1960 PLP 137 (PTD)

AMIRUDDIN AHMAD, J.‑‑This is a certificated appeal from an order of the High Court of West Pakistan at Lahore answering the questions of law referred to them by the Income‑tax Appellate Tribunal under section 66 (1) of the Income‑tax Act read with section 19 of the Business Profits Tax Act at the instance of the respondent‑company. The questions arose out of orders made by the Tribunal in two appeals with respect to two chargeable accounting periods ending 30th June 1947 and 30th June 1946, respectively. In both these appeals the only objection raised concerned the amount of abatement admissible in the computation of business profits, which again depended upon the question whether a certain amount of unappropriated balance, which was carried over from year to year by the Company, constituted its "reserves" within the meaning of Schedule II, rule 2 (1) of Act XXI of 1947. One of the questions referred to the High Court by the Tribunal for its opinion was as follows :‑ " Whether in the circumstances of the case, the sum of Rs. 1,30,20,910 being the unappropriated balance on profit and loss account constitutes a "reserve" of the company as on 1st day of the relevant chargeable accounting period within the meaning of Rule 2 (1) of Schedule II to the Business Profits Tax Act." This question related to chargeable accounting period ending 30th June 1947. Two other questions relating to the chargeable accounting period ending 30th June 1946, referred to the High Court were as follows :‑ " (1) Whether, in the circumstances of the case,, the sum of Rs. 98,02,608 being the unappropriated balance on profit and loss account, as computed by the assessee, constitutes. a reserve of the company as on the 1st April 1946, within the meaning of Rule 2 (1) of Schedule II to the Business Profits Tax Act ? If the answer to the first question be in the negative, (2) Whether the unappropriated balance on profit and loss account as on the 30th June 1945, less dividends paid up to the 31st March 1946, constitutes a reserve of the company as on the 1st April 1946, within the meaning of Rule 2 (1) of Schedule II to the Business Profits Tax Act ?" The accounts of the Company are made up on the 30th June each year. The unappropriated balance on profit and loss account in each of the chargeable accounting period was carried to the balance sheet and then taken to the accounts of the next year. The High Court held as follows :‑ " All profits, which a company decides to withhold from distribution as dividend though such withholding be only for a year, are `reserve' within the meaning of rule 2 (1) of Schedule II of the Business Profits Tax Act and we answer the question in the affirmative." The only ground taken in this appeal is that the High Court in answering the question was in error in holding that an unappropriated balance, which is merely withheld from distribu tion, amounts to reserve within the meaning of Schedule II of the Act. It is not disputed that with regard to the sums in question there was no setting apart or allocation for any general or special purpose but they were simply not distributed and carried over to the next year's account. Exactly the same question came up for decision before the Dacca High Court in the case of R. Sim & Company Limited v. Commissioner of Income‑tax, East Bengal, Dacca ((1955) 27 IT R 530). In that case it was held that profits lying unutilized and not specially set apart for any purpose on the crucial date did not constitute reserve within the meaning of Schedule II, Rule 2 (1). It was also held that the word "reserves" in the said Schedule should be given its plain and dictionary meaning, i.e., 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 with regard to any of the sums involved. We agree with the said decision and substitute an answer in the negative for one in the affirmative given by the High Court. The appeal is, therefore, allowed with costs. A. H. Appeal allowed.