SHELAT, J. -
(1.) 1. The question arising in this reference is whether it is permissible to the Income -tax department to deduct from the taxation reserve account shown on the credit side of the balance -sheet, the amount of taxes paid from the other available funds of the assessee -company which computing its capital under the Business Profits Tax Act, XXI of 1947.
(2.) THAT Act came into force on the 11th of April, 1947, having taken the place of the Excess Profits Tax Act which was repealed on March 30, 1946. Section 4 of the Act, which is the charging section, provides that subject to the provisions of the Act, 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 (business profits tax) which shall, in respect of any chargeable account period ending on or before the 31st day of March, 1947, be equal to sixteen and two -thirds per cent. of the taxable profits, and in respect of any chargeable accounting period beginning after that date, be equal to such percentage of the taxable profits as may be fixed by the annual Finance Act. By Finance Acts of 1948 and of 1949, the amount of taxable profits was reduced from sixteen and two -thirds per cent. of the taxable profits to ten per cent. Section 2(17) defines 'taxable profits' as meaning the amount by which the profits during a chargeable accounting period exceed the abatement in respect of that period. 'Abatement' has been defined in clause (1) of section 2 and, so far as is relevant for the purposes of this reference, means, in respect of any chargeable accounting period, ending on or before the 31st 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 of section 9 to be a firm, six per cent. of the capital of the company on the first day of the said period computed in accordance with Schedule II, or one lakh of rupees, whichever is greater. The business profits tax was therefore on the percentage allowed under the relevant Finance Act corresponding to the chargeable accounting period on taxable profits less the abatement computed in accordance with Schedule II of the Act. The accounting period, according to clause (2) of section 2, means a period in relation to any business which is or has been determined as the previous year for that business for the purposes of the Income -tax Act. 'Chargeable accounting period', as defined by clause (4) of section 2, means any account in period falling wholly within the term beginning on the first day of April 1946, and ending on the 31st day of March, 1949, and where any accounting period falls partly within and partly without the said term, such part of that accounting period as falls within the said term. The proviso to that clause provides that where an accounting period falls partly before, and partly after, the end of March, 1947, so much of that accounting period as falls before, and so much of that accounting period as falls after, the end of March, 1947, shall be deemed each to be a separate chargeable accounting period. So far as the present reference is concerned, the chargeable accounting periods are from January 1, 1948, to December 31, 1948, and January 1, 1949, to March 31, 1949.
For the purpose of arriving at the figure of abatement, the method of computing the capital and taxable profits is provided for in Schedule II, rules 1 and 2, to the Act. Rule 1 provides that for the purposes of ascertaining abatement under this Act in respect of any chargeable accounting period, the capital of a company shall be computed in accordance with the rule following thereto. Rule 2(1) then provides that where the company is one to which 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 Income -tax Act, diminished by the costs to it of its investments or other property, the income from which is not includible in the profits, so far as that costs exceeds any debt for money borrowed by it. Sub -rule (2) of rule 2 provides that in all other cases the capital shall be the sum ascertained in accordance with sub -rule (1) diminished by the cost to the company of its investments so far as that cost exceeds any debt for money borrowed by it.
(3.) THE assessee -company used to maintain what it called 'income -tax, super -tax, excess profits tax and deposit fund', and also the 'taxation reserve account', which admittedly was build out of the profit appropriations from time to time. The company used to pay taxes under an account called the 'taxes paid account' in which the amounts paid during the current year by way of advance, provisional and other taxes during the current year from the company's funds were debited. The system of accounting followed by the company was that after the assessments were finalised and the amounts of taxes were crystallised, the amounts of such taxes were transferred from the 'taxes paid account' to the 'taxation reserve account' and debited in that account, thus reducing the balance in that account and a corresponding credit entry used to be made in the second account, i.e., the 'taxes paid account' and that account was the enclosed so far as that assessment so finalised was concerned. If on such finalisation of assessment, any refund was payable to the assessee -company in respect of any assessment year, the amount of such refund used to be credited to the 'taxation reserve account', that account, after the finalisation of the assessment, being the only available account. If the assessee -company at any time felt that there was any excess amount in the 'taxation reserve account', such excess used to be transferred to the general reserve fund. In the year 1947, a sum of rupees twelve lakhs was in fact thus transferred from the 'taxation reserve account' to the 'general reserve fund.';