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Aluminium Industries Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax Referred Case No. 70 of 1966
Judge
Reported in[1968]68ITR125(Ker)
ActsCompanies Super Profits Tax Act, 1963 - Sections 4; Companies Super Profits Tax Rules, 1963 - Rule 1
AppellantAluminium Industries Ltd.
RespondentCommissioner of Income-tax
Appellant Advocate P.K. Kurien,; V. Desikan,; K.A. Nayar and;
Respondent Advocate C.T. Peter, Adv.
Cases ReferredFirst National City Bank v. Commissioner of Income
Excerpt:
- - ' 9. this rule and the other provisions extracted make it clear that reserves form a part of the capital of a company and that it is six per cent, of the capital of a company that constitutes, in a case like this, its standard deduction for the purposes of the act......consideration in computing the capital of the applicant-company for the purpose of determining the standard deduction as contemplated in sub-section (9) of section 2 of the super profits tax act, 1963, and the schedules mentioned therein? '3. section 4 is the charging section of the act. that section reads as follows :'subject to the provisions contained in this act, there shall be charged on every company for every assessment year commencing on and from the 1st day of april, 1963, a tax (in this act referred to as the super profits tax) in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the standard deduction, at the rate or rates specified in the third schedule. '4. in order to tax under section 4, two things have to be.....
Judgment:

1. This is a reference at the request of the assessee by the Income-tax Appellate Tribunal, Madras Bench. The assessee is a public limited company, the Aluminium Industries Limited, Kundara.

2. The assessment year concerned is 1963-64; and the accounting period, the 12 months ended on March 31, 1963. The question referred is :

' Whether, on the facts and circumstances of the case, the sum of Rs. 3,27,446 under ' Reserves and Surplus' in the balance-sheet, is to be taken into consideration in computing the capital of the applicant-company for the purpose of determining the standard deduction as contemplated in Sub-section (9) of Section 2 of the Super Profits Tax Act, 1963, and the Schedules mentioned therein? '

3. Section 4 is the charging section of the Act. That section reads as follows :

'Subject to the provisions contained in this Act, there shall be charged on every company for every assessment year commencing on and from the 1st day of April, 1963, a tax (in this Act referred to as the super profits tax) in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the standard deduction, at the rate or rates specified in the Third Schedule. '

4. In order to tax under Section 4, two things have to be ascertained :

(1) the chargeable profits of the previous year or previous years, as the case may be ; and

(2) the standard deduction.

5. It is the excess of the chargeable profits over the standard deduction that attracts the tax at the rate or rates specified in the Third Schedule.

6. The expression ' chargeable profits ' is defined in Section 2(5) of the Act. According to that definion, 'chargeable profits' means ' the total income of an assessee computed under the Income-tax Act, 1961 (43 of 1961), for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule '. The quantum of the chargeable profits is not in dispute in this case.

7. The expression ' standard deduction ' is defined in Section 2(9) of the Act, According to that definition ' standard deduction ' means ' an amount equal to six per cent, of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of fifty thousand rupees, whichever is greater'. The capital of the company exceeds Rs. 50,000 and it follows that the standard deduction will be an amount equal to six per cent, of the capital of the company as computed in accordance with the provisions of the Second Schedule.

8. Rule 1 of the Second Schedule, omitting the Explanations thereto, reads as follows :

' Subject to the other provisions contained in this Schedule, the capital of a company shall be the sum of the amounts, as on the first day of the previous year relevant to the assessment year, of its paid up share capital and of its reserve, if any, created under the proviso (b) to Clause (vib) of Sub-section (2) of Section 10 of the Indian Income-tax Act, 1922 (11 of 1922), or under Sub-section (3) of Section 34 of the Income-tax Act, 1961 (43 of 1961), and of its other reserves in so far as the amounts credited to such other reserves have not been allowed in computing its profits for the purposes of the Indian Income-tax Act 1922 (11 of 1922), or the Income-tax Act, 1961 (43 of 1961), diminished by the amount by which the cost to it of the assets the income from which in accordance with Clause (iii) or Clause (vi) or Clause (vii) of Rule 1 of the First Schedule is not includible in its chargeable profits, exceeds the aggregate of--

(i) any money borrowed by it which remains outstanding; and

(ii) the amount of any fund, any surplus and any such reserve as is not to be taken into account in computing the capital under this rule.'

9. This rule and the other provisions extracted make it clear that reserves form a part of the capital of a company and that it is six per cent, of the capital of a company that constitutes, in a case like this, its standard deduction for the purposes of the Act. It is common ground that, in order to succeed, the assessee must establish that the sum of Rs. 3,27,446 specified in the question referred amounts to a reserve, and that the only point for determination is whether that amount can be considered to be a reserve or not.

10. The word ' reserve ' is not defined in the Act, just as in the Business Profits Tax Act, 1947, which came up for consideration before the Supreme Court in Commissioner of Income-tax v. Century Spinning and ., [1953] 24 I.T.R. 499, 503 ; [1954] S.C.R. 203. The Supreme Court said :

' The term ' reserve ' is not defined in the Act and we must resort to the ordinary natural meaning as understood in common parlance. The dictionary meaning of the word ' reserve ' is :

' 1. (a) To keep for future use or enjoyment ; to store up for some time or occasion; to refrain from using or enjoying at once.

(b) To keep back or hold over to a later time or place or for further treatment......

6. To set apart for some purpose or with some end in view ; to keep for some use......

11. To retain or preserve for certain purposes. (Oxford Dictionary, Vol. VIII, p. 513).'

11. In Webster's New International Dictionary, second edition, page 2118, ' reserve ' is denned as follows :

' 1. To keep in store for future or special use ; to keep in reserve ; to retain, to keep, as for oneself.

2. To keep back ; to retain or hold over to a future time or place.

3. To preserve ' '

and :

'The reserve may be a general reserve or a specific reserve, but there must be a clear indication to show whether it was a reserve either of the one or the other kind. The fact that it constituted a mass of undistributed profits on the 1st January, 1946, cannot automatically make it a reserve.'

12. In the case before us also there is no indication whatsoever that the sum of Rs. 3,27,446 constituted a reserve of any kind. It was, to adopt the words of the Supreme Court, nothing more than a mass of undistributed profits on March 31, 1963 (see also First National City Bank v. Commissioner of Income-tax, .[1961] 42 I.T.R. 17 ; [1961] 2 S.C.R. 911 and Commissioner of Income-tax v. Standard Vacuum Oil Co., [1966] 59 I.T.R. 685 (S.C.).).

13. In the light of what is stated above, the question referred has to be answered in the negative, that is, against the assessee and in favour of the department. We do so ; but in the circumstances of the case without any order as to costs.


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