COMMISSIONER OF INCOME-TAX, MYSORE, BANGLORE vs. THE MYSORE ELECTRICAL INDUSTRIES LTD.

CIVIL APPEAL No. 1794/1970Supreme Court1971 INSC 12727 April 1971Bench: 5 JudgesAuthor: S.M. SIKRI, G.K. MITTER, C.A. VAIDYIALINGAM, P. JAGANMOHAN REDDY, I.D. DUA5 pages
AI SummaryDismissed

What did the Supreme Court hold?

The Supreme Court held that the appropriations made by the directors towards reserves on August 8, 1963, should be treated as effective from April 1, 1963, for the purpose of computing the company's capital under Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The Court reasoned that while it might not have been practically possible for the directors to finalize these appropriations on the very first day of the accounting year (April 1, 1963), the fact that they determined to appropriate these sums to specific reserves on a later date does not alter the nature or quality of the appropriation. Their decision must be related back to the beginning of the accounting year, April 1, 1963, as it pertains to the profits of the year ending on that date. The Court referred to and agreed with the Bombay High Court's decision in Commissioner of Income-tax, Delhi v. Ayodya Ginning & Manufacturing Co. Ltd., which held that resolutions approving appropriations could have retrospective effect. The Court dismissed the appeal, upholding the High Court's conclusion.

What were the facts?

The appeal concerns the computation of capital for surtax purposes under the Companies (Profits) Surtax Act, 1964. The respondent-company, The Mysore Electrical Industries Ltd., had appropriated three sums totaling Rs. 4,45,557 towards reserves on August 8, 1963, out of profits from the year ending March 31, 1963. The appellant, Commissioner of Income-tax, Mysore, contended that these appropriations, made after the commencement of the previous year (April 1, 1963), could not be included in the company's capital as on April 1, 1963, as per Rule 1 of the Second Schedule to the Act. The Mysore High Court had ruled in favour of the assessee. The assessment year relevant to the previous year commencing April 1, 1963, would be the assessment year commencing April 1, 1964.

What were the issues?

1. Whether sums appropriated by the directors towards reserves on August 8, 1963, out of profits of the year ending March 31, 1963, should be treated as effective from April 1, 1963, for the computation of the company's capital as on that date under Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. Assessee's contention: The assessee argued that the appropriations, though made on August 8, 1963, should be considered effective from April 1, 1963, as they related to the profits of the year ending March 31, 1963, and the division of undistributed profits became effective from the beginning of the accounting year. They relied on the principle that the directors' decision, even if formalized later, pertains to the profits of the preceding year and should be related back to the start of that year for capital computation purposes. Revenue's contention: The revenue contended that the appropriations, having been made on August 8, 1963, could not be treated as components of capital "as on the first day of the previous year" (April 1, 1963). They argued that on April 1, 1963, these amounts were merely part of undistributed profits, not yet earmarked for any specific reserve, and thus could only be considered for the subsequent assessment year.

Which sections of the Income-tax Act were involved?

Section 4,Section 2(3),Section 2(5),Section 2(8)

AI-generated summary — verify with the full judgment below

521 .COMMISSIONER OF INCOME-TAX, MYSORE, A BANGAWRE v. THE MYSORE ELECTWCAL INDUSTIUES LTD.

April 27, 1971 [S. M. Snt:RI, C. J., G. K. MITTER, C. A. VAIDIALINGAM, P. JAGANMOHAN REDDY AND I. D. DUA, JJ.] Companies (Profits) Surtax Act, 1964-Second Schedule, r. 1-Sums .appropriatrd by towards reserves not on the first day of 'the year but later -Should be treated a.r effective from the earlier date since divirion of ·undistributed profits became effectiw from that day.

On the question whether three several sums appropriated by the Direc- tors of the respondent-company towards reserves on the 8th August, 19o3 out of the profits of the year ending 31st March, 1963, should be added to other items for computation of the capital of the respondent as on the 1st day of April, 1963 in terms of rule I of the Second Schedule to the Com- panies (Profits) Surtax Act, 1964, HELD: The fact that the directors were unable to appropriate the -sums to reserves of different kinds cannot make any difference to the nature or quality of the appropriation of the profits to reserves as deter- mined by the directors after 1st April, 1963. Their determination to ap- propriate the sums ment

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