R SIM AND CO LTD Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) : This is a reference made by the Tribunal at the instance of the assessee under s. 66(1) of the IT Act r/w s. 19 of the Business Profits Tax Act (XXI of 1947) and s. 21 of the EPT Act (XV of 1940), by which several provisions of the IT Act including the provisions for reference have been applied to cases of assessment under the Business Profits Tax Act. The assessment was for the chargeable accounting period commencing on the 1st April, 1948, and ending on the 31st of March, 1949. In the assessee's PandL A/c a credit balance from the previous year amounting to Rs. 15,98,068 was brought forward and was not shown as appropriated to any purpose. The assessee contended that this amount was a reserve within the meaning of Schedule II, r. 2(1), of the Business Profits Tax Act, with respect to which he was entitled to get abatement as defined in s. 2(1) of the Act and as provided by that section. On these facts the question that has been referred to us for our opinion is as follows : "Whether on the facts and circumstances of this case, the amount of Rs. 15,98,068 unappropriated balance of PandL A/c is a part of the 'reserves' within the meaning of r. 2(1) of Schedule II of the Business Profits Tax Act?"

(2.) TWO conditions are necessary to attract the application of Schedule II, r. 2(1), of the Business Profits Tax Act which, according to both sides appearing before us, is the section applicable to the present case, the assessee being a joint stock company. The first condition is that the amount must be a reserve within the meaning of the above section ; and secondly, that the income-tax must have been assessed on this amount. It is not disputed in this case that the second condition was present. The only question for decision, therefore, is whether the amount in question was a reserve within the meaning of Schedule II.

(3.) AFTER a reference to this case was made Mr. Banerjee argued in the alternative that if a wider meaning was to be given to the word "reserves" as in this case, we should further look to the substance rather than the form of the entry in the account and as this amount could be utilised as a working capital, it should be held to come within the meaning of the word "reserves". We are unable to agree with this view. According to the plain and dictionary meaning of the word "reserve" there must be some setting apart of the amount for some special or general purpose by a person or by a body authorised under the articles of association of the company to allocate the funds for particular purposes. This was not done in the present case on the crucial date, namely, the 1st April, 1946, and as it was not done we are unable to hold that this amount of Rs. fifteen lacs and odd was a reserve within the meaning of Schedule II of the Act.