# BANGAWRE v. THE MYSORE ELECTWCAL INDUSTIUES LTD

- **Citation:** [1971] Supp. 1 S.C.R. 521
- **Court:** Supreme Court of India
- **Decided:** 1971-04-27
- **Case number:** Civil Appeal No. 1794 of 1970
- **Bench:** S. M. Snt:RI, G. K. Mitter, C. A. Vaidialingam, P. Jaganmohan Reddy, I. D. Dua
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/bangawre-v-the-mysore-electwcal-industiues-ltd-5272
- **Pages:** 5

## Headnote

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 Directors 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 Companies (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 determined by the directors after 1st April, 1963. Their determination to appropriate the sums mentioned to the three s-:p~rate classes of reserves on
the. 8th of August, 1963 must be related to the 1st of April, 1963 i.e. the
beginning of the accounts for the new year and must be treated as effective
fr~m that day. [524D]
Commissiona of lncom~-ta;c, Delhi v. A.ryodya Ginning & J"fanufacJuring Co. Ltd., 31 I.T.R. 145 and Commissioner of Income-tax v. Vasantfra
Mills Ltd., 32 I.T.R. 237, referred to.
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CrvrL APPELLATE JuRISDICTION: Civil Appeal No. 1794 of
1970.
F
Appeal from the judgment and order dated October 28, 1969
of the Mysore High Court in Tax Referred Case No. 12 of 1967.
Jagdish Swarup, Solicitor-General, A. N. Kirpal and B. D .
.Sharma, for the appellant.
M. K. Ramamurthi, J. Ramamurthy and Vineet Kumar, for
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the respondent.
S. Swamlnothan and R. Gopalakrishnan, for the intervener.

## Text

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 Directors 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 Companies (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 determined by the directors after 1st April, 1963. Their determination to appropriate the sums mentioned to the three s-:p~rate classes of reserves on
the. 8th of August, 1963 must be related to the 1st of April, 1963 i.e. the
beginning of the accounts for the new year and must be treated as effective
fr~m that day. [524D]
Commissiona of lncom~-ta;c, Delhi v. A.ryodya Ginning & J"fanufacJuring Co. Ltd., 31 I.T.R. 145 and Commissioner of Income-tax v. Vasantfra
Mills Ltd., 32 I.T.R. 237, referred to.
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CrvrL APPELLATE JuRISDICTION: Civil Appeal No. 1794 of
1970.
F
Appeal from the judgment and order dated October 28, 1969
of the Mysore High Court in Tax Referred Case No. 12 of 1967.
Jagdish Swarup, Solicitor-General, A. N. Kirpal and B. D .
.Sharma, for the appellant.
M. K. Ramamurthi, J. Ramamurthy and Vineet Kumar, for
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the respondent.
S. Swamlnothan and R. Gopalakrishnan, for the intervener.
The Judgment of the Court was delivered by
Mitt«, J.-The question involved in this appeal is, whether
;three several sums appropriated by the Directors of the respondent
1owards reserves on the 8th August 1963 out of the profits of the
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522
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SUPRBME COURT REPORTS
(1971] SUPP. S.C.R.
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 1 of the Second Schedule to the
Companies (Profits) Surtax Act, 1964 hereinafter referred to as
the 'Act'.
The Act which received the assent of the President on 2nd
May, 1964 is an Act to impose a special tax on the profits of certain companies. Under section 4 of the Act a tax known as surtax become chargeable on every company for every assessment
year commencing on and from the 1st day of April 1964 in respect of so much of its chatrgeable profits of the previous year as
exceeded the statutory deduction, at the rates specified in the Third
Schedule. Under s. 2(3) "assessment year" means the period of
twelve months commencing on the 1st day of April of every year.
"Chargeable profits" is defined in s. 2(5) as the total income of
an assessee computed under the Income-tax Act, 1961 for al]ly
previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule. "Statutory de-·
ductions", ignoring the provisos, means in terms of s. 2(8) an
!llmount equal to 10 per cent of the capital of the company as
computed in accordance with the provisions 0£ the Second Schedule
or an amount of Rs. 2,00,000/- whichever is greater. The Second'
Schedule to the Act contains the- rules, for computing the capital
of a company for the purposes of surtax. Rule 1 of the Second'
Schedule with which alone we are concerned in this section reads :
"Subject to the other provisions conta.ined in this
Schedule, the capital of a company shall be the aggregate
of the amounts, as on the first day of the previous year
relevant to the assessment year, of-
(i) its paid-up sha.re capital;.
(ii) its reserves, if any created under the
proviso
(b) to clause (vi-b) of sub-section (2) of section 10 of the
Indian Income-tax Act, 1922 (XI of 1922), or under subsection (3) of ·section 34 of the Income-tax Act, 1961
(LXIII of 1961)~
(iii) its othr.r reserves as reduced by the amounts
credited to such reserves as have been allowed as a deduc·
tion in computing the income of the company for the purposes of the lndi!IID Income-tax Act, 1922 (XI of 1922),
or the Income-tax Act, 1961 (XLIII of 1961);
(iv) its debentures. if any: and
(v) any moneys borrowed by it from G~vernment
or the Industrial Finance Corporation of India or the
C.I.T. v. VYSoPJl BLECT. LTD. (Mitter, J.)
523
Industrial Credit and Finance Corporation of India or
A.
any other finoocial institution which the Central Government may notify in this behalf in the Official Gazette or
any banking institution (not being a financial institution
notified as aJoresaid) or any person in a country outside
India:
Provided that such moneys are borrowed for the
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creation of a capital asset in India and the agreement
under which such moneys are borrowed provides for the
repayment thereof during a period of not less th&n seven
years.
Explanation.-For the removal of doubts it is hereby
declared that any amount standing to the credit of any
account in the books of a company &Cl on the first day of
the previous year relevant to the assessment year which
is of the nature of item (5) or item (6) or item (7) under
the heading "RESERVES Am>· SURPLUS" or of any
item under the heading "CURRENT LIABILITIES
AND PROVISIONS" in the column relating to "LiabiliD
ties" in the "Form of Balance-sheet" given in P&rt I of
Schedule VI to the Companies Act, 1956 (I of 1956),
shall not be regarded as a reserve for the purposes of
computation of the capital of a company under the provisions of this Schedule ...
In 1Crms of s. 4 of the Act the first assessment year for the purpose of the Act in respect of the company was that commencing
on and from the first day of April, 1964. The previous year in
respect of which the chargeable profits had to be ascertained commenced on the first of April 1963 and ended on the 31st March,
1964. The capital of the company in terms of rule 1 of the
Second Schedule would be its paid-up share capital and inter alia
reserves as would come under clauses (ii) and (iii) of rule 1 to
the Second Schedule. The reserves in this case to which exception is being taken by the appellant as components of the capital
of the company are the following three sums: (1) Rs. 2,56,000 as
plant modernisation and rehabilitation reserve; (2) Rs. 1,00,000 as
loan redemption reserve, and (3) Rs. 89,557/- as development rebate reserve. These are three of the items of reserve which the
directors of the respondent in their report to the general body of
the shareholders proposed as appropriations out of the profits of
the year ending on 31st March, 1963.
:!'.
The sole contention on behalf of the appell&nt is that these
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appropriations having been made on the 8th August, 1963 could
not be treated as components of capital "as on the first day of
the previous year" i.e. 1-4-1963, in tenns of rule 1 to the Second
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SUPRBMB COURT R.BPORT6
[1971) SUPP. S.C.R.
Schedule.
The learned Solicitor-General submitted thM these
could only be taken into consideration in the subsequent year commencing on the 1st of April 1964 on the ground that on the 1st
of April 1963 they only formed a part of the mass of undistributed profits, no portion of which had been earmarked or set apart
for any p31rticular purpose. In our view, this is not the correct
way of appreciation of the action of the directors.
It is well known that the accounts of the company have to be
made up for a year up to a particular day. In this case tht day
was the 31st March, 1963. If it was reasonably practicable to
ma.ke up the accounts up to the 31st March 1963 and present the
same to the directors of the respondent on April 1, 1963 they
could have made up their minds on that day and declared their
intention of appropriating the said and other sums to reserves of
different kinds. But the fact that thev could not do so for the
simple reason that the ca.lculation anct' collection of figures of all
the items of income, expenditure of the company for the year ending March 31, 1963 was bound to take some time cannot make
an~v difference to the nature or quality of the appropriation of the
profits to reserves as determined by the directors a·fter the first of
April, 1963. Their determination to appropriate the sums mentioned to the three separate classes of reserves on the 8th August
1963 must be related to the 1st of April 1963 i.e. the hegitming
of the accounts for the new year and must be treated as effective
from that day.
A ca~e very similar to the one before us came up for consideration before the Bombay High Court in Commissioner of Tn·
come-tax, Delhi v. Aryodya Ginning & Manufacturing Co. Ltd. (I)
In that case the profits of the company for the year ended 31st
December 1948 were shown as Rs. 28,56,997-14-2. The directors
made certain appropriations which included Rs. 11,08,000 to reserve fund and Rs. 1,50,000 to dividend reserve fund. The report
of the directors was made on April 27, 1949 and a general meeting of the shareholders held on 27th June 1949 adopted the report
and recommendation of the directors. The company was a~essed
to business profits tax chargeable under the Business Profits Ta.x
Act for the accounting period 1st January to 31st March 1949 and
the question which arose was : what was the capital of the company for the accounting period. The company contended that its
paid-up capital should be increased by the amount of reserYes con-
~tituted by the recommendation made by the directors and accepted by the share-holders. The Commi~sioner of Income-tax went
up to the High Court on a reference contending that as the re·
serve wM not sanctioned till 27th June 1949 it could not be looked
(1) 31 I,T.R. 145.
c.I.T. v. MYSORE ELECT. LTD. (Mitter, J.)
at or considered as reserves on a day prior thereto. The learned
Judges of the Bombay High Court were of the view that the resolution of 27th June, 1949 had a retrospective effect inasmuch as
it referred to the profits of the year ending on 31st December,
194&, the appropriations to be made in the baAance-sheet as of
that date and the reserves which should be constituted and shown
in the balance sheet as on 31st December 1948. The High Court
observed that when one looked at the_ balance sheet of the year
ended 31st December 1948 the amounts mentioned were shown
respectively in the reserve fi)nd and the dividend reserve fund and
the shareholders by passing a resolution on 27th June, 1949 did
not decide that these amounts should constitute reserves as from
that date but they accepted the recommendation of the directors
that these amounts should constitute reserves oo of 31st December.
1948.
The learned Solicitor-General referred to a judgment of the
Madras High Court in Commissioner of Income-tax v. Vasantha
Mil!J Ltd. (1) where the Madras High Court dissented from the
view expressed by the Bombay High COurt on the ground tha.t
there could be no reserve until there was allocation in fact by a
person having the requisite authority to order that allocation. In
our view, although such allocation woo factually not possible on
the very first day of a year but allocation on a later day should
be treated as effective from that da.y in view of the fact that the
division of undistributed profits became effective from that day.
In this view of the matter, we are of opinion that the High
Court had come to the correct conclusion and the appeal should
be dismissed. The appella.nt will pay the costs of the respondent.
K.B.N.
Ap;Jeal dismissed.
(1) 32 I.T.R. 237.
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