Judgement

GHULAM HASAN J. : These two connected appeals, one by the Commissioner of Income-tax, Bombay, and the other by the Century Spinning & Manufacturing Co. Ltd., arise out of the judgment and order of the Bombay High Court delivered on a reference made by the Income -tax; Appellate Tribunal, Bombay

2. The two questions of law referred by the Tribunal were as follows.

(1) Whether the, amount of Rs. 5,08,637/- is a part of the reserves of the assesses company as on l-4-1946, within the meaning of R. 2(1) of the Rules in Sch. II to the Business Profits Tax Act, and

(2) Whether the profits of the assessee Company from 1st January to 1st April, 1946, should be included in the said reserves as on lst April, 1946.

The High Court answered the first question in the affirmative and the second in the negative.

3. The accounting- year followed by the assesses is the Calendar year and the chargeable accounting period is 1-4-1946 to 31-12-1946, in respect of the profits ending with 31-12-1945. The profits according to the profit and loss account were Rs. 90,44,677 subject to the provisions for depreciation and taxation. After making provisions for these, the balance of Rs. 5,08,637 was carried to the balance-sheet.

4. Two contentions were raised on behalf of the assesses before the Income-Tax Officer, the first being whether the aforesaid sum could be called a reserve within the meaning of R. 2(1) of the Rules in Sch. II. Business Profits Tax Act and whether it should be included in its reserves while determining the capital on 1-4-1946; the second that the proportionate profits of the assessee for three months, between 1-1-1946 and 1-4-1946, should also be included in the said reserves.

The Income-Tax Officer rejected the contention holding that "A reserve represents profits set apart for some specific or general purpose and therefore profits which have not been so set apart cannot be treated as forming part of reserves for the purpose of inclusion in the capital." This order was confirmed on appeal by the Appellate Assistant Commissioner but was set aside by the Income-Tax Appellate Tribunal. Thereupon the Tribunal formulated the two questions aforementioned for reference to the High Court under S. 66 (1)of the Act, read with S. l9, Business Profits Tax Act of 1947. As already stated the High Court decided the first question in favour of the assessee and the second in favour of the department. Hence the two appeals.

5. The Business Profits Tax Act (No 21 of l947) came into force on 11-4-1947, having taken the place of the Excess Profits Tax Act which was repealed on 30-3-1946. This Act, as is well known, was designed to assess large profits made by Companies carrying on business during the boom years of the war. It was revived as it were, a after a year in the shape of the present Act. though in a modified form. Section 4 which is the charging section, so far as it is material for our purposes, permits the levying on the amount of the taxable profits during any chargeable accounting period a tax called the "Business Profit Tax" which shall be equal to sixteen and two third per cent. of the taxable profits

"Taxable profits" means the amount by which the profits during a chargeable account period exceed the abatement in respect of that period (S. 2 (17). Abatement , according to S. 2 (1) means, 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 Company, not being a Company deemed for the purposes of S. 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 Sch. II, or one lakh of rupees whichever is greater. . .. . . . . . . the same proportion as the said period bears to the period of one year. ... . . .. . . .. "

Accounting period according to S. 2 (2) in relation to any business means any period which is or has been determined as the previous year for that busine