THE FIRST NATIONAL CITY BANK vs. THE COMMISSIONER OF INCOME-TAX, BOMBAY CITY.
What did the Supreme Court hold?
The Supreme Court held that the amount designated as 'undivided profits' by the appellant bank was indeed a part of the reserves and had to be taken into account when computing the capital and reserves within Rule 2(1) of Schedule II of the Business Profits Tax Act, 1947. The Court reasoned that the instructions under Section 5211 of the Revised Statute of the United States mandated the bank to keep a certain sum under 'undivided profits,' making it an integral part of the capital structure. Applying the principle from Commissioner of Income-tax v. Century Spinning & Manufacturing Co. Ltd., which stated that reserves mean profits earned but not distributed as dividend and kept back for future use, the Court found that the 'undivided profits' met this criterion. Therefore, it was erroneous not to treat this amount as part of the capital funds. The question referred to the High Court was answered in the affirmative in favour of the appellant.
What were the facts?
The appellant, The First National City Bank, a non-resident bank incorporated in the USA, was assessed under the Business Profits Tax Act, 1947. The dispute concerned the computation of the bank's capital for abatement purposes, specifically whether 'undivided profits' should be included as 'reserves' under Rule 2(1) of Schedule II of the Act. The bank was required by US Treasury Rules to maintain a sum under 'undivided profits' as an integral part of its capital structure, available to absorb losses. The Income-tax Officer and Appellate Assistant Commissioner excluded these amounts, a view upheld by the Income-tax Appellate Tribunal and the Bombay High Court, which held that undivided profits were not reserves as they were not earmarked for specific purposes.
What were the issues?
1. Whether, for the purpose of computing capital and reserves under Rule 2(1) of Schedule II of the Business Profits Tax Act, 1947, the amount designated as 'undivided profits' by the appellant bank constitutes 'reserves'. Assessee's contention: The appellant bank argued that 'undivided profits' as maintained under US Treasury Rules, being an integral part of its capital structure and available to absorb losses, fell within the definition of 'reserves' as contemplated by Rule 2(1) of Schedule II of the Business Profits Tax Act, 1947. They relied on the specific meaning of these terms in banking business and the US context. Revenue's contention: The revenue contended that 'undivided profits' were not reserves, but rather equivalent to the balance of the profit and loss account, and therefore should not be included in the capital computation for abatement purposes. The High Court had held that since no direction was given regarding these profits and they were not earmarked, they did not constitute reserves.
Which sections of the Income-tax Act were involved?
Section 5211, Rule 2(1) of Schedule II of the Business Profits Tax Act, 1947
AI-generated summary — verify with the full judgment below
I 3 S.C.R. SUPREME COURT REPORTS 371 answered in the affirmative in favour of the appellant. 1961 The appeals are, therefore, allowed and the judgments Dharamvir DAir and . orders of the High Court are set aside. The Th c v. . . I 'JI h h' . h' C t d . th ' omm1ssioner appe !ant w1 ave IS costs m t IS our an m e of Income-•••, High Court. One hearing fee.
BihaY & Orissa Appeals allowed. THE FIRST NATIONAL CITY BANK v. THE COMMISSIONER OF INCOME-TAX, BOMBAY CITY. (J. L. KAPUR, M. HrnAYATULLAH and J.C. SHAH, JJ.)
Business Profits Tax-" Undivided profits ", if fell within the word" reserves "-Business Profits Tax Act, I947 (XX! of r947), Sch.[[, Rule 2(I).
The appellant, a non-resident Banker incorporated under the National Bank Act of the United States of America with its Head Office in America, was assessed under Business Profits Tax Act, 1947· Under the Treasury Rnles of the United States of America and Instructions for preparation of reports of condi- tions by the National Banking Association certain sums had to be specifically allocated under s. 52n of the Revised Statute of the United States, and the appellant bank was required to keep a c
The order continues below.
Read the full judgment
A free account opens 10 full judgments a month. Re-reading one you have already opened does not count again.
The summary, the parties, the sections and the citations above are open to everyone and always will be. Only the text of the order and the PDF are metered.
Recent GST High Court judgments
Search GST case law →- Tvl. Jeyarani Shopping Centre vs. The Deputy State Tax Officer -1/The Deputy Commercial Tax OfficerMadras · 14 Oct 2026
- Rohan Tanna vs. Directorate General Of Goods And Services Tax IntelligenceChhattisgarh · 14 Oct 2026
- Dipak Saikia vs. The Union Of INDIA And 4 OrsGauhati · 14 Oct 2026
- Saraswati Phukan vs. The Union Of INDIA And 4 OrsGauhati · 14 Oct 2026
- Sanjay Maheshwari vs. Union Of INDIA & Ors.Delhi · 14 Oct 2026
