Patna High Court
Commr. Of Income-Tax vs The Bank Of Bihar Ltd. on 31 March, 1953
Equivalent citations: [1953]23COMPCAS222(PATNA), [1953]24ITR9(PATNA)
JUDGMENT Ramaswami, J.
1. This reference is made by the Income-tax Appellate Tribunal under Section 19, Business Profits Tax Act 1947 read with Section 66(1), Indian Income-tax Act, 1922.
2. The assessee is the Bank of Bihar, Ltd., which is a public limited company and carries on banking business. The case relates to the assessment of the Bank to Business Profits Tax for the chargeable accounting period from 1-1-1947 to 31-12-1947. For this chargeable accounting period the Income-tax Officer determined the profit to be Rs. 8,13,513. The Bank claimed that abatement of Rs. 3,24,114 should be deducted from the profit as follows :
1. Paid up share capital on 1-1-47--Rs. 32,77,830.
2. Reserve fund not allowed in computation of profit in income-tax assessment, on 1-1-47--Rs. 17,00,000.
3. Reserve for contingency on 1-1-47--Rs. 3,07,154.
4. Credit in contingency current account on 1-1-47--Rs. 14,763.
5. Credit balance in the profit and loss account on 1-1-47--Rs. 1,02,161.
The total deduction was Es. 54,01,903 on which the company claimed abatement at 6 per cent., that is, Rs. 3,24,114. The Income-tax Officer did not accept the claim with respect to items 3, 4 and 5 for the purpose of computing the abatement, but the Income-tax Officer accepted items 1 and 2; in other words, he allowed abatement of Rs. 2,98,668 on the amount of Rs. 49,77,830. Alter deducting this abatement the Income-tax Officer determined the taxable profit to be the sum of Rs. 5,14,845. The Bank took, an appeal to the Appellate Assistant Commissioner but the appeal was dismissed. The Bank then preferred an appeal to the Income-tax Appellate Tribunal. The contention of the Bank in the appeal related to item No. 5 and the case of the Bank was that in computing abatement the Income-tax Officer should have included the credit balance in the profit and loss account of Rs. 1,02,161.
This contention was accepted by the Income-tax Appellate Tribunal as follows :
"......The Income-tax authorities, in our view, have taken a rather narrow view of the expression 'reserve'. We find that in this case the profits earned and subjected to taxation were consciously kept back and not distributed to share holders as dividends. The term has to be given a natural meaning and in that sense, the amount which has been consciously kept back in this case is to be considered 'reserve' for purposes of Schedule II, Rule 2, Business Profits Tax Act."
3. At the instance of the Commissioner of Income-tax the Appellate Tribunal has referred the following question of law for the opinion of the High Court:
"Whether the credit balance of Rs. 1,02,161 in the profit and loss account of the company on 1-1-1947 should be included in determining the capital of the company under Rule 2 of Schedule II, Business Profits Tax Act, 1947."
4. Before answering this question it is necessary to examine the relevant provisions of the Business Profits Tax Act of 1947. Section 4 which is the charging section states that "there shall, in respect of any business to which the Act applies, be charged, levied and paid on the amount of the taxable profits during any chargeable accounting period a tax referred to as 'Business profits tax' which shall in respect of any chargeable accounting period ending on or before the 31st day of March 1947 be equal to sixteen and two-thirds per cent of the taxable profits."
Section 2(1) defines the expression 'abatement' to mean "in respect of any chargeable accounting period ending on or Before the 31st day of March 1947 a sum which bears to a sum equal to (a) in the case of a company, not being a company deemed for the purposes of Section 9 to be a firm, six per cent of the capital of the company on the first day of the said period computed in accordance with Schedule II, or one lakh of rupees, whichever is greater........"
Section 2(16) defines 'profits' to mean profits as determined in accordance with Schedule I. Section 2(17) defines 'taxable profits' to mean the amount by which the profits during a chargeable accounting period exceed the abatement in respect of that period. Schedule I sets out the rules for computation of profits for the purposes of Business Profits Tax. Rule 1 of Schedule I states that the profits of a business during any chargeable accounting period shall be computed in accordance with the provisions of Section 10, Indian Income-tax Act. Schedule II sets out rules for computing the capital of a company for purposes of Business Profits Tax. Rule 1 of this Schedule states that for the purposes of ascertaining the abatement under this Act in respect of any chargeable accounting period, the capital of a company shall be computed in accordance with Rule 2. Rule 2 provides that "where the company is one to which Clause (a) of Rule 3 of Schedule I applies, its capital shall be the sum of the amounts of its paid up share capital and of its reserves in so far as they have not been allowed in computing the profits of the company for the purposes of the Indian Income-tax Act."
5. The real crux of this case is what is the meaning of the word 'reserves' in Rule 2 of Schedule II. The argument presented on behalf of the Bank is that the amount of Rs. 1,02,161 shown as credit balance in the balance-sheet dated 31-12-1946 should be taken to constitute reserve for the purpose of computing the capital of the Bank under Rule 2 of Schedule II.
It was conceded by Mr. Jain on behalf of the Bank that out of the credit balance the directors had declared a dividend of 8 per cent. on ordinary shares and 5 per cent. on preference shares and that the dividends were paid on 1-3-1947. Counsel, however, stressed the argument that the subsequent appropriation of the credit balance to the payment of dividends was not a relevant factor and the Section 2(1) required that for the purpose of abatement the material date was the first day of the chargeable accounting period and the capital of the company should be computed as it stood on that date. It was contended by counsel that the expression 'reserves' should be construed in its popular sense and that the credit balance of Rs. 1,02,161 in the balance sheet should be held to be reserve within the meaning of Schedule II, Rule 2 for the purpose of calculating the abatement.
In my opinion the proposition for which the learned counsel contends cannot be accepted as correct. The word 'reserve' or 'reserves' has a technical sense in the Indian Companies Act. Regulation 99 of Table A of the last Schedule of the Companies Act states that 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."
Section 131A, Companies Act states that the directors shall make out and attach to every balance-sheet a report with respect to the state of the company's affairs the amount, if any, which they recommend should be paid by way of dividend "and the amount, if any, which they propose to carry to the Reserve Fund, General Reserve or Reserve Account shown specifically on the balance-sheet or to a Reserve Fund, General Reserve or Reserve Account to be shown specifically in a subsequent balance-sheet."
In the present case the report of the directors at p. 8 of the paper book does not show that the directors recommended that the sum of Rs. 1,02,160 & odd should be appropriated to any Reserve or Reserve Account. The balance-sheet describes this amount of Rs. 1,02,160 not as reserve but as "balance of profit and loss account". The Report of the Directors does not describe this amount as reserve but it describes it as "surplus of profits available". It was conceded by Mr. Jain that the amount in dispute would not be 'reserve' within the meaning of Regulation 99 of Table A of 1st Schedule or Section 131A, Companies Act. Learned counsel, however, contended that the word 'reserve' should be given a wider meaning in Business Profits Tax. There is, however, no justification for this argument. For it is a familiar principle of construction that technical words used in a statute must be given a technical meaning. For example in -- 'Commissioners for Special Purposes of the Income-tax v. J. F. Pensel', (1891) AC 531 (A), Lord Macnaghten held that the phrase 'Charitable purposes' in the English Income-tax Act in Schedule A was not restricted to the meaning of relief from poverty but must be construed according to the legal and technical meaning given to the phrase in English law.
There is another matter to be considered. According to commercial practice a company which has a balance to the credit of its profit and loss account may either declare a dividend to be paid to the shareholder or may appropriate the balance to a suspense account or to reserves. Before recommending any dividend it is open to the directors to set aside out of the profits of the company such sum as they may think proper as a reserve fund for acquiring property for the company or providing for payment of rent for meeting contingencies or for equalizing dividends or for any other purpose of the company which they may think fit. 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. Mr. Jain placed much reliance upon the decision of Chagla C. J. in --'Commissioner of Income-tax v. Century Spinning & Manufacturing Co. Ltd.', AIR 1951 Bom 420 (B). I need hardly say that I have the greatest respect for the opinion of Chagla C. J. but for the reasons I have stated I have reached a different conclusion on the point.
6. In the result I hold that the credit balance of Rs. 1,02,161 in the profit and loss account on 1-1-1947 should not be included in determining the capital of the company under Rule 2, Schedule II of the Business Profits Tax Act, 1947.
7. I would accordingly answer the question in favour of the department. The assessee must pay the cost of the reference: hearing fee Rs. 250/-.
Jamuar, J.
8. I agree.