TaxTMI 
TaxTMI 
1953 (3) TMI 50
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....the assessment of the Bank to Business Profits Tax for the chargeable accounting period from 1-1-1947 to 31-12-1947. For this chargeable accounting period the Income Tax Officer determined the profit to be Rs. 8,13,513. The Bank claimed that abatement of Rs. 3,24,114 should be deducted from the profit as follows : 1. Paid up share capital on 1-1-47--Rs. 32,77,830. 2. Reserve fund not allowed in computation of profit in Income Tax assessment, on 1-1-47--Rs. 17,00,000. 3. Reserve for contingency on 1-1-47--Rs. 3,07,154. 4. Credit in contingency current account on 1-1-47--Rs. 14,763. 5. Credit balance in the profit and loss account on 1-1-47--Rs. 1,02,161. The total deduction was Es. 54,01,903 on....
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.... Tribunal has referred the following question of law for the opinion of the High Court: "Whether the credit balance of Rs. 1,02,161 in the profit and loss account of the company on 1-1-1947 should be included in determining the capital of the company under Rule 2 of Schedule II, Business Profits Tax Act, 1947." 4. Before answering this question it is necessary to examine the relevant provisions of the Business Profits Tax Act of 1947. Section 4 which is the charging section states that "there shall, in respect of any business to which the Act applies, be charged, levied and paid on the amount of the taxable profits during any chargeable accounting period a tax referred to as 'Business profits tax' which shall in....
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.... in accordance with Rule 2. Rule 2 provides that "where the company is one to which Clause (a) of Rule 3 of Schedule I applies, its capital shall be the sum of the amounts of its paid up share capital and of its reserves in so far as they have not been allowed in computing the profits of the company for the purposes of the Indian Income Tax Act." 5. The real crux of this case is what is the meaning of the word 'reserves' in Rule 2 of Schedule II. The argument presented on behalf of the Bank is that the amount of Rs. 1,02,161 shown as credit balance in the balance-sheet dated 31-12-1946 should be taken to constitute reserve for the purpose of computing the capital of the Bank under Rule 2 of Schedule II. It was conceded b....
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....f the company may be properly applied." Section 131A, Companies Act states that the directors shall make out and attach to every balance-sheet a report with respect to the state of the company's affairs the amount, if any, which they recommend should be paid by way of dividend "and the amount, if any, which they propose to carry to the Reserve Fund, General Reserve or Reserve Account shown specifically on the balance-sheet or to a Reserve Fund, General Reserve or Reserve Account to be shown specifically in a subsequent balance-sheet." In the present case the report of the directors at p. 8 of the paper book does not show that the directors recommended that the sum of Rs. 1,02,160 & odd should be appropriated to any Reserv....
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....ofits of the company such sum as they may think proper as a reserve fund for acquiring property for the company or providing for payment of rent for meeting contingencies or for equalizing dividends or for any other purpose of the company which they may think fit. Unless the directors apply their mind to the question and unless they make appropriation of the balance to the payment of dividends or to building up reserves it is difficult to say that any portion of the amount of balance in the profit and loss account could be treated as 'reserve or reserves' for the purpose of computing the amount of capital under Rule 2 of Schedule II. In view of these considerations I think that the credit balance of Rs. 1,02,161 in the present ca....