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

- **Citation:** [1954] 1 S.C.R. 203
- **Court:** Supreme Court of India
- **Decided:** 1954
- **Case number:** CIVIL APPELf,ATE JURISDICTION: Civil Appeals Nos. 157 and 158 of 1952
- **Bench:** PATANJALI SASTRI c. J, s. R. DAS, Vivian Bose, Ghulam Hasan, Bhagwati
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/the-century-spinning-and-manufacturing-co-ltd-the-century-spinning-and-253
- **Pages:** 9

## Headnote

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 declaring it ns
reserve-Whethei· 'reserve'-Indian Oomprmies Act (VII of 1913),
ss. 131-A, 132, Sch. I, Table A, Reg. 99.
The balance sheet of a company for the calendar year 1945
showed a profit of Rs. 90,44,677, subject to the provision for
depreciation and taxation, and, a!ter giving credit to these items
- '
.
.
-
.
.
.
. '·-·
1953
Oct. 8.
204
SUPREME COURT REPORTS
[1954]
1953
the balance of Rs. 5,08,637 was carried to the balance sheet of the
--
next year on the 1st ,January, 1946, without making or declaring
Commis4ioner 0.f it a reserve.
On the 28th February, 1946, the directors marked it
Income-tax,
for distribution as dividend, on the 3rd. April, a resolution was
Bombay City
passed for distributing it as dividend, and a few days later it was
v.
actually distributed as dividend:
The Oentur.11
Spinning and
Manufacf.uriny
Go. Ltd.
Held, that as the said sum of Rs. 5,08,637 was never earmarked
or declared as a reserve, but was, on the other hand, earmarked
for distribution as dividend on the 28th February and 3rd April
and was actually so distributed, it cannot be deemed to be a reserve
and added to the paid-up capital in determining the company's
capital under rr. 2 and 3 of Sch. II to the Business Profits 'fax
Act, 194 7, for the chargeable accounting period commencing on
the 1st April, 1946.
Held also, that the profits of the company from the 1st
,January to 1st April, 1946, cannot also be treated as reserves.
CIVIL
APPELf,ATE
JURISDICTION: Civil
Appeals
Nos. 157 and 158 of 1952.
Appeals from the Judgment and Order dated the
29th day of March, 1951, of the High Court of Judicature
at Bombay (Chagla C.J. and Tendolkar J.) in its
Original Civil Jurisdiction in Income-tax Reference
No. 27 of 1950.
G. N. Joshi for the Commissioner of Income-tax.
R. J. Kolah for the Century Spinning and Manufacturing Co. Ltd.
1953. October 8. The Judgment of the Court was
delivered by
GHULAM HASAN J.-These two connected appeals,
one by the Commissioner of Income-tax, Bombay, and
the other by the Century Spinning & Manufacturing
Co. Ltd., ·arise out of the judgment and order of the
Bombay High Court delivered on a reference made by
the Income-tax Appellate Tribunal, Bombay.
The two questions of law referred by the Tribunal
were as follows :-
( 1) Whether the amount of Rs. 5,08,637 is a part
of the 'reserves' of the assessee company as on 1st
April, 1946, within the meaning of rule 2(1) of the
rules in Schedule II to the Busi~ess Profits Tax Act,
anq
.
.
·
•
l
)
..
. ..,
•
s.c.R.
SUPREME COURT REPORTS
205
(2) Whether the profits of the assessee company
1968
from 1st .January to 1st April, 19~6, should be included Commissioner of
m the said reserves as on 1st April, 1946.
Income-tax,
The High Court answered the first question in the
Bombay City
affirmative and the second in the negative.
v.
The Century
The accounting year followed by the assessee is the
Spinning and
calendar year and the chargeable accounting period is Manufacturing
the 1st of April, 1946, to the 31st of December, 1946,
Co. Ltd.
in respect of the profits ending with 31st December,
--
1945.
The profits according to the profit and loss Ghulam Hasan J.
account were Rs. 90,44,677 subject to the provisions
for depreciation and taxation. After making provisions
for these, the balance of Rs. 5,08,637 was carried to
the balance-sheet.
Two contentions were raised on behalf of the assessee
before the Income-tax Officer, the first being whether
the aforesaid sum could be called a "reserve" within the
meaning of rule 2(1) of the Rules in Schedule II to thP
Business Profits Tax Act and whether it should be
included in its reserves while determining the capital
on. the 1st April, 1946; the second that the proportionate profits of the assessee for three months, between the 1st January, 1946, and the 1st April, 1946,

## Text

•
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 declaring it ns
reserve-Whethei· 'reserve'-Indian Oomprmies Act (VII of 1913),
ss. 131-A, 132, Sch. I, Table A, Reg. 99.
The balance sheet of a company for the calendar year 1945
showed a profit of Rs. 90,44,677, subject to the provision for
depreciation and taxation, and, a!ter giving credit to these items
- '
.
.
-
.
.
.
. '·-·
1953
Oct. 8.
204
SUPREME COURT REPORTS
[1954]
1953
the balance of Rs. 5,08,637 was carried to the balance sheet of the
--
next year on the 1st ,January, 1946, without making or declaring
Commis4ioner 0.f it a reserve.
On the 28th February, 1946, the directors marked it
Income-tax,
for distribution as dividend, on the 3rd. April, a resolution was
Bombay City
passed for distributing it as dividend, and a few days later it was
v.
actually distributed as dividend:
The Oentur.11
Spinning and
Manufacf.uriny
Go. Ltd.
Held, that as the said sum of Rs. 5,08,637 was never earmarked
or declared as a reserve, but was, on the other hand, earmarked
for distribution as dividend on the 28th February and 3rd April
and was actually so distributed, it cannot be deemed to be a reserve
and added to the paid-up capital in determining the company's
capital under rr. 2 and 3 of Sch. II to the Business Profits 'fax
Act, 194 7, for the chargeable accounting period commencing on
the 1st April, 1946.
Held also, that the profits of the company from the 1st
,January to 1st April, 1946, cannot also be treated as reserves.
CIVIL
APPELf,ATE
JURISDICTION: Civil
Appeals
Nos. 157 and 158 of 1952.
Appeals from the Judgment and Order dated the
29th day of March, 1951, of the High Court of Judicature
at Bombay (Chagla C.J. and Tendolkar J.) in its
Original Civil Jurisdiction in Income-tax Reference
No. 27 of 1950.
G. N. Joshi for the Commissioner of Income-tax.
R. J. Kolah for the Century Spinning and Manufacturing Co. Ltd.
1953. October 8. The Judgment of the Court was
delivered by
GHULAM HASAN J.-These two connected appeals,
one by the Commissioner of Income-tax, Bombay, and
the other by the Century Spinning & Manufacturing
Co. Ltd., ·arise out of the judgment and order of the
Bombay High Court delivered on a reference made by
the Income-tax Appellate Tribunal, Bombay.
The two questions of law referred by the Tribunal
were as follows :-
( 1) Whether the amount of Rs. 5,08,637 is a part
of the 'reserves' of the assessee company as on 1st
April, 1946, within the meaning of rule 2(1) of the
rules in Schedule II to the Busi~ess Profits Tax Act,
anq
.
.
·
•
l
)
..
. ..,
•
s.c.R.
SUPREME COURT REPORTS
205
(2) Whether the profits of the assessee company
1968
from 1st .January to 1st April, 19~6, should be included Commissioner of
m the said reserves as on 1st April, 1946.
Income-tax,
The High Court answered the first question in the
Bombay City
affirmative and the second in the negative.
v.
The Century
The accounting year followed by the assessee is the
Spinning and
calendar year and the chargeable accounting period is Manufacturing
the 1st of April, 1946, to the 31st of December, 1946,
Co. Ltd.
in respect of the profits ending with 31st December,
--
1945.
The profits according to the profit and loss Ghulam Hasan J.
account were Rs. 90,44,677 subject to the provisions
for depreciation and taxation. After making provisions
for these, the balance of Rs. 5,08,637 was carried to
the balance-sheet.
Two contentions were raised on behalf of the assessee
before the Income-tax Officer, the first being whether
the aforesaid sum could be called a "reserve" within the
meaning of rule 2(1) of the Rules in Schedule II to thP
Business Profits Tax Act and whether it should be
included in its reserves while determining the capital
on. the 1st April, 1946; the second that the proportionate profits of the assessee for three months, between the 1st January, 1946, and the 1st April, 1946,
should also be included in the said reserves.
The
Income-tax Officer rejected the contention holding that
"A 'reserve' represents profits set apart for some
specific or general purpose and therefore profits which
have not been so set apart cannot be treated as forming part of reserves for the purpose of inclusion in the
capital." This order was confirmed on appeal by the
Appellate Assistant Commissioner but was set aside by
the Income-tax Appellate Tribunal.
Thereupon the
Tribunal formulated the two questions aforementioned
for reference to the High Court under section 66(1) of
the Act, read with section 19 of the Business Profits
Tax Act of 1947.
As already stated the High Court
decided the first question in favour of the assessee and
the second in favour of the department.
Hence the
two appeals.
The Business Profits Tax Act (No. XXI of 1947)
came into force on the 11th April, 1947, having taken
28
206
SUPREME COURT REPORTS
[1954]
1953
the place of the Excess Profits Tax Act which was
-. -.
repealed on the 30th March, 1946.
This Act, as is well
00
;::;:,::~;:;. of known, . was de~igned to ~ssess la~ge profits made by
Bombay Oitv
compames carrymg on busmess durmg the boom years
v.
·
of the war. It was revived, as it were, after a year in
The Owtury
the shape of the present Act, though in a modified
Spinning and form.
Section 4 which is the charging section, so far
M.mmfac<urina as it is material for our purposes, permits the levying
O~Ltd.
on the amount of the "taxable profits" during any
Glmlam Ha,an J. "chargeable accounting period", a tax called the "business profits tax" which shall be equal to sixteen and
two-thirds per cent. of the taxable profits.
"Taxable
profits" means the amount by which the profits during
a chargeable accounting period exceed the abatement
in respect of that period [section 2(17)]. "Abatement",
according to section 2 (1) means, in respect of any
chargeable accounting period ending on or before the
31st day of March, 1947, a sum which bears to a sum
equal to-
"(a) in the case of a company, not being a company deemed for the purposes of section 9 to be a firm,
six per cent. of the capital of the company on the first
day of the said period computed in accordance with
Schedule II, or one lakh of rupees, whichever is greater
............ the same proportion as the said period bears
to the period of one year .................. "
"Accounting period" according to section 2(2) in relation to any business means any period which is or has
been determined as the previous year for that businesR
for the purposes of the Indian Income-tax Act, 1922.
Lastly "chargeable accounting period" is defined in
section 2( 4) as follows :-
"(a) any accounting period falling wholly with.in
the terms beginning on the first day of April, Hl46, and
ending on the thirty-first day of March ;
(b) where any accounting period falls partly within and partly without the said term, such part of that
accounting period as falls within the said term : ".
·. It appears that the definition of abatement contemplates that the normal profit of a company is six
per cent: on its capital and where the profit exceeds
<
•
s.C.R.
SUPREME COUR± REPORTS
207
that amount, it becomes liable to pay business profits
tax. Schedule II lays down the rule for computing
1953
Oommissioner of
the capital of a company for purposes of business proIncome-tax,
fits tax and rule 2(1) of the Schedule which admittedly
Bombay Oity
applies to the present case lays down that "\Vhere
v.
the company is one to which rule 3 of Schedule I
The Oentury
applies, its capital shall be the sum of the amounts of MSpin~ingt a~id
-
'd
l
· I
d f' ·
.
,,
an,u;ac ttring
its pa1 -up s 1are capita an o its reserves m so iar as
00 Ltd.
they have not been allowed in computing the profits
of the company for the purposes of the Indian Income- Ghutam Hasan J.
tax Act .......... '~
The point that arises for consideration on the
first question is whether the assessee is entitled
to treat the sum of Rs. 5,08,637 as a reserve and
to add it to its paid-up share capital for the
purposes of computing the abatement. Two essential characteristics must be present before the assessee
can avail himself of the benefit of the rule, namely,
that the amount should not have been allowed in computing the profits of the company for the purposes of
Income-tax Act and that it should be a reserve as contemplated by the rule. That it has not been so allowed
is not denied and therefore the only question is whether it .can be treated as a .reserve within the meaning
of the rule. The balance-sheet shows that the company
made a profit of B,s. 90,44,677 for the calendar year
1945 subject to the provision of depreciation and taxation.
After giving credit for these items the balance
of Rs. 5,08,637 was carried to the balance-sheet on
1st January, 1946, in the profit and loss account.
On
the 28th Februarv, 1946, the directors recommended
that the aforesaitl" sum should be appropriated in the
following manner :-
Payment of a final dividend at the rate of Rs. 18
per share (making Rs. 28 per share for the whole
year) free of income-tax absorbing
Rs. 4,92,426-0-0
Balance to be carried forward to
next year's account
Rs.
16,211·6-8
This recommendation was accepted by the shareholders in their meeting on the 3rd April, 1946, by a
,..j.
resolution passed to that effect.
The dividend was
made payable on the 15th April, 1946, and it is not
•
208
SUPREME COURT REPORTS
[1954]
1953
denied that it was actually distributed. These being
0
-:--:-
·' the facts, the question arises whether the amount in
ommissioner OJ
t.
b
]] d
"
,,
Inconie-ta:r:,
ques ion can e ca e a reserve .
Bambay Oity
The term "reserve" is not defined in the Act and we
v.
must resort to the ordinary 1101tural meaning as underThe Oentnry
stood in common parlance. The dictionary meaning
Spinning and of the word "Reserve" is :-
Manufacturing
oa. Ltd.
" 1(a) To keep for future use or enjoyment; to
-
store up for some time or occasion; to refrain from
Ghuiam Hasan J. using or enjoying at once.
.
(b) To keep back or hold over to a later time or
place or for further treatment.
6.
To set apart for some purpose or with some end
in view; to keep for some use.
. 11. To retain or preserve for certain purposes."
(Oxford Dictionary, Vol. VIII, p. 513).
In Webster's New International Dictionary, Second
Edition, page 2118, "Reserve" is defined as follows:-
"l. To keep in store for future or special use; to
keep in resenre; to retain, to keep, as for oneself.
2.
To keep back; to retain or hold over to a future
time or place.
3.
To preserve."
What is the true nature and character of the disputed sum, must be determined with reference to the
substance of the matter and when this is borne in
mind, it follows that on the 1st of April, 1946, which
is the crucial date, the sum of Rs. 5,08,637 could not
be called a "reserve", for nobody possessed of the requisite authority had indicated on that date the manner of its disposal or destination.
On the other hand,
on the 28th February, 1946, the directors clearly
ear-marked it for distribution as dividend and did not
choose to make it a reserve. Nor did the company in
its meeting on the 3rd April, 1946, decide that it was a
reserve. It remained on the 1st of April as a mass of
undistributed profits which were available for distribution and not ear-marked as "reserve". On the 1st of
January, 1946, the amount was simply brought from
•
•
•
..
S.C.R.
SUPREME COURT REPORTS
209
the profit and loss account to the next year and nobody
1953
with any authority on that date made or declared a Commis•ioner of
reserve.
The reserve may be a general reserve or <t
Incomc-taJ:,
specific reserve, but there must be a clear indication to
Bombay City
show whether it was a reserve either of the one or the
v.
other kind. The fact that it constituted a mass of
The Century
undistributed profits on the 1st January, 1946, cann?t 1;J:~:;;:~~~
automatically make it a reserve.
On the 1st April,
co. Ltd.
1946, which is the commencement of the chargeable
accounting period, there was merely a recommendation Ghularn Ha.an J.
by the directors that the amount in question should be
distributed as dividend. Far from showing that the
directors had made the amount in question a reserve,
it shows that they had decided to ear-mark it for distribution as dividend. By the resolution of the shareholders on the 3rd April, 1946, the amount was shortly
afterwards distributed as dividend. The High Court
appear to have been under a misapprehension as to the
real position, for they observed :-"It was open to the
directors to distribute the sum of Rs. 5,08,537 as dividends. They didnotchoosetodo so andhave kept back
this amount. Therefore, by keeping back this amount
they constituted it 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 dividend to the
shareholders but kept back 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 directors had no power
to distribute the sum as dividend.
They could only
recommend, as indeed they did, and it was up to the
shareholders of the company to accept that recommendation in which case alone the distribution could take
place.
The recommendation was accepted and the
dividend was actually distributed. It is, therefore, not
correct to say that the amount was kept back.
The
nature of the amount which was nothing more than
the undistributed profits of the company, remained
unaltered. Thus the profits lying unutilized and not
210
SUPREME COURT REPORTS
[1954]
1953
specially set apart for any purpose on the crucial date
·-. -.
,, did i.10t constitute resct'l'CS within the meanmg of
Oomnmstoner o, S h, [ J, IL , l 2. (l)
Income-tax,
C CCU C
'Ille
•
Bombay Cit.y
Reference was made to seetions 131 (a) and 132 of
v.
the Indian Companies Act. Section 131 (a) enjoins
The Century
upon the directors to attach to every balance-sheet a
Spinn-ing and
· h
h
f
'
fl' '
Manufactu•ing report wit respect to t e state o
company s a an·s
00. Ltd.
and the amount if any which they recommend to be
paid by way of dividend and the amount, if any, which
Ghulan• Hasan J. they propose to carry to the Reserve Fund, General
Reserve or Reserve Account. The latter section refers
to the contents of the balance-sheet which is to be
drawn up in the Form marked F in Schedule III. This
Form contains a. separate head of reserves. Regulation
99 of the First Schedule, Table A, lays down "that
the directors may, before recommending any dividend
set aside out of the profits of the company such sums
as they think proper as a reserve or reserves which
shall, at the discretion of the directors, be applicable
for meeting contingencies, or for equalising dividends,
or for any other purpose to which the profits of the
company may be properly applied ...... ". The Regulation suggests that any sum out of the profits of the
company which is to be made as a reserve or rese1•ves
must be set aside before the directors recommend any
dividend. In this case the directors while recommending dividend took no action to set aside any portion of this sum as a reserve or reserves.
Indeed they
never applied their mind to this aspect of the matter.
The balance-sheet drawn up by the assessee as showing
the profits was prepared in accordance with the provisions of the Indian Companies Act. These provisions
also support the conclusion as to what is the true nature
·of a reserve shown in a balance-sheet.
We are of the opinion that the view taken by the
Bombay High Court is erroneous and must be set aside.
The appeal of the Commissioner of Income-tax is
allowed with costs.
As regards the second question, Mr. Kolah, the
·learned counsel for. the company, frankly conceded
that the view taken by the High Court on this part of
the case is not open to challenge and is correct. The
•
•
S.C.R.
SUPREME COURT REPORTS
211
High Court held that the profits for three months from
the 1st January, 1946, to the 1st April, 1946, were not
reserves which would attract the application of rule 2
of Schedule II. With this conclusion we agree.
The
assessee's appeal is, therefore, dismissed with costs.
Appeal No. 157 allowed.
Appeal No. 158 dismissed.
Agent for the
Rajadhyaksha.
Commissioner of Income-tax:
Agent for the company: I. N. Shroff.
CHAINRUP SAMPATRAM
v.
COMMISSIONER OF INCOME-TAX,
WEST BENGAL.
G.H.
[PATANJALI SAsTRI C. J., S. R. DAs, VIVIAN BosE,
GHULAM HASAN and BHAGWATI JJ.]
Indian Income-tax Act (XI of 1922), ss. 4(1)(b) and 14(~)(c)
Ascertainment of profit by valuation of stock-Stock-in-trade removed
to Native State-·Place where profit accrnes-Exemption itnder s. 14
(2) (c)-Principles underlying vali;ation of stock.
The assessee firm which carried on business at Calcutta in bullion
despatched during the accounting year to Bikaner, where its partners resided, a certain quantity of silver bars and showed them as
having been sold to the partners. The Income-tax authorities
disbelieved the story oi' the sale and, treating the bars as stock-intrade and valuing them at their market value at the close of the
year which was much higher than the cost, assessed the firm's
profits at Rs. 2,20,887.
The assessee contended that, even admitting that the bars were the stock-in-trade of the business, the
increased value at the close of the year accrued at Bikaner and was
exempt from tax in British India under s. 14(2)(c) of the Incometax Act.
The High Court held that the notional profit representing
the appreciation in value of the stock-in-trade emerged out of the
valuation and the profit accordingly arose at the time when, and at
the place where, the valuation was made, and as the valuation was
made at Calcutta s. 14(2)(c) did not apply and the profit was taxable,
On appeal,
19:;3
Cornrnissioner of
lnconze-tax,
Bombay City
v.
The Oentur!I
Spinning and
JI[ anitfacturing
Go. Ltd.
19:;3
Oct. 9.