1993 (2) TMI 23 - HC - Income Tax

Issues:
1. Interpretation of the Companies (Profits) Surtax Act, 1964 regarding the computation of capital based on dividends declared from general reserves.
2. Determining whether dividends declared after the first day of the previous year should be excluded from general reserves for surtax assessment purposes.

Analysis:
1. Income-tax Reference No. 233 of 1978:
The case involved the assessment years 1973-74 and 1974-75 under the Companies (Profits) Surtax Act, 1964. The issue was whether dividends recommended by directors after the first day of the previous year could be deducted from general reserves for capital computation. The Tribunal held that there was no liability to pay dividends on the first day of the previous year, thereby rejecting the assessee's contention. The Court agreed with the Tribunal, stating that dividends declared from general reserves post the first day of the previous year are includible in computing the capital for surtax purposes.

2. Income-tax Reference No. 335 of 1978:
This reference pertained to the assessment years 1970-71 and 1971-72. The Tribunal held that dividends declared from general reserves on the first day of the accounting period should reduce the general reserves. The question referred was whether proposed dividends should be excluded from general reserves for surtax assessments. The Court, concurring with the Tribunal, answered in the affirmative, stating that dividends declared from general reserves should be deducted for capital computation.

3. Income-tax Reference No. 230 of 1978:
In this reference, the assessment years were 1971-72, 1972-73, and 1973-74. The Tribunal reduced general reserves by dividends declared subsequently, holding that such dividends should be excluded from the capital computation. The Court referred to precedents like Vazir Sultan Tobacco Co. Ltd. and Indian Tube Co. P. Ltd. to determine the nature of reserves and provisions. It emphasized that even dividends declared after the first day of the previous year should impact capital computation, aligning with the Supreme Court's rulings.

4. Precedents and Legal Interpretations:
The Court referred to various cases, including Vazir Sultan Tobacco Co. Ltd. and Indian Tube Co. P. Ltd., to distinguish between reserves and provisions. It highlighted that dividends declared after the first day of the relevant year can impact capital computation under the Companies (Profits) Surtax Act, aligning with Supreme Court decisions. The Court emphasized that the intention and purpose behind setting apart sums for dividends impact whether they are considered reserves or provisions.

In conclusion, the Court upheld the Tribunal's decisions across all references, emphasizing that dividends declared from general reserves, even post the first day of the previous year, should be considered for capital computation under the Companies (Profits) Surtax Act, 1964. The judgments were in favor of the Revenue, with no order as to costs.

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