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PETITIONER: COMMISSIONER OF INCOME-TAX, MYSORE, BANGALORE

       Vs.

RESPONDENT: THE MYSORE ELECTRICAL INDUSTRIES LTD.

DATE OF JUDGMENT27/04/1971

BENCH: MITTER, G.K. BENCH: MITTER, G.K. SIKRI, S.M. (CJ) VAIDYIALINGAM, C.A. REDDY, P. JAGANMOHAN DUA, I.D.

CITATION:  1971 AIR 1361            1971 SCR  521  CITATOR INFO :  RF         1981 SC2105  (42,43)

ACT: Companies (Profits) Surtax Act, 1964-Second Schedule, r.  1- Sums appropriated by towards reserves not on the first  day of  the year but later Should be treated as effective  from the  earlier date since division of undistributed  profits became effective from that day.

HEADNOTE: On  the question whether three several sums appropriated  by the Directors of the respondent-company towards reserves  on the  8th August, 1963 out of the profits of the year  ending 31st  March,  1963,  should be added  to other  items  for computation  of the capital of the respondent as on the  1st day of April, 1963 in terms of rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, HELD:     The  fact  that  the  directors  were  unable   to appropriate  the SUMS to reserves of different kinds  cannot make  any  difference  to  the  nature  or  quality  of  the appropriation  of the profits to reserves as  determined  by the directors after 1st April, 1963.  Their determination to appropriate the sums mentioned to the three separate classes of  reserves on the 8th of August, 1963 must be  related  to the  1st of April, 1963 i.e. the beginning of  the  accounts for the new year and must be treated as effective from that day. [524D] Commissioner  of  Income-tax,  Delhi v.  Aryodya  Ginning  & Manufacturing  Co. Ltd., 31 I.T.R. 145 and  Commissioner  of Income-tax  v. Vasantha Mills Ltd., 32 I.T.R. 237,  referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1794 of 1970. Appeal from the judgment and order dated October 28, 1969 of the Mysore High Court in Tax Referred Case No. 12 of 1967. Jagdish  Swarup, Solicitor-General, A. N. Kirpal and  B.  D. Sharma, for the appellant.

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M.   K. Ramamurthi, J. Ramamurthy and Vineet Kumar, for the respondent. S.   Swaminathan and R. Gopalakrishnan, for the intervener. The Judgment of the Court was delivered by  Miter, J.-The question involved in this appeal is,  whether three  several  sums appropriated by the  Directors  of  the respondent  towards reserves on the 8th August 1963  Gut  of the profits of the 522 year ending 31st March, 1963 should be added to other  items for  computation of the capital of the respondent as on  the 1st  day  of April, 1963 in terms of rule 1  of  the  Second Schedule  to  the  Companies  (Profits)  Surtax  Act,   1964 hereinafter referred to as the ’Act’. The  Act which received the assent of the President  on  2nd May,  1964 is an Act to impose a special tax on the  profits of  certain  companies.  Under section 4 of the  Act  a  tax known as surtax become chargeable on every company for every assessment year commencing on and from the 1st day of  April 1964 in respect of so much of its chargeable profits of  the previous  year as exceeded the statutory deduction,  at  the rates  specified  in  the Third  Schedule.   Under  S.  2(3) "assessment   year"  means  the  period  of  twelve   months commencing   on  the  1st  day  of  April  of  every   year. "Chargeable  profits"  is defined in S. 2(5)  as  the  total income  of  an assessee computed under the  Income-tax  Act, 1961 for any previous year or years, as the case may be, and adjusted  in  accordance with the provisions  of  the  First Schedule.   "Statutory deductions", ignoring  the  provisos, means in terms of S. 2(8) an amount equal to 10 per cent  of the  capital of the company as computed in  accordance  with the  provisions of the Second Schedule or an amount  of  Rs. 2,00,000/- whichever is greater.  The Second Schedule to the Act  contains  the  rules for computing  the  capital  of  a company  for the purposes of surtax.  Rule 1 of the  Second’ Schedule  with which alone we are concerned in this  section reads:               "Subject to the other provisions contained  in               this Schedule, the capital of a company  shall               be  the  aggregate of the amounts, as  on  the               first day of the previous year relevant to the               assessment year, of-               (i)   its paid-up share capital;               (ii)  its  reserves, if any created under  the               proviso (b)     to   clause  (vi-b)  of   sub-               section  (2)  of  section  10  of  the  Indian               Income-tax  Act, 1922 (XI of 1922),  or  under               subsection (3) of section 34 of the Income-tax               Act, 1961 (LXIII of 1961);               (iii) its  other  reserves as reduced  by  the               amounts credited to such reserves as have been               allowed as a deduction in computing the income               of the company for the purposes of the  Indian               income-tax  Act,  1922 ( XI of 1922),  or  the               Income-tax Act, 1961 (XLIII of 1961);               (iv)  its debentures, if any; and               (v)   any   moneys   borrowed   by   it   from               Government    or   the   Industrial    Finance               Corporation of India or the               523               Industrial  Credit and Finance Corporation  of               India or any other financial institution which               the  Central  Government may  notify  in  this               behalf in the Official Gazette or any  banking               institution (not being a financial institution

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             notified  as  aforesaid) or any  person  in  a               country outside India :               Provided that such moneys are borrowed for the               creation  of a capital asset in India and  the               agreement under which such moneys are borrowed               provides  for the repayment thereof  during  a               period of not less than seven years.               Explanation.-For  the removal of doubts it  is               hereby  declared that any amount  standing  to               the  credit of any account in the books  of  a               company  as on the first day of  the  previous               year relevant to the assessment year which  is               of the nature of item (5) or item (6) or  item               (7)  under the heading "RESERVES AND  SURPLUS"               or  of  any item under  the  heading  "CURRENT               LIABILITIES  AND  PROVISIONS"  in  the  column               relating  to  "Liabilities" in  the  "Form  of               Balance-sheet" given in Part I of Schedule  VI               to the Companies Act, 1956 (1 of 1956),  shall               not be regarded as a reserve for the  purposes               of  computation  of the capital of  a  company               under the provisions of this Schedule." In  terms of s. 4 of the Act the first assessment  year  for the  purpose of the Act in respect of the company  was  that commencing  on and from the first day of April,  1964.   The previous year in respect of which the chargeable profits had to  be ascertained commenced on the first of April 1963  and ended on the 31 st March, 1964.  The capital of. the company in terms of rule 1 of the Second Schedule would be its paid- up share capital and inter alia reserves as would come under clauses  (ii)  and (iii) of rule 1 to the  Second  Schedule. The reserves in this case to which exception is being  taken by the appellant as components of the capital of the company are  the  following three sums: (1) Rs.  2,56,000  as  plant modernisation  and rehabilitation reserve; (2) Rs.  1,00,000 as  loan  redemption  reserve,  and  (3)  Rs.  89,557/-   as development rebate reserve.  These are three of the items of reserve  which  the  directors of the  respondent  in  their report  to the general body of the shareholders proposed  as appropriations out of the profits of the year ending on 31st March, 1963. The sole contention on behalf of the appellant is that these appropriations  having  been made on the  8th  August,  1963 could  not  be treated as components of capital "as  on  the first  day of the previous year" i.e. 1-4-1963, in terms  of rule 1 to the Second 524 Schedule.   The  learned  Solicitor-General  submitted  that these  could  only  be  taken  into  consideration  in   the subsequent  year commencing on the 1st of April 1964 on  the ground that on the 1st of April 1963 they only formed a part of  the mass of undistributed profits, no portion  of  which had been earmarked or set apart for any particular  purpose. In our view, this is not the correct way of appreciation  of the action of the directors. It is well known that the accounts of the company have to be made  up  for a year up to a particular day.  In  this  case that  day  was the 31st March, 1963.  If it  was  reasonably practicable  to  make up the accounts up to the  31st  March 1963 and present the same to the directors of the respondent on April 1, 1963 they could have made up their minds on that day  and declared their intention of appropriating the  said and other sums to reserves of different kinds.  But the fact that  they  could not do so for the simple reason  that  the calculation  and collection of figures of all the  items  of

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income, expenditure of the company for the year ending March 31,  1963  was  bound  to take some  time  cannot  make  any difference to the nature or quality of the appropriation  of the profits to reserves as determined by the directors after the   first   of  April,  1963.   Their   determination   to appropriate the sums mentioned to the three separate classes of  reserves on the 8th August 1963 must be related  to  the 1st of April 1963 i.e. the beginning of the accounts for the new year and must be treated as effective from that day. A case very similar to the one before us came up for  consi- deration before the Bombay High Court in Commissioner of In- come-tax, Delhi v. Aryodya Ginning & Manufacturing Co.  Ltd. (1)  In  that case the profits of the company for  the  year ended  31st December 1948 were shown as Rs.  28,56,997-14-2. The directors made certain appropriations which included Rs. 11,08,000  to  reserve  fund and Rs.  1,50,000  to  dividend reserve fund.  The report of the directors was made on April 27,  1949 and a general meeting of the shareholders held  on 27th June 1949 adopted the report and recommendation of  the directors.  The company was assessed to business profits tax chargeable  under  the  Business Profits  Tax  Act  for  the accounting  period  1st January to 31st March 1949  and  the question  which arose was: what was the capital of the  com- pany for the accounting period.  The company contended  that its  paid-up  capital should be increased by the  amount  of reserves  constituted  by  the recommendation  made  by  the directors   and   accepted  by   the   share-holders.    The Commissioner  of Income-tax went up to the High Court  on  a reference contending that as the reserve was not  sanctioned till 27th June 1949 it could not be looked (1)  31 I.T.R. 145.  525 at  or considered as reserves on a day prior  thereto.   The learned  Judges  of the Bombay High Court were of  the  view that  the resolution of 27th June, 1949 had a  retrospective effect  inasmuch as it referred to the profits of  the  year ending on 31st December, 1948, the appropriations to be made in the balance-sheet as of that date and the reserves  which should  be constituted and shown in the balance sheet as  on 31st  December 1948.  The High Court observed that when  one looked at the balance sheet of the year ended 31st  December 1948  the amounts mentioned were shown respectively  in  the reserve   fund  and  the  dividend  reserve  fund  and   the shareholders by passing a resolution on 27th June, 1949  did not decide that these amounts should constitute reserves  as from  that date but they accepted the recommendation of  the directors  that these amounts should constitute reserves  as of 31st December, 1948.   The  learned Solicitor-General referred to a  judgment  of the  Madras  High  Court in Commissioner  of  Income-tax  v. Vasantha  Mills  Ltd.  (1)  where  the  Madras  High   Court dissented  from the view expressed by the Bombay High  Court on the ground that there could be no reserve until there was allocation  in  fact  by  a  person  having  the   requisite authority  to order that allocation.  In our view,  although such allocation was factually not possible on the very first day  of  a  year but allocation on a  later  day  should  be treated as effective from that day in view of the fact  that the division of undistributed profits became effective  from that day. In this view of the matter, we are of opinion that the  High Court  had  come to the correct conclusion  and  the  appeal should  be dismissed.  The appellant will pay the  costs  of the respondent. K.B.N.

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                                Appeal dismissed. (1) 32 I.T.R. 237. 526