The term "reserves" in Rule 2 of the second schedule of the Business Profits Tax Act means profit earned by a company and not distributed as dividends to the shareholders but kept bank by the directors for any purpose to which it may be put in future.

Chagla C.J.

1. This reference raises a question under the Business Profits Tax Act. The assessee company is the Century Spinning Manufacturing Co., Ltd., and its balance sheet for the year 1945 shows that it made a profit of Rs. 90,44,677. This profit was appropriated by a certain amount being paid for dividend and certain amounts being set aside for depreciation and other funds. Under this heading amounts were set aside for machinery, for buildings, for provision for taxation and for compulsory Excess Profits Tax deposit; and a sum of Rs. 6,08,637 was carried over as balance to the balance sheet. Now the question that falls to be determined is whether this sum of Rs. 5,08,637 can be called a reserve for the purposes of Rule 2 (1) in Schedule II of the Business Profits Tax Act,

That rule 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, 1922."

Therefore, in order to determine the capital of the company, for the purposes of this Act you have got to take the paid up share capital of the company, then you have to add to it the reserves and you have to add only those reserves which have been subjected to taxation. The expression used in this rule is rather curious because we dc not find the expression "reserves" used in the Indian Income-tax Act at all. An assessee may build up any reserves that he likes, but it does not follow that those reserves escape taxation. The only provision made in the Income-tax Act is under Section 10 (2) (vi) which permits an assesses doing business a certain amount for depreciation which escapes taxation, or is considered to be an allowable deduction. Depreciation is allowed according to the rules framed by the Department, Therefore, we cannot give to the expression "reserves" used in this rule any technical meaning which has been given to it in any taxing statute, but we must give to it its plain natural meaning. Now what is urged by the Advocate General is that this sum of Rs. 5,08,637 which has been admittedly subjected to taxation does not satisfy the characteristics of a reserve contemplated by Rule 2. He says that before a certain amount can be added to capital two conditions must be satisfied. It is not sufficient that the amount should be subjected to tax ; it is also necessary that that amount must be a reserve. Therefore, says the Advocate General, although the sum of Rs. 5,08,637 has been subjected to tax, it is not a reserve. He says that this sum of Rs. 6,08,637 would be a reserve provided it had been appropriated for some specific purpose, or for some general purpose. Our attention is drawn to the fact that other amounts have been appropriated for specific purposes, e. g. machinery, building, provision for taxation, etc., but no purpose has been mentioned as far as this sum of Rs. 3,08,637 is concerned. Therefore, the contention of the Advocate General is that this sum is not a reserve at all. I do not see any reason at all why in order that a certain amount should be a reserve it should be appropriated for a specific purpose. It was open to the directors to distribute the sum of Rs 5,08,637 as dividends. They did not choose to do so and have kept back this amount. Therefore, by keeping back this amount they constituted a reserve. A reserve in the sense in which it is used in Rule 2 can only mean profit earned by a company and not distributed as dividends to the shareholders but kept bank by the directors for any purpose to which it may be put in future. Therefore, giving to the "reserves" its plain natural meaning it is clear that the sum of Rs. 5,08,637 was kept in reserve by the company and not distributed as profits and subjected to taxation. Therefore, it satisfied all the requirements of Rule 2. The Advocate Gener