1991 (1) TMI 455 - SC - Income Tax

Summary

Issues Involved:
1. Whether the sum of Rs. 76 lakhs paid as dividend should be included in the capital computation as on January 1, 1963, under the Companies (Profits) Surtax Act, 1964.
2. Distinction between 'reserve' and 'provision' for the purpose of capital computation under the Surtax Act.

Detailed Analysis:

Issue 1: Inclusion of Rs. 76 Lakhs in Capital Computation

The primary question was whether the Rs. 76 lakhs paid as dividend for the year 1962, following the General Meeting on May 31, 1963, should be included in the capital computation as on January 1, 1963, under the rules of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The appellant argued that the Rs. 90 lakhs transferred to the dividend reserve should be considered as a reserve entering into capital computation. The assessing authority excluded this sum, but the Appellate Assistant Commissioner (AAC) found it to be a reserve created from amounts not allowed as deduction for computing the profits of that year. The Tribunal, however, held that only Rs. 14 lakhs should be treated as a reserve, as Rs. 76 lakhs was appropriated for dividend payment. The High Court answered the question in the negative and against the assessee, affirming that Rs. 76 lakhs was a provision and not a reserve.

Issue 2: Distinction Between 'Reserve' and 'Provision'

The court examined the definitions and treatment of 'reserve' and 'provision' under the Surtax Act and the Companies Act. Section 4 of the Surtax Act imposes a tax on the chargeable profits of a company, with statutory deductions as specified. Rule 1 of the Second Schedule outlines the computation of a company's capital, excluding amounts credited to reserves that have been allowed as deductions in computing income.

The court found that the Rs. 76 lakhs earmarked for dividend payment by the Directors' recommendation on May 3, 1963, and approved by the shareholders on May 31, 1963, could not be considered a reserve as on January 1, 1963. The court emphasized that the nature and substance of the company's accounts preparation should determine whether an amount is a reserve or a provision. The court concluded that the Rs. 76 lakhs appropriated for dividend payment was a provision, as it was set aside to meet a known liability, and only the remaining Rs. 14 lakhs was a reserve.

Supporting Precedents:

1. Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53: This case distinguished between 'provision' and 'reserve,' stating that provisions are made against anticipatory losses and contingencies, whereas reserves are appropriations of profits retained as part of the capital employed in the business.

2. CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566: The court held that the determination of directors to appropriate accounts to reserves must be related to the beginning of the new accounting year and treated as effective from that date.

3. Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 (SC): The court clarified that if a retention or appropriation of a sum is not a provision, it does not automatically become a reserve. The true nature and character of the sum must be determined based on several factors, including the intention and purpose of the retention or appropriation.

4. Hyco Products (P.) Ltd. v. CIT: The court approved the Bombay High Court's decision, which held that the appropriation of dividend related back to the relevant assessment year, and the amount set aside for dividend payment was a provision, not a reserve.

Conclusion:

The Supreme Court held that the Rs. 76 lakhs appropriated for dividend payment was a provision and could not be included in the capital computation as on January 1, 1963. Only the remaining Rs. 14 lakhs was considered a reserve. The Tribunal and the High Court correctly applied the law, and the appeal was dismissed with parties bearing their own costs.