P. Chakravartti, C.J.
1. This case is a remnant of a Reference under Section 66(1) of the Income-tax Act by which three questions were referred to this Court. Two of them were disposed of by an order of Lahiri, J. and myself, passed on 19-8-1954 but by the same order we called for a further Statement of Case with respect to the third question. That statement has since been received.
2. Broadly stated, the third question asks whether the payments made by a company under Section 18A of the Income-tax Act can be treated as a part of its reserve till actually credit in respect of them is given in the regular assessment. It has arisen in the following way :
3. For the purposes of the Business Profits Tax Act, 'taxable profits' means the amount by which the profits, during a chargeable accounting period, exceed the abatement allowable in respect of that period. That is laid down in Section 2(17) of the Act. Under Section 2(1) 'abatement' means a sum computed by a rather complicated process by reference to the capital of the company on the first day of the chargeable accounting period in accordance with Schedule II of the Act, but, as the Act originally stood, the provision was only for chargeable accounting periods ending on or before 31-3-1947. The Finance Aet of 1948 amended Section 2(1) of the Business Profits Tax Act so as to provide that in respect of any chargeable accounting period beginning after 31-3-1947, the amount of the abatement shall be such sum as may be fixed by the Annual Finance Act. The same Act provided by Section 11(2) that in respect of any chargeable accounting period beginning after 31-3-1947, the amount of the abatement shall be a sum computed by reference to the capital in accordance with Schedule II of the Act. The provision for computation in accordance with Schedule II of the Act was thus maintained even with respect to chargeable accounting periods' beginning after 31-3-1947. Under Rule 2(1) of the Schedule, the capital of a company is the sum made up of the amounts of its paid up share capital and of its reserves, less certain amounts which I need not particularise. It is only necessary to observe that one of the constituent parts of the capital, as contemplated by Section 2(1)(a) of the Act and Rule 2(1) of Schedule II, is the amount of the reserves of a company.
4. During the period ending on 31-3-1948, the assessce company made advance payments of income-tax under Section 18A of the Act amounting in all to Rs. 13,54,054/-. In the course of its assessment to business profits tax for the chargeable accounting period beginning on 1-4-1948 and endingon 31-3-1949, the assessee claimed that in computing its capital for the purpose ot determining the abatement admissible to it, the amount of payments made by it under Section 18A of the Act during the previous year should be taken into account as its reserve and, therefore, as a part of its capital.
The Income-tax Officer refused to allow the claim.
On appeal, the Appellate Assistant Commissioner held that the question as to whether the assessee was entitled to the amount in question being treated as a part of its reserve did not arise, because it had in fact been allowed as a reserve, being included in a larger sum. According to him, what had been disallowed was only a double allowance. In that view, he rejected the assessee's claim that in addition to the larger amount in which, according to him, the amount of the actual payments under Section 18A was included, the latter amount was also to be separately taken into account as a reserve in computing the capital. On further appeal by the assessee, the Tribunal proceeded on what, according to them, was the true nature of payments made under Section 18A of the Act. The view taken by the Tribunal was that the payments under Section 18A had been made to meet a statutory liability and not put by as a reserve, to be applied to a further contingency, and consequently the claim made by the assessee was not maintainable. Upon the decision of the Tribunal going against the assessee, it asked for a reference of the question to this Court and the following question was referred:
'Whether the Income-tax Officer was correct in holding that advance payment of tax under Section 18A was not a reserve of the assessee mentioned in Rule 2(1) of Schedule II?'
5. When the Reference came up for hearing before Lahiri, J., and myself, it appeared to us that if the actual fact was as stated by the Appellate Assistant Commissioner and if the amount claimed by the assessee as a reserve had in fact been allowed as contained in a larger amount, the true nature of payments under Section 18A of the Income-tax Act would not fall to be considered. The Reference was at the instance of the assessee and if the assessee had already got credit for the payments made under Section 18A of the Act, its claim could be disposed of on the short ground that it could not expect the same allowance twice. The Tribunal, however, had not adverted at all to the reason given by the Appellate Assistant Commissioner in support of the view taken by him and, therefore, we were left in doubt as to what the actual facts were. Accordingly, we remanded the case under Section 66(4) of the Act with a direction to the Tribunal to submit a further Statement of Case,
6. The Appellate Assistant Commissioner had pointed out that in the balance-sheet of the assessee company, showing the financial position as on 31-3-1948, the sum of Rs. 13,54,054/- was to be found on the asset side as an advance payment of tax under Section 18A. On the capital and liability side, there was to be found another amount of Rs. 36,67,481/-, shown as the reserve for income-tax, super-tax and business profits tax dues. The Appellate Assistant Commissioner interpreted the figures to mean that the larger figure was the gross figure, intended to represent a fund out of which all income-tax, and super-tax and business profits tax dues were to be paid, whether in advance or in accordance with assessments made.
'The reserve for income-tax shown in the Balance Sheet,' he observed, 'is not arrived at after deducting the advance payment of tax, but it is the gross figure which has been considered in the capita! computation. Therefore no further relief is admissible.'
7. In the supplementary Statement of Case submitted by the Tribunal, the position has been explained in the following words:
'The procedure adopted by the assessee is that during a chargeable accounting period advance payments of tax under Section 18A are debited to an account named advance payment of tax. At the end of chargeable accounting period when Profit and Loss account and Balance Sheet is prepared, the assessee makes an estimate of its income-tax liability and sets apart out of the profits, an amount to cover this liability. This amount is credited to a taxation reserve account. The idea is that all income-tax liabilities would be met out of this account. When tax liability for chargeable accounting period is determined. it is debited to taxation reserve account. The amount standing to the debit of advance payment of tax account is also for the same reason transferred to Taxation Reserve Account. Before the transfer entry from advance payment of tax account to taxation reserve account is made, there is no connection between the amounts standing to the credit of taxation reserve account and that standing to the debit of advance payment of tax account'.
8. After thus describing the accounting or bookkeeping methods followed by the company, the Tribunal have proceeded to state the facts, relative to the particular year in question as follows:
'During the chargeable accounting period 1-4-1947 to 31-3-1948, three payments totalling to Rs. 13,54,054/- were made as advance payment of tax under Section 18A. There was thus a total of Rs. 13,54,054/- standing to the debit of advance payment of tax account on 31-3-1948. Similarly, Rs. 36,67,4817- stood to the credit of taxation reserve account on that date. The Rs. 13,54,054/- debit has no direct connection with Rs. 36,67,481/- credit. It cannot be said that Rs. 13,54,054/- has come out of or is included in Rs. 36,67,481/-. The Appellate Assistant Commissioner was wrong in holding that Rs. 13,54,054/- was included in the Rs. 36,67,481/-.'
9. I shall have something to say about the conclusion drawn by the Tribunal, but shall for the moment proceed on the footing that the smaller and the larger sums were two separate sums and that the smaller was not included in the larger.
10. The fieneral question, therefore, is whether it can be said that when a company makes advance payments of tax under Section 18A of the Income-tax Act, it creates a reserve, as the term is understood1 in Company Law. In the case of Commissioner ot Income-tax Bombay City v. The Century Spinning and ., : 24ITR499(SC) (A), the Supreme Court had occasion to point out how and when reserves were created. They observed that someone, possessed of the requisite authority, must make a declaration or give some indication that the manner of the disposal of or the destination of the amount in question is that it is being carried to reserve. That was looking at the question of a reserve from the procedural point of view. We are concerned in this case with the nature of a reserve. If I may refer to the definition given inMurray's Oxford Dictionary to which the Supreme Court also referred, but only to give the various meanings of the word 'reserve' as a verb, the meaning as a noun is given as follows:
'Something stored up, kept back, or relied upon, for future use or advantage; a store or stock'. An illustration of such use of the word 'reserve' is drawn from 'Political Economy' by Rogers and the following sentence is quoted: 'It is a maxim in business that a man .... should have a hoard or reserve from which he can draw, when the times are untoward'.
Apart from the dictionary meaning of the word reserve,' I think it can hardly be disputed that nothing can be reserved unless it has been reserved or laid by or stored for use or application in a future contingency which is anticipated as certain or likely. In the actual administration of companies also, a part of the surplus profits is removed from the immediate business of the company by way of a provision against future contingencies and a reserve is thus created, although, after being carried to the reserve, the amount in question may be invested or re-employed in the business, if the Articles so permit.
11. If such be the true concept of 'reserve', the question is whether payments under Section 18A of the Income-tax Act come within it. It was contended on behalf of the assessee that they did, because what was actually done when payments under Section 18A were made, was that the amounts paid were put aside in the custody of the Government, to lie there as the property of the company till they were appropriated to the regular assessment after such assessment had been made. The fact that the payment was made in discharge of a statutory liability, it was contended, made no difference, because the amount actually payable would fall to be decided at a future date and till that decision was made and the moneys paid were credited against the dues under the assessment, they could only be regarded as a reserve created by the company against the contingency of being required to pay the tax under the assessment to be made. Even if the reserve was created under compulsion, it was still a reserve, because what was compelled was only the parting with the physical possession of the money and not its actual application to, or expenditure on, the payment of the tax liability.
12. In support of the above line of reasoning Mr. Iyengar, who appeared before us for the assessee, referred to Sub-section (II) of Section 18A and pointed out that credit for the payments Was to be .given to the assessee only in the regular assessment which, according to him, showed that till such credit was given, the money continued to remain the property of the assessee. He sought to reinforce that argument by referring to Sub-section (5) of the section which provides for payment of some interest by Government from the date of payment up to the date of the provisional or the final assessment. According to Mr. lyengar, payments made under Section 18-A of the Income-tax Act were in no way different from compulsory reserves under the provisions of other Acts, such as, in particular, the Banking Companies Act and their true nature was that they were investments, earning interest.
13. In my view, there are several reasons for which Mr. Iyengar's conception of payments madeunder Section 18A of the Act cannot be accepted. In the first place, the provision for payment of interest by Government, though it is of some assistance to him, does not carry him the whole way. It is to- be observed that the interest payable by Government is not always payable up to the date of the regular, or final assessment when credit for the payment is to be given to the assessee. According to Sub-section (5) of Section 18A, when there is a provisional assessment under Section 23B, interest is payable only up to the date of that assessment. A provisional assessment can be made only after the receipt of a return made under Section 22 and, therefore, by the time a provisional assessment is made, all the instalments of payment under Section 18A shall have been paid. It is, however, not unlikely that in the final assessment, it may be found that the assessee has overpaid and in such a case the excess amount will be lying in the hands of Government between the date of the provisional assessment and that of the final assessment without carrying any interest. This, however, is only a small point.
14. The real answer to Mr. lyengar's argument, built on the provision for payment of interest by Government, is that the Section also provides for payment of interest by the assessee. Under Sub-section (1) of Section 18A, the Income-tax Officer may, by an order in writing, require an assessee to make quarterly payments of tax on the 15th day of June, the 15th day of September, the 15th day of December and the 15th day of March, as computed on his income from the previous year, if such income exceeded six thousand rupees, but computed according to the rates applicable to the current year. Under subsection (2) of the section, the assessee may at any time before the last instalment is due, send to the Income-tax Officer his own estimate of the tax pay able by him, if he thinks that such tax will be less than the tax which he has been called upon to pay and he may thereafter pay tax in accordance with the estimate made by himself. If, however, the tax so paid proves to be less than 80 per cent, of the tax determined on the basis of the regular assessment, Sub-section (6) of the Section makes the assessee liable to pay interest to Government upon the amount by which the tax paid by him falls short of the 80 per cent. Again, under Sub-section (4), the assessee may, in Certain circumstances, defer payment of tax on income of the nature of commission which is due, but has not yet been received, but it' the payment of tax is wrongly deferred by him, rob- Section (7) (b) makes him liable to pay interest for the period during which payment of tax was wrongly deferred am the amount of which the payment was so deferred. If, as Mr. lyengar contended, payments under Section 18A were only investments road by the assessee, they could be so only if the amounts paid remained the assessee's property even after the payments had been made and if the amount of the tax, to the payment of which the monies paid were intended to be applied, had not yet become due and payable and if by such payments they were not actually paid. Also on Mr. lyengar's theory the amount by which the tax is under-estimated and which remains in the hands of the assessee, it being withheld, cannot be said to have become the property of Government. If so, it is impossible to see on what, basis the assessee is required to pay interest to Government on the amount by which the actual payments. made by him may fall short of the amount of tax,ultimately found payable. It appears to me that the provision for payment of interest by Government is completely neutralised by the provision for payment of interest by the assessee and that it can by no means be said that the payments made under Section 18A are in the nature of investments.
15. Investments, again, are made by the investor voluntarily and he can realise the investments when he chooses to do so, subject only to the conditions under which they were made. It can by no means be said of payments made under Section 18A that the assessee can recall the payments at his will & that he can apply the fund, as augmented by the interest, to any use that he may consider expedient. The payments made under Section 18A are made once and for all, subject only perhaps to a refund of the appropriate amount when an excess payment has been made. Not only is the assessee made liable for interest in case of under-payment, but by Subsection (9) he is also made liable for penalties, if he submitted untrue statements of the tax payable by him under Sub-section (2) or Sub-section (3), knowing or having reason to believe them to be untrue. In my view, the conception of an investment is wholly inapplicable to payments under Section 18A. Interest is payable by Government on the amount actually paid, not as a hire of the assessee's money which remains his, but because the tax is realised before it becomes payable under the assessment and because the statute so provides. No other basis of the provision for the payment of interest will fit in with the scheme of the section.
16. The question whether payments under Section 18A made by a company can be rightly regarded as reserves may be looked at from another point of view. Reserves are created out of profits. Under Article 99 of Table A, which is more or less typical of the provision on the subject contained in Regulations of Companies, 'the directors may, before recommending any dividend, set aside out of the profits of the company such sums as they think proper as a reserve or reserves.' lam quoting from Table A, as it stood in the Companies Act of 1913 before it was replaced by the new Act. The whole Article reads thus:
'The directors may, before recommending any dividend, set aside out of the profits of the company such sums as they think proper as a reserve or reserves which shall, at the discretion of the directors be applicable for meeting contingencies, or for equalizing dividends, or for any other purpose to which the profits of the company may be properly applied, and pending such application, may, at the like discretion, either be employed in the business of the company or be invested in such investments (other than shares of the company) as the directors may from time to time think fit'.
What is important to notice is that a reserve is created out of the profits. It appears to me that in the case of payments under Section 18A made by a company, it may well happen that when some at least of these payments are made, there are yet no profits out of which the tax can be paid and, therefore, the money has to be procured from other sources. I am not thinking of what happened in this particular case, but in judging the true nature of payments under Section 18A, as made by a company, it is pertinent to bear in mind the possibility which I have indicated. If, for example, when the first or the second instalment has become due, the company hasnot yet made any profits in the current year or if even when the fourth instalment is due, the profits of the company, made during the year, have by some misadventure been exhausted and no profits are available out of which the tax can be paid, the tax will yet have to be paid and, when paid, will not be paid out of the profits. There will be thus no setting aside out of the profits of any sum at all and that seems to be an additional reason why it cannot be said that when payments under Section 18A are made, a reserve is created.
17. The next consideration which appears to Me to be relevant is also fundamental. A reserve, as I have endeavoured to explain, is by its very nature a fund which is created and maintained for the purpose of being drawn upon in future. If certain payments are to be made in discharge of a present liability in the course of the year to which the balance-sheet and the Profit and Loss account relate, I am unable to see how such payments can be said to be made by way of creating a reserve. They are cleanly of the nature of expenditure, although it may not be expenditure in the income-tax sense, allowable in an assessment, but none-the-less they are expenses incurred and met by the company in the course of its business existence during the year, when liabilities, requiring an instant discharge, arise. A reserve is created only out of the whole or a part of the surplus profits, as they are found to be in the hands of the company at the end of the year and it is a reserve against a contingency which still lies in the future. Payments under Section 18A do not, in my view, satisfy that test. Their true nature is that they are payments on account, made under the compulsion of a statute, towards the discharge of an instant liability for liquidating a charge, the precise measure of which is to be determined at a later date.
18. I would next point out a further circumstance by reference to the special facts of the present case which also appears to me to negative the assessee's contention. The capital contemplated by station 2(1)(a) of the Business Profits Tax Act is the capital of the company as on the first day of the chargeable accounting period. The chargeable accounting period in the present case commenced on the 1st of April, 1948. In order that a reserve may be a part of that capital, it must obviously be a reserve existing and available on the first day. The facts of the present case, however, are that before 31-3-1948, the payments had all been made, the moneys had gone out of the funds of the company into the hands of Government. They could not be recalled and they could not be available to the company for application or use according to its pleasure. I am not overlooking the assessee's argument that since the final appropriation would not be made till the regular assessment, the moneys would continue to belong to the company, although their local habitation might change. The point, however, is that the disposing power of the company over the moneys had completely and irretrievably gone and if it had gone, it is not possible to say that the moneys were still lying as a part of the company's reserve.
19. The foregoing reasons appear to me to he conclusive that payments under Section 18A, as made by a company, cannot be regarded as payments made by way of creating a reserve. I observed at the beginning of this judgment that I would have something to say about the Tribunal's interpretation of the book-keeping or accounting procedure of the company and the manner in which its funds were handled. It appears to me that, in a broader sense, the Appellate Assistant Commissioner was not wrong in saying that the sum of Rs. 13,54,054/- was really included in the larger sum of Rs. 36,67,481/- so that when the latter sum was allowed as a part of the company's capital, no further claim could be entertained with respect to the smaller sum. The Tribunal has found that the company maintains an account called the Advance Payment of Tax Account and the payments under Section 18A are debited thereto. It also maintains a second account, called the Taxation Reserve Account and the Tribunal have found the company's intention to be that 'all income-tax liabilities would be met out of this account.' That intention obviously means that sums, standing to the debit of the Advance Payment of Tax Account and those standing to the credit of the Taxation Reserve Account are not both to be applied to the payment of tax liabilities. The real nature of the intention appears from the further finding of the 7'ribunal. They have found that when the tax liability for the chargeable accounting period is determined, the amount standing to the debit of the Advance Payment of Tax Account is transferred to the Taxation Reserve Account. It is true that till such transfer is made, the two funds are separate, but it is equally true that when the tax liability comes to be finally met, the Taxation Reserve Account is not diminished by actual payment out of it of the whole tax liability, but the amount standing to the debit of the Advance Payment of Tax Account is taken as already paid and then that account is assimilated to the Taxation Reserve Account. To take the figures of the instant case, Rs. 36,67,481/- was kept to the credit of the Taxation Reserve Account and all taxes were to be paid out of it. In the course of the year, however, a sum of Rs. 13,54,054/- had already been paid as advance payment of income-tax and that amount was shown as a debit to the Advance Payment of Tax Account. When the tax liability was finally determined, the debit of Rs. 13,54,054/- would be transferred to the Taxation Reserve Account, showing a credit of Rs. 36,67,481/-, the effect being that the tax liability would be met by the payment already made of that Rs. 13,54,054/- plus only what would be further required to discharge the liability in full. In the sum, therefore, the real reserve for payment of tax would be only the sum of Rs. 36,67,481/-, the other being deemed to be a part of it, kept apart, it is true, for the time being, but assimilated at a subsequent stage. The Appellate Assistant Commissioner, it seems to me, was right, if the matter is looked at broadly, in holding that regarded from the point of view of a reserve, the sum of Rs. 13,54,054/- was really included in the larger sum of Rs. 36,67,481/- & that the smaller sum was not intended for an application with which the larger sum had no concern. As, however, at the beginning of the chargeable accounting period, the two funds were still standing separate, I would not like to rest my decision on the ground I have just stated, but I think it would be right to point out what, as a matter of accounting and as a matter of the final adjustment of the company's affairs, the true position was. But, as I have said, I would rest my answer to the question asked on the general grounds which I have previously given.
20. On those grounds I hold that the answer to the question referred must be in the affirmative.
21. The Commissioner of Income-tax, West Bengal, will get the costs of this Reference, as also- the costs reserved by the order of 19-8-1954.
B.K. Guha, J.
22. I agree.