1990 PLP 829 (PTD)

SALEEM AKHTAR, J.‑‑The respondents are carrying on business as clearing, forwarding, shipping and airline agents. In the assessment year 1967‑68 the Income‑tax Officer treated Rs. 2,18,719 being a credit balance of profit and loss account as free reserve and charged to tax holding it as an income of the respondents within the meaning of Explanation 5 to subsection (1) of section 4 of Income‑tax Act. The respondents had contended that un-appropriated balance of the profit and loss account does not constitute a reserve and therefore it cannot be charged to lax. The respondents filed appeal before the Tribunal where it was held that Income‑tax Officer has acted illegally and without jurisdiction to treat the amount of Rs. 2,18,790 as part of free reserve and accordingly it was deleted. On application filed by the Department following question has been referred: "Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that a sum of Rs. 2,18,790 being the credit balance of profit and loss appropriation account does not form a part of `free reserves' and consequently does not fall within the purview of Explanation 5 to subsection (1) of section 4 of Income‑tax Act." Explanation 5 to subsection (1) of section 4 of the Income‑tax Act reads as follows:‑‑ Explanation 5: So much of the amount by which the free reserves of any company exceed the paid‑up ordinary share capital of the company as on the last day of the previous year, not being a previous year, ending earlier than the 1st day of July, 1966 shall be deemed to he income accruing or arising to the company during that year. The word `reserve' has not been defined in the Act and according to the applicant this amount could be treated as free reserve. In the absence of any definition the ordinary dictionary meaning of the word `reserve' shall be taken into consideration. In Ballentine's Law Dictionary the following meaning has been given: Reserve--a fund or sum of money retained for a special purpose. A fund of a bank, know as a legal reserve, being required by law in an amount proportionate to the deposits by way of assurance to depositors of opportunity to withdraw cash as they need or desire it. According to Black's Law Dictionary: Reserve‑‑'To keep back, to retain, to keep in store for future or special use and to retain or hold over to a future time." In Commissioner of Income‑tax v. Century Spinning and Manufacturing Company Limited (1953) 24 I.T.R. 499 (503) while considering the meaning of `reserve' as used in Rule 2(1) of the second schedule to the Business Profits Tax Act, 1947 it was observed: "The term `reserve' is not defined in the Act and we must resort to the ordinary natural meaning as understood in common parlance. The dictionary meaning of the word `reserve' is: "I. (a) To keep for future use or enjoyment; to store up for some time or occasion; to refrain from using or enjoying at once:" (b) To keep back or hold over to a later time or place or for further treatment. (c) To set apart for some purpose or with some end in view; to keep for some use. II. To retain or preserve for certain purposes (Oxford Dictionary, Vol. VIII, p. 513). In Webster's New International Dictionary, Second Edition, page 2118, reserve is defined as follows:‑‑ (1) To keep in store for future or special use; to keep in reserve; to retain, to keep, as for oneself. (2) To keep back; to retain or hold over to a future time or place. (3) To reserve." The same meaning was affirmed in 1st National City Bank v. Commissioner of Income‑tax (1961) 42 I.T.R. 17 (SC) and Commissioner of Income‑tax v. Standard Vacuum Oil Co. (1900) 59 I.T.R. 685 (SC). 1n Commissioner of Income‑tax v. Security Printers of India (P) Ltd. (1972) 86 I.T.R. 210 after taking into consideration the aforesaid judgments and various other authorities it was observed as follows:‑‑ "From the cases referred to, one thing is clear. And that is that the term `reserve' means a sum specifically kept apart for future use or for a specific occasion. The reservation must be effected by some one having authority to do so, and it must be of a specified sum for a specified use. Where it arises out of the surplus profits of the company, it should be set apart before the distribution of dividends to the shareholders. It is a sum laid 1w or stored for use or application in a future contingency which is anticipated, a fund which is created and maintained for the purpose of being drawn upon in future:' While reaching this conclusion reliance was placed on Commissioner of Income -tax v. Bank of Bihar Ltd. (1953) 24 I.T.R. 499; Commissioner of Income‑tax v. Vasantha Mills Ltd. (1957) 32 I.T.R. 237, Indian Steel &. Wire Products Ltd. v. Commissioner of Income‑tax (1958) 33 I.T.R. 379, Aluminium Industries Ltd. v. Commissioner of Income‑tax (1968) 68 I.T.R.

125. The word `reserve' in its ordinary sense means keeping apart something with a view to utilise it on a future date for a particular or specific purpose. Therefore any amount which has been kept apart with reference to its particular use at a future time will be called reserve. But if there is an un-appropriated amount in the profit and loss account without specifically keeping it apart for utilizing for any purpose in future, it will not be deemed to be a reserve. Both the learned counsel have pointed out that for the first time the word 'reserve' has been defined by the Finance Act, 196,8 whereby subsection (6BB) to section 2 was added which reads as follows:‑‑ (6‑BB) "free reserves", in relation to a company, means such reserves of a Company as the Central Board of Revenue may, by notification in the official Gazette, declare to be free reserves of a company, and includes any un-appropriated profits of a company." Therefore in 1968 it was for the first time provided that un-appropriated profits of a company will be treated as `free reserve'. The amendment supports the contention that till that date the un-appropriated profits could not be treated as a free reserve. Our answer to the question is therefore in the affirmative. M.B.A./C‑161/K Question answered in affirmative.