1. This is a reference under Section 66(1), Income-tax Act, read with Section 19, Business Profits Tax Act, of a single question of law at the instance of the Commissioner of Income-tax, West Bengal. The reference came up for hearing on a previous occasion -- on 4-5-1953, to be-precise -- when further hearing was adjourned on the ground that the identical point was pending consideration by the Supreme Court in an appeal from Bombay. An opportunity, however, was taken to reframe the question of law because it was felt that the basis on which the specific sum had been chosen was not clear and if the answer of the Court was limited to that sum, the opinion given on the question might mislead rather than guide. The real controversy between the parties, it was admitted, was whether the undistributed profits of any particular year carried forward to the first day of the chargeable accounting period next following, could be treated as a reserve and added to the paid up share, capital for the purposes of Rule 2(1) of Schedule II to the Business profits Tax Act, provided, however, such profits had been assessed to tax under the Income-tax Act. In order to reflect that controversy between the oarties more truly, the question was reframed in form agreed to by all the parties.
2. This particular reference is singularly bare facts. All that we know is that the relevant rgeable accounting period is the period comncing on 1-4-1946, and ending on 31-3-1947. The (sic) ssee is a limited company and its Profit and ss account, as on 31-3-1945, showed an undistributed balance of Rs. 7,90,543-0-5. It was that sum .and the whole of that sum which the assessee wanted to be taken into the computation of its capital as a reserve and the Tribunal allowed the claim on the ground that there was virtually no difference between amounts classified as reserves and undistributed net profits, carried forward The Commissioner Of Income-tax was dissatisfied with the decision, and required the Tribunal to refer the matter to this Court. Accordingly, the following question was referred : 'Whether upon a correct interpretation of Rule 2(1) of Schedule II of the Business Profits Tax Act, 1947, Rs. 7,90,543-0-5 undistributed profits carried forward to the next year should be considered as a part of the 'reserve' and be added to capital.'
3. For the reasons given in our order, dated 4-5-1953, the question referred was reframed in the following form with the consent of all parties: 'Whether upon a correct interpretation of Rule 2(1) of Schedule II of the Business Profits Tax Act, undistributed profits carried forward to the first day of the chargeable accounting period should be considered as a part of the 'reserve' and be added to capital, so far as they have not been allowed in computing the profits of the company for the purposes of the Indian Income-tax Act, 1922.'
4. The appeal which was pending before the Supreme Court when further hearing of the present reference was adjourned has since been decided. It appears that, after the decision, it is not even arguable that the view taken by the Tribunal was correct, but Mr. Mitra contended that the 'ratio decidendi' of the decision of the Supreme Court was not what might appear to lie on the surface, but was to be sought deeper. If I understood Mr. Mitra aright, what he contended was that the Supreme Court had proceeded on the special facts of the case before it and one of the special facts was that instead of being kept back, as the Bombay High Court had thought, the undistributed, balance had, in fact, been distributed subsequently and therefore utilised for a specific purpose. Our attention was drawn by Mr. Mitra to the various meanings of the word 'reserve', as set out in the judgment of their Lordships, and he contended that if a particular case came under any of those things, it should be held to satisfy the condition of being a reserve. We were referred particularly to meaning (b), as given in the judgment, which is 'to keep back or hold over, to a later time.' ' Mr. Mitra's contention was that the Supreme Court was concerned with testing the correctness of the view taken by the Bombay High Court that the amount of the balance in question in that case had been kept back by the directors and not constituted a reserve.
In the course of examining the position, the Supreme Court had pointed out that the amount in question had not in fact been kept as a reserve, because, in the first place, the directors had done on 28-2-1946, all that they could possibly do, namely, they had recommended distribution of the amount as a dividend and subsequently the share-holders had accepted the recommendation and, in fact, authorised a distribution, Mr. Mitra's contention was that it was not the negative fact that no final decision had been taken with regard to the amount up to 1-4-1946, but the positive act of the application of the amount for the purposes of a dividend declaration, which was the real basis of the judgment of the Supreme Court. It was pointed out that there was no such positive act in the present case. No decision of any kind had been taken with regard to the unappropriated balance either on 1-4-1946, or at any time thereafter. The amount had, therefore, been really kept back a reserve for application to such purposes as might require its application in future and, therefore, it was not hit by the principle laid down by the Supreme Court.
5. I am unable to agree with Mr. Mitra that the decision of the Supreme Court can be distinguished in the manner suggested by him. The whole basis of the decision, as I understand it, is that the creation of a reserve cannot be automatic. Some decision by persons of the requisite authority regarding its disposal for a specific purpose or its destination to a specific or a general end is required before an amount carried forward as mere undistributed balance Can acquire the character of a reserve. This basic principle has been emphasised by their Lordships at several places in their Judgment, and if that principle be applied, the amount in question in the present case can, by no means, be said to have been so dealt with as to make it destined for some specific or general end and so reserved. According to their Lordships, an amount of a balance which is 'nothing- more than undistributed profits' cannot be treated as a reserve so long as its character of being merely undistributed profits remains unaltered. The amount in question in the present case comes wholly under that description and is covered thereby and, accordingly, it must be held that it could not be treated as a reserve.
6. The answer to the question referred as re-framed must, therefore, be in the negative.
7. The Commissioner of Income-tax, West Bengal, will have his costs of this Reference.
8. Certified for two Counsel.
9. I agree.