounts should constitute reserves as from that date, but they accepted the recommendation of the directors that these amounts should constitute reserves of the company as of the. 31st December, 1948. The Advocate-General says that there must be someone with the requisite authority who can decide that a certain amount should constitute reserve. The directors under the Companies Act do not have the requisite authority, only the shareholders have it, and till somebody has decided to this effect no part of the profits can become reserves. Now, that proposition is perfectly sound, but in advancing that argumen....
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.... Court and the Supreme Court held that nobody possessed of the requisite authority had indicated on that date the manner of its disposal or destination and the fact that that amount constituted a mass of undistributed profits could not automatically make it a reserve. Therefore, it will be noticed that in the case before the Supreme Court there was no reserve at all and therefore no question arose as to when the reserve could be considered as having been constituted. In the other case to which reference is made, which is an unreported decision in Commissioner of Income-tax, Bombay City v. India United Mills, Ltd. Income-tax Reference No. 46 of 1954 decided on 18th February, 1955, the question was whether an amount of profits carried forw....