Judgment :- SRINIVASAN J. The assessee is a private limited company. The total income of the assessee company during the account year ended June 30, 1951, relevant for the assessment year 1952-53, was Rs. 50, 539. After deduction of the taxes, the amount available for distribution as dividend was Rs. 28, 586. The company declared a dividend of Rs. 17, 500, which was in excess of 60 per cent. of the amount available for distribution. It was found that the company had by credit in the profit and loss account a sum of Rs. 10, 72, 898. The Income-tax Officer purported to apply section 23A of the Act and held that in view of the large balance of accumulated profits available, the payment of a larger dividend than that declared by the assessee would not be unreasonable. He accordingly made an order, after following the prescribed procedure, that the company should pay 100 per cent. of the available profits, that is to say, that the further sum of Rs.11, 086 should also be distributed as dividend. In terms of the provisions of the Act, this amount was deemed to have been distributed to the only two shareholders of the company which were themselves private limited companies Against the application of section 23A of the Act, an appeal was taken to the Appellate Assistant Commissioner, it was contended that the availability of a sum of Rs. 10, 72, 898 in the shape of a credit balance in the profit and loss account did not attract the application of section 23A, as that sum could not be said to be reserves representing the accumulation of past profits within the meaning of the first proviso to section 23A as it stood before its amendment by the Finance Act of 1955. The Appellate Assistant Commissioner, relying upon the Supreme Court decision in Commissioner of Income-tax v. Century Spinning and Manufacturing Co. Ltd., accepted the contention that a mass of undistributed profits cannot be termed a reserve within the meaning of the Act and accordingly set aside the order of the Income-tax OfficerThe department appealed to the Appellate Tribunal. The Appellate Assistant Commissioner, relying upon the Supreme Court decision in Commissioner of Income-tax v. Century Spinning and Manufacturing Co. Ltd., accepted the contention that a mass of undistributed profits cannot be termed a reserve within the meaning of the Act and accordingly set aside the order of the Income-tax OfficerThe department appealed to the Appellate Tribunal. The Appellate Tribunal thought that the decision of the Supreme Court referred to had special reference only to reserves as that expression was used in the Business Profits Tax Act and that in the absence of any definition of the word "reserve" in the Income-tax Act, the ordinary and natural meaning of that expression should be adopted. It expressed itself thus "Profits carried to reserve remain profits unless capitalised. Equally so, the profits, even if shown in the balance-sheet under the head 'profit and loss account', do not differ from a reserve. The board of directors, as well as the general body of shareholders, when it decided to carry forward the balance at credit in the profit and loss, in substance set aside the same and in so doing it reserved the sum. The only thing is that it did not name the sum as 'reserve'. The company can draw on its reserves for paying any dividend or for meeting any contingencies. As we pointed out earlier, the profits in this case were withheld and utilised for distributing as dividend. We are, therefore, of the opinion that the accumulated profits do represent reserve as the word is understood in common parlance and in accountancy." * The order of the Income-tax Officer applying section 23A was accordingly restored On the application to the assessee, the Tribunal referred the following question for our determination "Whether, on the facts and in the circumstances of the case, the credit balance in the profit and loss account of the company on the 1st July, 1950, represents a reserve within the meaning of section 23A of the Indian Income-tax Act ?" * The object of section 23A of the Income-tax Act is to prevent the avoidance of tax by the device of non-distribution of the profits. Profits made by the company which are distributable to shareholders are allowed to accumulate in the hands of the company and presumably at some later point of time will be distributed in a capital form by the creation of bonus shares which would not be assessable. The section was designed to provide that such devices should not be allowed to defeat revenue of its lawful claim to taxes on profits. If we have referred to the underlying object of this provision, it would not be too much to say that in the present case the company has certainly adopted this device of keeping the profits as a credit balance in its profit and loss account, and not apportioning it to any reserve only for the purpose of evading distribution and the payment of tax by the shareholders. Though the common sense interpretation of the provisions adopted by the Appellate Tribunal appears to be in accord with the underlying intention of the statute, it is nevertheless not proper to impose a tax liability upon the assessee unless on a strict interpretation of the wording of the statute such a liability can be justified. We have, therefore, to examine whether the proviso to section 23A as it stood before the amendment in 1955 would applyThis proviso is in these terms "Provided that when the reserves representing accumulations of past profits, which have not been the subject of an order under this sub-section, exceed the paid up capital of the company, together with any local capital which is the property of the shareholders, or the actual cost of the fixed assets of the company, whichever of these is greater, this section shall apply as if instead of the words 'sixty per cent.', the words 'one hundred per cent.' were substituted The case of Commissioner of Income-tax v. Century Spinning and Manufacturing Co. Ltd. no doubt arose under the Business Profits Tax Act of 1947. Under that Act any profit over and above six per cent. of the capital of the company as computed on a particular date was liable to business profits tax. The computation of the taxable profits under that Act called for the determination of its capital as on the 1st April, 1946. That portion of the profits amounting to six per cent. of the capital so computed was treated as the normal profit and was defined as the abatement. The computation of the taxable profits under that Act called for the determination of its capital as on the 1st April, 1946. That portion of the profits amounting to six per cent. of the capital so computed was treated as the normal profit and was defined as the abatement. Any profit over and above this normal profit became liable to pay business profits tax. It was accordingly necessary to compute what the capital of the company was on the relevant date and the rules in Schedule II, of that Act provided for the mode of computation of the capital. Rule 2 stated" * where the company is one to which rule 3 of Schedule I applies, its capital shall be the sum of the amounts of its paid-up share capital and of its reserves in so far as they have not been allowed in computing the profits of the company for the purposes of the Indian Income-tax Act... "It was this expression" reserves "appearing in the above rule that had to be interpreted by the Supreme CourtIn the case which their Lordships had to deal with the balance-sheet of the company showed a profit of Rs. 90, 00, 000. After giving credit to depreciation and taxation, the balance of Rs. 5, 08, 637 was carried to the balance-sheet as on the 1st January, 1946, in the profit and loss account. On the 28th February, 1946, the directors recommended the payment of a dividend and the carry forward to the next year's account of a sum of Rs. 16, 211-6-8. These recommendations of the board of directors were accepted by the shareholders only on the 3rd April, 1946. The question therefore arose as to the character of this sum of Rs. 5 lakhs and odd as on the 1st April, 1940. Their Lordships said" * ...it follows that on the 1st 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 earmarked 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. On the other hand, on the 28th February, 1946, the directors clearly earmarked 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 earmarked as 'reserve'. On the 1st January, 1946, the amount was simply brought from the profit and loss account to the next year and nobody with any authority on that date made or declared a reserve. The reserve may be a general reserve or a specific reserve, but there must be a clear indication to show whether it was reserve either of the one or the other kind. The fact that it constituted a mass of undistributed profits on the 1st January, 1946, cannot automatically make it a reserve. On the 1st April, 1946, which is the commencement of the chargeable accounting period there was merely a recommendation 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 earmark it for distribution as dividend........ 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 unutilised and not specially set apart for any purpose on the crucial date did not constitute reserves within the meaning of Schedule II, rule 2(1). "The decision regarding the nature of the amount appearing in the profit and loss account of a company has been followed in several cases arising under the Business Profits Tax Act : see Commissioner of Income-tax v. Aryodaya Ginning and Manufacturing Co. Ltd., Commissioner of Income-tax v. Vasantha Mills Ltd., Commissioner of Income-tax : v. Pierce Leslie and Co. "The decision regarding the nature of the amount appearing in the profit and loss account of a company has been followed in several cases arising under the Business Profits Tax Act : see Commissioner of Income-tax v. Aryodaya Ginning and Manufacturing Co. Ltd., Commissioner of Income-tax v. Vasantha Mills Ltd., Commissioner of Income-tax : v. Pierce Leslie and Co. Ltd. and First National City Bank v. Commissioner of Income-tax The question however is whether the meaning given to the expression "reserve" in the above decision in its context in the Business Profits Tax Act could also apply to cases arising under the Indian Income-tax Act. This point was decided by the Bombay High Court in Nanubhai Maneklal and Co. Ltd. v. Commissioner of Income-tax. The learned judges relied on the Supreme Court decision in this regard and setting out the passage which we have extracted above proceeded to say" * It is notable that the Supreme Court emphasised that to amount to reserves there must be a clear direction by the directors to that effect and it is that allocation by an act of volition on the part of the directors that can constitute reserves. Now, let us apply the test to the facts of the case and applying the test laid down by their Lordships, it seems extremely difficult to see how this amount ...... carried forward in the profit and loss account and not earmarked for any purpose, not treated directly or indirectly as general reserves or special reserves and left as a mass of undistributed profits, can be called 'reserves' of the company..... " The learned judges were not unaware that the expression" reserves "as interpreted by the Supreme Court arose in the context of the Business Profits Tax Act, but nevertheless, since the observations of their Lordships of the Supreme Court were perfectly general in their scope and proceeded upon accepted notions of company law and procedure, the learned judges of the Bombay High Court followed that interpretation as applying equally to that expression in the context of section 23AMr. Ranganathan, for the department, contends that the expression "reserves" has a connotation opposed to distribution and that where the general body of shareholders has decided to keep an amount without distributing it, it should be taken as indicating that they had taken a decision to reserve it. Ranganathan, for the department, contends that the expression "reserves" has a connotation opposed to distribution and that where the general body of shareholders has decided to keep an amount without distributing it, it should be taken as indicating that they had taken a decision to reserve it. It was precisely this argument that was adopted by the Bombay High Court in the decision which was taken in appeal and was reversed in Commissioner of Income-tax v. Century Spinning and Manufacturing Co. Ltd. The argument adopted by the Bombay High Court in that case was" * It was open to the directors to distribute the sum of Rs. 5, 08, 637 as dividends. They did not choose to do so and have kept back this amount. Therefore, by keeping back this amount, they constituted it a reserve..... "Their Lordships of the Supreme Court did not accept this argument at all as sound and interpreted the expression "reserves" in the manner already set out. Section 23A was amended by the Finance Act of 1955 and the part of the provision as it stood previously was altered in this manner" * Where the accumulated profits and reserves (including the amounts capitalised from earlier reserves) representing accumulations of past profits ... exceed.... " The original form of" reserves representing accumulations of past profits " which occurred in the proviso was amplified by the Finance Act of 1955 to take in three categories : (1) accumulated profits ; (2) reserves representing accumulations of past profits ; and (3) amounts capitalised in the earlier reserves. It is quite possible that it was in order to meet a contingency like the one which revenue is faced with in the present case, viz., cases where no reserves are created by the company but past profits are deemed to accumulate in the profit and loss account, that this provision appears to have been recast in the form introduced above. It was not merely clarificatory of the previous position. Had that been the intention, the statute could well have declared that even accumulated profits, though unallocated to any reserves, shall be treated as reserves and given that content and retrospective operationIt seems to us, therefore, that in the present case the mass of undistributed profits appearing in the profit and loss account cannot be treated as "reserves representing accumulations of past profits". It follows that the question has to be answered in favour of the assessee. The assessee will be entitled to its costs. Counsel's fee Rs. 250.