Mitter, J. - (1.) The question involved in this appeal is, whether three several sums appropriated by the Directors of the respondent towards reserves on the 8th August 1963 out of the profits of the year ending 31st March, 1963 should be added to other items for computation of the capital of the respondent as on the 1st day of (Tax Referred Case No. 12 of 1967, D/28-10-1969 - Mys.) April, 1963 in terms of Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 hereinafter referred to as the 'Act'.
(2.) The Act which received the assent of the President on 2nd May, 1964 is an Act to impose a special tax on the profits of certain companies. Under Section 4 of the Act a tax known as surtax became chargeable on every company for every assessment year commencing on and from the 1st day of April, 1964 in respect of so much of its chargeable profits of the previous year as exceeded the statutory deduction, at the rates specified in the Third Schedule, Under Section 2 (3) "assessment year" means the period of twelve months commencing on the 1st day of April of every year. "Chargeable profits" is defined in Section 2 (5) as the total income of an assess computed under the Income-tax Act, 1961 for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule. "Statutory deductions", ignoring the provisos, means in terms of Section 2 (8) an amount equal to 10 per cent of the capital of the company as computed in accordance with the provisions of the Second Schedule or an amount of Rs. 2,00,000/- whichever is greater. The Second Schedule to the Act contains the rules for computing the capital of a company for the purposes of surtax. Rule 1 of the Second Schedule with which alone we are concerned in this section reads: ".........Subject to the other provisions contained in this Schedule, the capital of a company shall be the aggregate of the amount as on the first day of the previous year relevant to the assessment year, of ......,.. (i) its paid-up share capital; (ii) its reserves, if any created under the proviso (b) to clause (vi-b) of sub-section (2) of Section 10 of the Income Tax Act, 1922 (XI of 1922) , or under sub-section (3) of Section 34 of the Income-tax Act, 1961 (XLIII of 1961) : (iii) its other reserves as reduced by the accounts credited to such reserves as have been allowed as a deduction in computing the income of the company for the purposes of the Income Tax Act, 1922 (XI of 1922) , or the Income Tax Act, 1922 (XI of 1922) , or the Income-tax Act. 1961 (XLIII of 1961) ; (iv) its debentures, if any; and (v) any moneys borrowed by, it from Government or the Industrial Finance Corporation of India or the industrial Credit and Finance Corporation of India or any other financial institution which the Central Government may notify in this behalf in the Official Gazette or any banking institution (not being a financial institution notified as aforesaid) or any person in a country outside India: Provided that such moneys are borrowed for the creation of a capital asset in India and the agreement under which such moneys are borrowed provides for the repayment thereof during a period of not less than seven years. Explanation. - For the removal of doubts it is hereby declared that any amount standing to the credit of any account in the books of a company as on the first day of the previous year relevant to the assessment year which is of the nature of item (5) or item (6) or item (7) under the heading "RESERVES AND SURPLUS" or of any item under the heading "CURRENT LIABILITIES AND PROVISIONS" in the column relating to "Liabilities" in the "Form of Balance- sheet" given in Part I of the Schedule VI to the Companies Act, 1956 (1 of 1956) , shall not be regarded as a reserve for the purposes of computation of the capital of a company under the provisions of this Schedule." In terms of Section 4 of the Act the first assessment year for the purpose of the Act in respect of the company was that commencing on and from the first day of April, 1964. The previous year in respect of which the chargeable profits had to be ascertained commenced on the first of April 1963 and ended on the 31st March. 1964. The capital of the company in terms of Rule lot the Second Schedule would be its paid-up share capital and inter alia reserves as would come under Clauses (ii) and (iii) of Rule 1 to the Second Schedule. The reserves in this case to which exception is being taken by the appellant as components of the capital of the company are the following three sums:(1) Rs. 2.56.000 as plant modernisation and rehabilitation reserve; (2) Rs. 1,00,000 as loan redemption reserve, and (3) Rs. 82.557 as development rebate reserve. These are three of the items of reserve which the directors of the respondent in their report to the general body of the share holders proposed as appropriations out of the profits of the year ending on 31st March, 1963.
(3.) The role contention on behalf of the appellant is that these appropriations having been made on the 8th August 1963 could not be treated as components of capital "as on the first day of the previous year" i.e 1-4-1963, in terms of Rule 1 to the Second Schedule. The learned Solicitor-General submitted that these could only be taken into consideration in the subsequent year commencing on the 1st of April 1964 on the ground that on the 1st of April 1963 they only formed a part of the mass of undistributed profits no portion of which had been earmarked or set apart for any particular purpose. In our view, this is not the correct way of appreciation of the action of the directors.;