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I.T.C. No. 25 of 1986, decided on 24th February, 1987.
Income-tax Act (XI of 1922)--
---S. 4(1). Explanation 5--'"Free reserve," meaning of--Free reserve is in the nature of a reserve which is allocated or taken out of profit of the Company-- Unapportioned profits prior to introduction of statutory definition of "free reserve", held, would not amount to "free reserve".
Pakistan. Gum Industries Ltd. v. Commissioner Income-tax (East) Karachi 1982 P T D 370; P L D 1960 S', C: 40 and Peakles and Lafferty v Accounting IV Edn. p. 718 ref.
K. Salahuddin far Applicant.
Ali Akhtar for Respondent.
Date of hearing: 24th February, 1987.
.-- The applicant has filed this application under section 66 (2) of the Income-tax Act, 1922 raising the following question:-
"Whether on the facts and in the circumstances of the case, the learned Income-tax Appellate Tribunal was justified in holding that the provision for payment of dividend and unappropriated profit do not fall a part of free reserve and consequently not fall within the purview of Explanation 5 to subsection (1) of section 4 of Income-tax Act
Mr. Khawaja Salahuddin the learned counsel for the applicant has stated that he does not wish to press the question relating to dividends as it has been decided by the Tribunal as question of fact. Therefore, we have framed the question in respect of appropriated profits as follows.
"Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that unappropriated profits of the assessee for the assessment year 1967-68 were 'free reserve' and as such liable to super-tax
During the assessment year 1967-68 the Income-tax Officer calculated the "free reserve" amounting to Rs.64,15,964. In computing this amount the Income-tax Officer included the provision for payment of dividend and unappropriated profits. Against this assessment order the respondent filed an appeal before the Income-tax Appellate Tribunal, which was allowed. The applicant then filed an application under section 66(1) of the Income-tax Act before the Tribunal for referring the question quoted above under section 66 (1) but that application was dismissed by order dated 29-1-1976. Consequently the present application has been filed and the aforestated question which was reframed has been considered by us. The same question arose in Pakistan Gum Industries Ltd. v. Commissioner, Income-tax (East) Karachi 1982 PTD 370 and it was replied in the negative.
Mr. Khawaja Salahuddin learned counsel for the applicant has mended that in that judgment reliance was placed on PLD 1960 SC 40 but the judgment was dealing with the Business Profits Tax in which y the term "reserve" was used. The learned counsel has referred to the Peakles and Lafferty Accounting IV Edition' page 718 in which "general reserve" has been explained as reserve created by setting aside profits in order to strengthen the general financial position of the business. Such profits, however, remain available for distribution, and for this reason it is often described as a "free" reserve." Therefore, "free reserve"; is in the nature of a reserve which is allocated or taken out of the profit of the company. We have gone through the judgment quoted above and do not find any reason to distinguish or to disagree with it. We are in respectful agreement with the views expressed in Pak Gum Industries Ltd. case and answer the question in the negative.
M.B.A./C-8/K Answered in the negative.
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