1. The short question which arises in this references is whether the proviso to section 23A(1) prior to its amendment by the Finance Act of 1955 applies to the assessee during the two assessment years 1953-54 and 1954-55.
2. It is not in dispute that section 23A applied to the respondent company, Messrs, Kores (India Private Ltd. Accordingly, it did distribute, by way of dividends, more than 60% of its assessable income for the previous years, corresponding to the assessment year in question 1953-54 and 1954-55. The department however, felt that the proviso to sub-section (1) of section 23A applied and 100% of its assessable income in both the years should have been distributed.
3. Originally the paid-up capital of the company was Rs. 50,000, but in 1950, it issued bonus shares worth Rs. 3,50,000 and in 1951, further bonus shares worth Rs. 1,00,000. Thus during the said assessment year its paid up share capital stood at Rs. 5,00,000. In applying the proviso the ratio between a company's capital and its 'reserves representing accumulations of past profits' has to be determined (the fixed assets of this company being less than the capital). Before the Tribunal and the tax authorities there was a dispute as to both these items, viz., what was the company's capital and what were its reserves. The Tribunal ultimately decided that the company's capital was Rs. 5,00,000 and that finding has not been challenged before us. The only question, therefore, which survives is what were 'the reserves representing accumulations of past profits which have not been the subject of an order under this sub-section' within the meaning of those words in the proviso. If the reserves are more than the capital, the proviso would apply and the company would be constrained to distribute the whole of its assessable income as determined for the previous years, less the taxes paid. Otherwise, the profits already distributed by way of dividend would be in compliance with law.
4. As regards the 'reserves', from the order of the Tribunal, we find that only two items were discussed, firstly, whether the 'reserve for taxation' amounts to a reserve representing accumulation of past profits and, secondly, whether the amount standing to the credit of the company in the profit and loss account constituted 'reserves', but when the matter came before us on an earlier occasion, an objection was taken that the Tribunal had unjustifiably refused to consider certain contentions of the department as regards some other items which the department wanted to be considered as 'reserves'. At the hearing on March 22, 1968, we decided to call for a supplementary statement of the case to cover these questions also. The department wanted the further question to be stated :
'Whether the Tribunal was justified in refusing to consider the argument of the departmental representative put before the Tribunal at the hearing ?'
5. On this question counsel on behalf of the assessee has urged that the Tribunal had not refused to consider any of the arguments of the departmental representative and that in fact none of the arguments now urged were advanced before the Tribunal.
6. Having heard counsel for both the sides we think that in this reference it will not be necessary to consider the question which has been stated in the supplementary statement of the case dated March 22, 1962 because, after hearing counsel for the Commissioner on all the items which he wished to agitate, we are satisfied that the original question referred namely, 'Whether on the materials considered by the Tribunal the assessee is a company to which the proviso to section 23A(1) applied for both the assessment years 1953-54 and 1954-55 ?', should be answered in the negative and against the contention on behalf of the Commissioner. We will briefly set forth our reasons.
7. The figures regarding the other items upon which counsel for the department relies to show that the 'reserves' exceed the capital of Rs. 5,00,000 of this company for the two years in question are as follows :
Reserves Account year ending Account year ending31-12-52 (Assessment 31-12-53 (Assessmentyear 1953-54) year 1954-55)Rs. Rs.General Reserve 30,000 30,000Reserve for Taxation 5,29,319 5,00,000Reserve for Dividends 2,25,000 1,75,000Profit & Loss Account 2,98,676 4,26,248
8. Regarding each of these items we may first of all refer to the nature of the dispute and the finding. So far as the 'general reserve' is concerned there is absolutely no dispute that if would constitute a reserve representing accumulation of post profits within the meaning of the proviso. That item, therefore, will have to be taken into account. As regards the item of 'reserve for taxation', the Income-tax Officer held that the whole amount should be treated as a reserve within the meaning of the proviso to section 23A(1), but the Appellate Assistant Commissioner took the view that only the difference between the amount set apart to provide for taxation less the actual tax payable would be the amount which could be said to be the 'reserve'. Accordingly he held that only Rs. 35,686 for the assessment year 1953-54 and Rs. 29,863 for the assessment year 1954-55 could be taken as reserve for taxation. This view was confirmed by the Tribunal in paragraph 8 of its order. Therefore, though we have quoted above the figures for reserve for taxation at Rs. 5,29,319 for the first year and Rs. 5,00,160 for the second year the actual figures which have now to be taken towards reserves under the proviso so far as the 'reserve for taxation' in concerned, are Rs. 35,686 and Rs. 29,863 for the two respective years. The dividend reserve is of course the same figure, namely, Rs. 2,25,000 for the first year and Rs. 1,75,000 for the second year. The figure of the amount in the profit and loss account according to the department is Rs. 2,98,676 for the first year and Rs. 4,26,248 for the second year. It is upon these figures that we have to examine the contentions on behalf of the Commissioner and the assessee.
9. Now, it will be seen straightaway that for the assessment year 1953-54 even if the figure of general reserve, the excess of taxation reserve and the dividend reserve are taken into account, they do not come to the figure of Rs. 5,00,000. Therefore, the sole question which survives is whether the figure mentioned in the profit and loss account of Rs. 2,98,676 should also be taken into account. Only if that figure is taken as a 'reserve' will the total of 'reserves' exceed the paid-up capital.
10. Similarly, for the assessment year 1954-55, even if all the amounts in the general reserve, in the taxation reserve and in the dividend reserve are taken into account they would not come to the figure of Rs. 5,00,000 and the proviso would not be attracted unless the figure mentioned in the profit and loss account is also taken into account, in which case it would exceed Rs. 5,00,000. It will thus appear that the principal question which we have to consider first is the question whether the figures mentioned in the profit and loss account of this company ought to be takes into account as reserve representing accumulations of past profits within the meaning of the proviso to section 23A(1).
11. Now, in this respected to a reserve the Income-tax Officer held as regards both the years that it amounted to a reserve for a somewhat curious reason. He held that the assessee was showing a relatively large amount as profit and loss account balance and was definitely making 'an attempt to avoid application of the proviso to section 23A(1)'. The Appellate Assistant Commissioner followed what we may call a middle course in that he held that the balance in the profit and loss account would amount to a reserve but after deduction of such amounts as are deemed to be dividends under section 23A(1). He, therefore, held that the amounts of dividends under section 23A of Rs. 1,23,183 in each of the two years should be deducted from the figure mentioned the profit and loss account and the balance should be held to be a reserve representing accumulations of past profit within the meaning of the proviso.
12. When the matter came before the Tribunal they held that the entire amount mentioned in the profit and loss account was nothing more than undistributed profits which had not been 'crystallised' in the sense that these profits had not been appropriated to any reserve fund by the company and, therefore, they cannot be said to be 'reserves' at all. The Tribunal referred to the decision of this court in Nanubhai Maneklal & Co. Ltd. v. Commissioner of Income-tax.
13. This, as we have said, is the principal question involved in the reference. If this item is eliminated, as the Tribunal has eliminated it from the computation, from the figure of reserves, then in none of the two years in question would the figure of reserve exceed Rs. 5,00,000, which in the figure of paid-up capital of this company, and the proviso would not be attracted. It is only if the department succeeds in its contention on this question that it would be necessary to consider the other questions raised.
14. Now, on the question whether the figures mentioned in the company's profit and loss account as the balance of profit and loss carried over to the carried over to the balance-sheet constitute reserves, it seems to us that the question admits of no doubt or difficulty. A direct authority is the decision of the court in Nanubhai Maneklal & Co. Ltd. v. Commissioner of Income-tax. There is also the decision of the madras High Court in Rukmani and Company Private Ltd. v. Commissioner of Income-tax. In Nanubhai Maneklal's case the company had distributed as dividends more than 60 per cent. of its assessable income reduced be the tax payable thereon and had thus satisfied the requirement of section 23A(1) of the Income-tax Act but the department took the view that the proviso to that section applied inasmuch as the undistributed reserves representing accumulation of past profits of Rs. 1,33,037 together with a credit balance of Rs. 1,000 in the charity account and a sum of Rs. 3,156 brought forward from the earlier year in the profit and loss account exceeded its paid up capital of Rs. 1,34,400. It will be noticed that in this case the inclusion of the figure of Rs. 1,000 would not have mattered but the inclusion of the figure of Rs. 3,156 was crucial because the balance in the profit and loss account was only Rs. 1,33,037. This court hold that the amount had not been earmarked for any purpose which directly or indirectly could be said to be the purpose of a general or special reserve. It was merely a mass of undistributed profit and, therefore, it could not be treated as 'reserves' of the company. The point of importance in this decision is that quite apart from the profits in that particular year of Rs. 1,33,037, it was the department's contention that the sum of Rs. 3,156, which was the amount brought forward from the earlier years, should also be included in the computation of reserves. This court held that that amount could not be said to be reserve, although it was carried forward as the balance from the profit and loss account of the previous year. This court pointed out that the question as to what constitutes 'reserves' had been decided by the Supreme Court in the earlier decision in Commissioner of Income-tax v. Century Spinning and . In that case the Supreme Court was considering the provisions of the Business Profits Tax Act (XXI of 1947), Schedule II, read with rule 2(1) of the Business Profits Tax Rules. that rule required two circumstances to be established, one of which was that the amount should be treated as a reserve within the meaning of the Rule. In that connection the Supreme Court observed at page 504 :
'A reserve in the sense in which it is used in rule 2 can only mean profit earned by a company and not distributed as dividend to the shareholders but kept back by the directors for any purpose to which it may be put in future'.
15. They also observed generally :
'Thus the profits lying unutilized and not specially set apart for any purpose on the crucial date did not constitute reserves within the meaning of Schedule II, rule 2(1).'
16. The Business Profits Tax Act was a taxation statute in pari materia with the provisions of section 23A of the Income-tax Act and, therefore, this court applied that definition of the expression 'reserve' in section 23A in Nanubhai Maneklal & Co.'s case.
17. Another decision in point is Rukmani & Co.'s case. That decision followed both the definition laid down by the Supreme Court in the Century Spinning and Manufacturing Co.'s case and its application to section 23A in Nanubhai Maneklal & Co.'s case. The Madras High Court held that undistributed profits appearing in the profit and loss account cannot be treated as 'reserves representing accumulations of past profits' within the meaning of the first proviso to section 23A as it stood before its amendment in 1955'.
18. These authorities virtually conclude the controversy on this point. It is clear from the balance-sheets of the two years in question that the figures mentioned in the profits and loss account of Rs. 2,98,676 and Rs. 4,26,248 in the two respective year were merely figures representing an amorphous mass of profit of the company which the company's directors decided to leave as the profits of each year and did not appropriate to any specific fund, much less a reserve fund. Therefore, they continued to be the profits of the company and not reserves of any such much less reserves representing accumulations of past profits.
19. In this view we do not feel called upon to consider the further contention on behalf of the assessee that, in any event, the amount of dividend that is deemed declared by the application of section 23A is each year would be liable to be deducted from the amount of the profit and loss account (a view which prevailed with the Appellate Assistant Commissioner). Upon the view which we have taken, the whole of the amount in the profit and loss account cannot be treated as 'reserve'. Therefore, we need not consider this farther point.
20. If then this amount found in the profit and loss account does not form 'reserve' representing accumulation of past profits within the meaning of the proviso to section 23A(1), then even if we take into account all the rest of the figures, upon each of which a contention has been based by the department, still the total amount would not come to Rs. 5,00,000 and, therefore, the reserves will not exceed the paid-up capital of the company. That being the position, it seems to us unnecessary to consider the arguments on the individual items. Such a consideration would be purely academic. Since upon the merits we have come to the conclusion that the Tribunal was right in the view which it took, it seems to us also unnecessary to consider the additional question stated in the supplementary statement because we have in fact heard the department upon the several questions which were raised and yet come to the conclusion, that the decision of the Tribunal was right.
21. In the circumstances, therefore, we answer the question originally referred, viz., 'whether on the materials considered by the Tribunal the assessee is a company to which the proviso to section 23A(1) applied for both the assessment years 1953-54 and 1954-55 ?', in the negative. So far as the question raised in the supplementary statement, 'whether the Tribunal was justified in refusing to consider the argument of the departmental representative put before the Tribunal at the hearing ?', the question no longer survives. The Commissioner shall pay the costs of the reference.