1960 PLP 1125 (PTD)

AHMAD, J.‑This is a reference made by the Income‑tax Appellate Tribunal at the instance of the assessee under section 66 (1) of the Income‑tax Act read with section 19 of the Business Profits Tax Act (XXI of 1947) and section 21 of the Excess Profits Tax Act (XV of 1940), by which several provisions of the Income‑tax Act including the provisions for reference have been applied to cases of assessment under the Business Profits Tax Act. The assessment was for the chargeable accounting period commen cing on the 1st of April 1948, and ending on the 31st of March 1949. In the assessee's profit and loss account a credit balance from the previous year amounting to Rs. 15,98,068 was brought forward and was not shown as appropriated to any purpose. The assessee contented that this amount was a reserve within the mean ing of Schedule II, Rule 2 (1) of the Business Profits Tax Act, with respect to which he was entitled to get abatement as defined in section 2 (1) of the Act and as provided by that section. On these facts the question that has been referred to us for our opinion is as follows: "Whether on the facts and circumstances of this case, the amount of Rs. 15,98,068 un-appropriated balance of profit and loss account is a part of the `reserve' within the meaning of Rule 2 (1) of Schedule II of the Business Profits Tax Act? Two conditions are necessary to attract the application of Schedule II, rule 2 (1) of the Business Profits Tax Act which according to both sides appearing before us, is the section applicable to the present case, the assessee being a joint stock company. The first condition is that the amount must be a reserve within the meaning of the above section ; and secondly, that the Income‑tax must have been assessed on this amount. It is not disputed in this case that the second condition was present. The only question for decision, therefore, is whether the amount in question was a reserve within the meaning of Schedule II. Mr. Banerjee appearing on behalf of the assessee urged in the first instance, that the word 'reserve' must be understood to carry the sense in which it is understood in mercantile usage and accounting, and he has referred to us two books on accountancy‑one by Pickles and Dunkerlay and another by Spicer and Pegglar‑to show that there are various kinds of reserves and that there may be a "general reserve" credited by setting aside profits in order to strengthen the financial position of the company, and he submitted that an un-appropriated reserve should be covered by this group. He also referred to some cases in which it was held that a technical meaning should be given to the word `reserve' in Rule 2, Schedule II, of the Business Profits Tax Act, and he particularly referred in this connection to the case of Commissioner of Income‑tax, Bihar and Orissa v. Bank of Bihar Ltd. ((1953) 24 I T R 9), in which it was held that the word `reserve' In Schedule II of the Act was used in a technical sense as in the Indian Companies Act, and with regard to the treatment of a particular amount as a reserve or not by the company, Ramaswami, J., made the following observations:‑ "Unless the directors apply their mind to the question and unless they make appropriation of the balance to the payment of dividends or to building up reserves it is difficult to say that any portion of the amount of balance in the profit and loss account could be treated as reserve or reserves for the purpose of computing the amount of capital under Rule 2 of Schedule II. In view of these considerations I think that the credit balance of Rs. 1,02,161 in the present case cannot be held to be `reserve' within the meaning of Schedule II, Rule 2, of the Act." In the present case, however, there is no appropriation with regard to the sum in question as contemplated in the above observations of the Patna High Court. This case does not, therefore, help Mr. Banerjee, even if the word `reserve' is well understood in a narrow and technical sense. In view, however, of the definition of `company' as given in section 2, subsection (5), of the Business Profits Tax Act, which is much wider than the definition in the Companies Act, and in view of the fact that the term `reserve' has not been defined anywhere in this Act, we are constrained to hold that the term `reserves' in Schedule II has been used in a much wider sense than in the Companies Act and, in our view, the turn should be given its plain and natural meaning as was held by the Supreme Court of India in the case of Commissioner of Income‑tax, Bombay City v. Century Spinning and Manufacturing Co. Ltd ((1953) 24 I T R 499). In that case also Their Lordships of the Supreme Court were palled upon to construe the word `reserve' under this very Act in respect of a sum of money carried forward in the next year's account within appropriation as in the present case. In that case the term `reserve' as used in this Act in Schedule II was held to carry the ordinary natural meaning as understood in common parlance and after referring to the carious dictionary meanings of the word 'reserve' as given in the Oxford and Webster's New International Dictionary, the learned Judges were of opinion that the word 'reserve' carried with it the idea of setting apart or retaining or preserving or keeping in store or keeping back for special or general use. In the case before the Supreme Court in addition to the facts which are similar to the present case, there was the circumstance that before the crucial date which was the 1st of April, 1946, namely, on the 28th of February, 1946, the directors had recommended that the sum in, question in that case should be distributed for payment of dividend and by a resolution of the shareholders on the 3rd of April, 1946, it was so declared, and the sum was actually utilised for the payment of dividend ; but that on the 1st of April, 1946 which was the crucial date, although it was a subject of recommendation by the directors it was not actually made reserve until the 3rd April, 1946. It was, therefore, held that "the profits lying unutilised and not specially set apart for any purpose on the crucial date did not constitute reserves within the meaning of Schedule II, Rule 2 (1)." In the present case there was not even a recommendation as in the case under review. We agree with the reasons given by Their Lordships of the Supreme Court of India and hold that the word "reserves" has been used in the Act in its plain ordinary meaning as understood in common parlance. After a reference to this case was made, Mr. Banerjee argued in the alternative that if a wider meaning was to be given to the word `reserves' as in this case, we should further look to the substance rather than the form of the entry in the account and as this amount could be utilised as a working capital, it should be held to come within the meaning of the word `reserves.' We are unable to agree with this view. According to the plain and dictionary meaning of the word `reserve' there must be some setting apart of the amount for some special or general purpose by a person or by a body authorised under the articles of association of the company to allocate the funds for particular purposes. This was not done in the present case on the crucial date, namely, the 1st of April 1946, and as it was not done we are unable to hold that this amount of Rs. fifteen lacs and odd was a reserve within the meaning of Schedule II of the Act. For the above reasons we answer the question in the negative. The assessee will pay ten gold Mohurs as costs of this reference. RAHMAN J.‑I agree. Reference answered in the negative.