Undivided profits in US banking accounting system constitute reserves under the Business Profits Tax Act and are included in capital computation.

Judgement

KAPUR, J. : This is an appeal against the judgment and orders of the High Court of Judicature at Bombay in Income-tax Reference 34 of 1956. The appellant is a non-resident Bank incorporated under the National Bank Act of the United States of America with its head office in that country and with branches all over the worlds including some branches in India. It was assessed under the Business Profits Tax Act (Act XXI of 1947), hereinafter termed the "Act , in respect of the chargeable accounting periods:

1-4-1946 to 24-12-1946.

25-12-1946 to 24-12-1947.

25-12-1947 to 23-12-1948, and

24-12-1948 to 31-3-1949

and the sole question for decision in this appeal is the meaning of the word "reserves in R. 2(1) of Schedule 2 of the Act and how the capital of the appellant during the above-mentioned chargeable accounting periods has to be computed for the purpose of allowing the "abatement under the Act.

2. The appellant contended that in computing the amount for the purpose of abatement, it was entitled to include what is termed in the United States "Undivided Profits , the contention being that this item falls within the word "reserves in R. 2(1) of Schedule II of the Act which provides:

"Where the company is one to which R. 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 purpose of the Indian Income-tax Act, 1922 (XI of 1922), diminished by the cost to it of its investments or other property the income from which is not includable in the profits, so far as that cost exceeds any debt for money borrowed by it.

It is not necessary to give the details of all the years; but it will be sufficient as an illustration if we were to confine ourselves to the "Undivided Profits in the Balance Sheet as on December 31, 1946, wherein the relevant entries were as follows:Capital .... .... $ 77,500,000,00Surplus .... ....$ 152,500,000,00Undivided Profit .... $ 29,534,614,21

3. The Report of the Directors dated January 14, 1947, was as follows:

"At the year-end, Capital of the Bank remains at $ 77,500,000 surplus has increased to $ 152,500,000 by the transfer of $ 10,000,000 from Undivided Profits. After this transfer, Undivided Profits are $ 29,534,614 an increase of $ 240,376 from a year ago. The Trust Company has Capital of $10,000,000 surplus of $ 10,000,000 and Undivided Profits of $ 8,097,020. The two institutions thus show total capital funds, that is Capital, Surplus and Undivided Profits of $ 287,631,634 or $ 46.39 per share compared with $ 44.60 per share at the end of 1945.

4. According to the Balance Sheet of 1948, capital funds since 1939 had increased from $ 169,768 thousands to $ 320,795 thousands in the year 1948 and there had been a progressive increase both in what is called "Surplus as well as "Undivided Profits , the former increased from $ 62,500 thousands to $ 182,500 thousands and the latter from $ 19,768 thousands to $ 50,795 thousands. The question in this case is whether this large sum of money shown as "Undivided Profits is a part of the Reserves or is equivalent to the inallocated amount carried forward at the end of a year of account in the balance of Profit and Loss Account as we know it. It was the sum of $ 29,534,614,21 and similar sums for the other chargeable Accounting Periods which are the subject matter of controversy in this appeal. Both the Income-tax Officer and the Appellate Assistant Commissioner excluded these amounts in determining the capital of the Bank under R. 2(1) of Schedule II of the ground that they were not a part of the reserves of the Bank. The appellant took an appeal to the Income-tax Appellate Tribunal which was dismissed on the ground that "Undivided Profits meant nothing more than the "Balance of the profits and loss account and that no distinction could be drawn merely because in the nomenclature used in the United