1. This is a reference under Section 66(1), Income-tax Act, by the Calcutta Bench of the Income-tax Appellate Tribunal of a question of law at the instance of the assessees.
2. The assessees are a company, called Braithwaite & Co. (India) Limited. The assessment year concerned is the year 1947-43, the relevant accounting year being the calendar year 1946. In the course of the assessment proceedings, the assessees claimed that a sum of Rs. 5,10,130/- which was the balance shown by their Profit and Loss account as on 1-1-1946, should be considered as a reserve within the meaning of Explanation (a) to the proviso to Paragraph D of Part II of the Schedule to the Indian Finance Act, 1947, for the purpose of the calculation of additional super-tax. The amount of Rs. 5,10,130/-was made up as follows ;
(a)Balance of Profit and Loss account brought forward on 1-1-1945Rs. 82,760/-(b)Profit for the calendar year 1945Rs. 4,27,370/-
3. With respect to the second sum of Rs. 4,27,370/-, the Tribunal did not accept the assessees' contention and held that it could not be treated as a reserve. As the assessees have not disputed that finding and have not caused any question to be referred to this Court with regard to the aforesaid sum, we may leave it out of account altogether.
4. With regard to the other sum of Rs. 82,760/-, however, the Tribunal accepted the contention of the assessees. They held that although the amount had not been specifically sec aside as a reserve, it was, nevertheless, a reserve' in sub-stance, inasmuch as it consisted of the unutilised profits of earlier years and would be available to the assessee company for use in subsequent years. The Commissioner of Income-tax was dissatisfied with that decision and asked the Tribunal to refer the matter to this Court. Accordingly, the following question of law has been referred: 'Whether upon a correct interpretation of Explanation (a) to the proviso to Paragraph D of Part II of the Schedule to the Indian Finance Act, 1947, the sum of Rs. 82,760/- could be added to the share capital of the Assessee Company as a part of the reserves for the computation of capital.'
5. It will be noticed that the question involves a construction of the word 'reserves' as occurring in the Explanation (a) to the proviso to Paragraph D of Part II of the Schedule to the Indian Finance Act of 1947. That Explanation is concerned with the definition of 'capital of the company' and says that
'capital of the company shall be deemed to mean the paid up share capital at the beginning of the previous year for the assessment for the year ending on 31-3-1948 (other than capital entitled to a dividend at a fixed rate) plus any reserves,'
subject to certain exceptions which are not material here. It will thus appear that in the contemplation of the Explanation, 'reserves' are one of the constituent or component parts of the capital of the company, as defined in the proviso.
6. The ground upon which the Tribunal decided against the Department has already been indicated by reference to the reason briefly given in the Statement of the Case. The same reason has been given more fully in the appellate order. Broadly speaking, the Tribunal's reasons are that an amount virtually set aside out of the profits of a company for future use is really a reserve, by whatever name it may be called, and that in view of the manner in which a company is worked and its accounts are made up, great complications would arise if such view of the expression 'reserve' were not accepted and undistributed profits were not treated as reserves.
7. In our opinion, the question is now concluded by the decision of the Supreme Court inthe case of -- 'Commr. of Income-tax, BombayCity v. Century Spinning and .', : 24ITR499(SC) (A). It is true that thestatute which the Supreme Court had to construe was not the Indian Finance Act of 1947,but the Business Profits Tax Act. That distinction, however, makes no difference, inasmuch asthe definition of 'capital', as contained in Rule 2(1)of Schedule II of the Business Profits Tax Act is, forall material purposes, the same as in Explanation (a) to the proviso to Paragraph D of PartII of the Schedule to the Indian Finance Act,1947. While the definition in the Indian FinanceAct speaks of 'the paid up share capital at thebeginning of the previous year plus any reserves', the Business Profits Tax Actspeaks of 'the amounts of its paid up sharecapital and of its reserves'. The constituentparts of the capital, as contemplated by the twoprovisions, namely, the paid up share capital andthe reserves, are thus common.
8. In the case to which I have referred, the relevant date was 1-4-1946. The balance sheet of the company concerned for the calendar year 1945 showed a profit of Rs. 90,44,677 and the balance left after certain appropriations was Rs. 5,08,637, which was carried to the balance sheet of the next year on 1-1-1946. The amount, however, was not made or declared a reserve. It being argued on behalf of the assessees that, nevertheless, the amount should be treated as a reserve for the purposes of Rule 2(1) of Schedule II to the Business Profits Tax Act, the Bombay High Court accepted the contention and held that the directors of the company not having distributed tile sum as dividend but having kept it back, they had constituted a reserve of it. In the view of the Bombay High Court, a 'reserve', in the sense in which the word was used in Rule 2, could only mean profit earned by a company and not distributed as dividend to the shareholders, but on the other hand kept back by the directors for any purpose to which it might be put In future.
This view was expressly dissented from by the-Supreme Court. Their Lordships pointed out that. on 1-4-1946, which was the crucial date, the sum concerned could not be called a reserve, because nobody possessed of the requisite authority, had indicated on that date the manner of its disposal or its destination. In the view of their Lordships, the mere fact that a mass of undistributed profits was carried over by a company from one year to another, was not sufficient to make such a mass a reserve, but it was further necessary that it must be clearly allotted to a reserve, whether, general or specific.
It will appear that the position hi the present case is precisely the same. The sum of Rs. 82,760/- had been brought forward to the 1st of January, 1945, from the previous year and it was-simply carried further as a load of undistributed profits even over the end of the year 1945 to the-first day of the following year. From the beginning to the end, however, it remained, in the language of the Supreme Court, 'a mass of undistributed profits' and it never got allocated to either a special or a general reserve. That being so, the amount clearly fails to satisfy the test laid down by their Lordships of the Supreme Court and it must be held that it could not be treated as a reserve, as the Tribunal erroneously did.
9. The answer to the question referred must, therefore, be in the negative.
10. The assessees have not appeared before us.. Why they have not done so, we are unable to say, but since the Commissioner succeeds in the Reference, he will be entitled to his costs.
11. I agree.