The substance of the matter and the concept of reserve in commercial accountancy must be considered in determining the treatment of amounts as reserves under the Companies (Profits) Surtax Act.

Rajendra Babu, J.—The matter under reference arises under the Companies (Profits) Surtax Act, 1964.

2. The Syndicate Bank came to be amalgamated with the assessee-company. For the assessment year 1973-74, the assessee claimed that a sum of Rs. 1,68,20,000 should be treated as a reserve for the purpose of the Companies (Profits) Surtax Act. The Income Tax Officer held that the said sum was not a reserve as this amount represented the surplus "received as compensation" when the company's business was taken over on the nationalization of the bank and rejected the contention. He also stated that in working out the capital, he took note of the reduction in capital and in spite of the objection from the assessee, overruled the same.

3. On appeal, the Appellate Assistant Commissioner held that the company itself had not treated this amount as a reserve and it represented an existing liability which is liable to be distributed among the shareholders, He also held that it was not a reserve within the meaning of the Companies Act or in the parlance of commercial accountancy. As regards the computation of capital, he held that the certificate issued under section 103 of the Companies Act alone is conclusive and the date of registration should be taken as the effective date for reduction or date of special resolution to reduce the capital. In that view of the matter, he affirmed the findings of the Income Tax Officer.

4. On further appeal to the Tribunal, the Tribunal found that the capital has to be computed as on January 1, 1972, and the relevant balance sheet as on December 31, 1971, should be looked into. The amount of Rs. 1,68,20,000 stood as "excess of compensation over paid-up share capital and premium as at July 18, 1969" and it is only in the subsequent period that this sum was shown as "funds of the shareholders of Syndicate Bank Limited" and considered that the latter treatment was irrelevant in considering the assessee's claim. On January 1, 1973, it is not the funds of the shareholders of the Syndicate Bank even though it may not be treated as a reserve in the balance sheet and looking into the circumstances of the case, it is, in substance, a reserve, and allowed the contention of the assessee. On the question relating to the reduction of capital, the Tribunal held that the date of filling of the return to the Registrar of Companies under section 103(2) of the Companies Act would be the effective date. Thus. The Tribunal allowed the appeal of the assessee in toto.

5. Aggrieved by the order of the Tribunal, the Revenue sought for a reference to this court on the following two questions:

"(1) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal, is right in law in holding that the amount of Rs. 1,68,20,000 representing the excess of compensation received at the time of nationalization the excess of compensation received at the time of nationalization of the bank should be treated as a 'reserve' for the purpose of capital computation ?

(2) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in holding that for the purpose of rule 3 of the Second Schedule to the Companies (Profits) Surtax Act, the date of filing of the return with the Registrar of Companies under section 103(2) of the Companies Act is the relevant date ?"

6. We shall take up the second question first for consideration:

7. Section 103(2) of the Companies Act, reads as follows:

"103(2). On the registration of the order and minute and not before, the resolution for reducing share capital as confirmed by the order shall take effect."

8. In view of the plain meaning of section 103(2) of the Companies Act, the view of the Tribunal is that the date of filing of the return with the Registrar of Companies under section 103(2) of the Companies Act, would be the effective date, which is December 13, 1972. Hence we answer this question in the affirmative and against th