COMMISSIONER OF INCOME-TAX, BOMBAY CITY vs. THE CENTURY SPINNING AND MANUFACTURING CO. LTD.

CIVIL APPEAL No. 157/1952Supreme Court[1954] 1 S.C.R. 20308 October 1953Bench: 5 JudgesAuthor: M. PATANJALI SASTRI, SUDHI RANJAN DAS, VIVIAN BOSE, GHULAM HASAN, NATWARLAL HARILAL BHAGWATI9 pages
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What were the facts?

The case involves two appeals concerning the Business Profits Tax Act, 1947. The assessee, Century Spinning and Manufacturing Co. Ltd., and the Commissioner of Income-tax, Bombay City, are parties. The dispute pertains to the chargeable accounting period from April 1, 1946, to December 31, 1946. The core issue is the determination of the company's capital for tax purposes, specifically whether a sum of Rs. 5,08,637, representing the balance of profits after depreciation and taxation for the calendar year 1945, and the profits earned between January 1, 1946, and April 1, 1946, should be included as 'reserves'. The Income-tax Officer rejected the assessee's claim, a view confirmed by the Appellate Assistant Commissioner but overturned by the Income-tax Appellate Tribunal, which then referred two questions of law to the Bombay High Court.

What did the Supreme Court hold?

The Supreme Court held that the sum of Rs. 5,08,637 was not a reserve. The Court reasoned that this amount was not earmarked or declared as a reserve. Instead, it was earmarked for distribution as dividend on February 28, 1946, and was actually distributed shortly after a shareholder resolution on April 3, 1946. The Court found the High Court's reasoning that keeping back the amount constituted a reserve to be erroneous, as the directors' recommendation for dividend was accepted and the amount was distributed. The nature of the amount remained undistributed profits, not specially set apart for any purpose. Therefore, it did not constitute 'reserves' under rule 2(1). Regarding the second question, the Court agreed with the High Court that profits from January 1, 1946, to April 1, 1946, could not be treated as reserves. The appeal by the Commissioner of Income-tax was allowed, and the assessee's appeal was dismissed.

What were the issues?

The Tribunal had to decide two questions of law: 1. Whether the amount of Rs. 5,08,637 is a part of the 'reserves' of the assessee company as on April 1, 1946, within the meaning of rule 2(1) of Schedule II to the Business Profits Tax Act, 1947. 2. Whether the profits of the assessee company from January 1, 1946, to April 1, 1946, should be included in the said reserves as on April 1, 1946. The assessee contended that the sum of Rs. 5,08,637 was not a 'reserve' and that proportionate profits for the three months should also be included in reserves. The revenue, through the Income-tax Officer, argued that a 'reserve' represents profits set apart for a specific or general purpose, and profits not so set apart cannot be treated as reserves. The High Court answered the first question in favour of the assessee and the second in favour of the department.

Which sections of the Income-tax Act were involved?

Section 66(1),Section 19,Section 2(1),Section 2(17),Section 2(2),Section 2(4),Section 4,Section 131-A,Section 132

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• S.C.R. SUPREME COURT REPORTS 203

In view of the above we do not think it necessary to 1953 go into the interesting questions which were sought to All h bad 8 k be raised by the appellant, viz., what was the scope of a ~td. an the reference, and by the respondent, viz., whether the v. expenditure was a capital expenditure or revenue Commissioner of expenditure and if the latter whether the deduction Income-tax, could still not be allowed in view of the provisions of West Bengal. section 10 (4) (c) of the Act. Bhagwati J. The result therefore is that the appeal fails and must be dismissed with costs. Appeal dismissed. Agent for the appellant: P. K. Mukherjee. Agent for the respondent: G. H. Rajadhyaksha. COMMISSIONER OF INCOME-TAX, BOMBAY CITY v. THE CENTURY SPINNING AND MANUFACTURING CO. LTD. THE CENTURY SPINNING AND MANUFACTURING CO. LTD. v. COMMISSIONER OF INCOME-TAX, BOMBAY CITY. [PATANJALI SASTRI c. J., s. R. DAS, VIVIAN BOSE, GHULAM HASAN and BHAGWATI JJ.] Business Profits Tax Act (XXI of 1947), Sch. II, rr. 2 and 3 -Deterrnination of capital of company-Inclusion of 'reserves'- Acci1m11lated profit carried over to next yenr without declarin

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