RAJAGOPALAN, J. - Of the three questions referred to this court under section 66(1) of the Act, the first two were answered against the assessee in the order of this court dated September 3, 1958. The answer to the third of the questions was reserved, and by the order dated September 3, 1958, a further statement of the case was called for from the Tribunal, which has since been submitted.
The entire claim of the assessee was allowed by the Tribunal, and even at the earlier stage the assessee did not dispute the fact that the entirety of its claim, though upheld by the Tribunal, could not be sustained. The claim in the proceedings put forward by the assessee before us was a much more limited one, the details of which were set out in the order dated September 3, 1958. It is the correctness of that claim we have to decide on the basis of the further statements of the case submitted by the Tribunal.
The first item which we have to consider is the claim of the assessee, that for the first two chargeable accounting periods a sum of pound 27,857 constituted 'reserves' within the meaning of the rule, and that for the next two chargeable accounting periods the amount under this head was pound 9,812-0-5.
The relevant dates were the commencement of the respective chargeable accounting periods, April 1, 1946, July 1, 1946, April 1, 1947, and July 1, 1947. Even if we take the passing by the general body of the shareholders of the profit and loss accounts submitted by the directors as evidence of the appropriation of the various amounts to the various heads shown in the profits and loss account, the real question we have to consider is, whether inclusion of any amount under the head, 'capital profit account', amounted to authorisation of a reserve fund giving the extended meaning to the word 'reserve' as explained in Commissioner of Income-tax v. Century Spinning and ., and in Commissioner of Income-tax v. Vasantha Mills Ltd. A copy of the capital profits accounts has been marked as annexure Z. With reference to the first two chargeable accounting periods of the position was, that a sum of pound 31,646-4-0 was included in the capital profits account prior to March 31, 1946, and that inclusion must be deemed to have been authorised both for the first chargeable accounting period and the second chargeable accounting period. We find from annexure Z that a portion of the profits was taken over to this head of account, what apparently in the opinion of the assessee was capital profits. How an assessee chose to treat a particular item of profit, either as capital or as trading receipt, could not obviously conclude the question, and so mere inclusion in the head of the capital profit account with nothing more cannot, in the circumstances of this case, be proof of appropriation for any specific purpose. Specific evidence as to the nature of this particular fund shown as the capital profit account was not furnished except what appears ex facie the account. We have no other material on which to rest our conclusions. We find that while several items were credited to the account, items which apparently in the view of the assessee were capital receipts, the only out-going was by way of distribution to shareholders. Learned counsel for the assessee conceded that what was paid out of this 'capital profits account' was further dividends to the deferred shareholders. Thus on the material placed before us, the only conclusion we can come to is, that a portion of the profits of the company was taken over to the capital profit account only to be available for a deferred distribution of dividends to shareholders. If that be the real position of the capital profit account, it would only mean a portion of the profits were kept undistributed, and merely because they were included in a separate head of account they were not taken out of what was called 'amorphous and undistributed profits', profits available for further distribution. In this case distribution was deferred, and that by itself with nothing more cannot make the amount so set apart a reserve within the meaning of rule 2.
Therefore, the assessees claim that whatever was found in the capital profits account, whether that claim was based upon what was credited or upon what was retained as balance at the end of the relevant period, was a reserve within the meaning of the rule 2 will have to be negatived. As we said, it only retained a portion of the undistributed profits; only it was put under a separate head in the balance sheet.
Similarly the amount of pound 219-3-3 shown in the first two chargeable accounting periods and pound 30-7-4 shown in the third and the fourth accounting periods constituted only a portion of the undistributed profits. That they were shown in the profits and loss account did not make them any the less undistributed profits; and that they have been shown under a separate head of account by itself and with nothing more cannot be viewed as constituting them a reserve for future use for any specified purpose. So that portion of the claim also of the assessee will have to be negatived.
That leaves only one other item for consideration. With reference to the second, third and the fourth chargeable accounting periods the assessee claimed that a sum of pound 19,236 constituted a reserve within the meaning of rule 2. This was shown in the balance-sheet under the head 'excess profits tax post-war refund suspense account' and as the balance-sheet was approved by the shareholders, the appropriation to this head of account must be deemed to have been authorised. So if this head of account had been authorised before the relevant dates with reference to each of the chargeable accounting periods, and if such appropriation constituted a reserve, the assessee would be entitled to the relief of abatement for which rule 2 provided.
Before going into the nature of this head of account, we have to point out that with reference to the second chargeable accounting period commencing from July 1, 1946, the position was there was no meeting of the general body prior to July 1, 1946, which means there was no authorisation by the general body, which alone was competent, before the relevant date July 1, 1946. So even if the inclusion of this amount in the suspense account is accepted as proof of constituting a reserve, the claim of the assessee with reference to the second chargeable accounting period from July 1, 1946, to June 30, 1947, will have to be negatived on the grounds that prior to July 1, 1946, there was no authorisation by the general body of shareholders.
There was certainly a meeting of the general body prior to April 1, 1947, and the requisite authority with reference to the third and the fourth chargeable accounting periods was there. The question that remains is, whether inclusion of this amount under this head of account can be taken as proof of constituting a reserve.
The nature of the fund included under the head, 'excess profits tax post-war refund suspense account', is to be gathered with reference to sections 39 and 40 of the Finance Act (No. 2) of 1945 of the United Kingdom. As the learned counsel for the assessee pointed out, section 40 of the Act defined with precision the use to which the refund ordered by the British Treasury could be put by the taxpayer who got the refund. Section 40 prohibited certain uses and ordained certain uses to which alone the amount so refunded could be put. We can briefly say that section 40 required the amount so refunded to to be utilised for development purposes. It could not be used for instance either for the issue of shares or for the declaration of dividends.
Thus the position was that whatever was given as a refund of excess profits tax in the United Kingdom was available only for use for a limited purpose, and the assessee was under a statutory liability to utilise this amount only for those purposes. Therefore, when the amount was refunded, it was shown under a separate head of account as excess profits tax post-war refund suspense account. It meant the amount was held in reserve, but in suspense, to be utilised for the statutory purposes as directed by section 40 of the English Finance Act of 1945. Therefore, the very inclusion of this amount under this head of account would be proof of an appropriation for a specified purpose, the purpose specified being statutory, but none the less a purpose specified. When that purpose specified was further authorised by the shareholders, the fact that they were under a statutory liability to do so did not make the authority of the shareholders any the less effective. Thus the requirements were satisfied to constitute the fund a reserve within the meaning of rule 2, and for the assessee to claim abatement with reference to that amount.
In our opinion, the assessee is entitled to claim a relief of abatement with reference to this sum of pound 19,236 with reference to the third and the fourth chargeable accounting periods, that is April 1, 1947, to June 30, 1947, and July 1, 1947, to June 30, 1948. The rest of the claim which the Tribunal allowed will have to stand disallowed, and the other sums will have to be brought to tax.
In form our answer to question No. 3 is, the credit balances in the capital profits account, profit and loss account and excess profits tax post-war refund suspense account did not constitute reserves within the meaning of rule 2(1), except to this except to this extent, that with reference to the third and the fourth chargeable accounting periods alone the sum of pound 19,236, which was included in the post-war refund suspense account, did constitute a reserve within the meaning of rule 2(1).
As the assessee has substantially failed in this reference, he will pay the costs of the Department. Counsels fee Rs. 250.