1981 (11) TMI 15 - HC - Income Tax

Issues Involved:
1. Whether the proposed dividend can be deducted from the cost of investments in the computation of capital under clause (ii) of rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Detailed Analysis:

1. Computation of Capital and Deduction of Proposed Dividend:
The primary issue was whether the proposed dividend could be deducted from the cost of investments in the computation of capital under clause (ii) of rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The Tribunal initially held that the proposed dividend could not be treated as a reserve or surplus and thus could not be deducted in computing the capital. The Tribunal's decision was based on the interpretation that the proposed dividend did not constitute a reserve or surplus available for future use by the company.

2. Tribunal's Computation and Assessee's Appeal:
The ITO computed the surtax and disallowed the deduction of the proposed dividend, considering it neither a reserve nor surplus. The assessee appealed to the AAC, who held that the proposed dividend could be considered a surplus and thus deductible from the investment cost. However, the Revenue appealed this decision to the Tribunal, which upheld the ITO's original decision.

3. Reframing of the Question:
The court reframed the question to clarify the controversy: whether the proposed dividend could be deducted from the cost of investments under clause (ii) of rule 2 of the Second Schedule. The court examined the relevant statutory provisions and judicial interpretations to address this issue.

4. Legal Interpretation of Reserve and Provision:
The court referred to the Supreme Court's interpretation in Vazir Sultan Tobacco Co. Ltd. v. CIT, which distinguished between 'reserve' and 'provision'. The Supreme Court observed that a provision is for a known liability, while a reserve is for future use. The proposed dividend, not being a known liability on the relevant date, could not be considered a provision, but this did not automatically make it a reserve.

5. Commercial Perspective and Supreme Court's Observations:
The Supreme Court in Kesoram Industries' case clarified that a dividend recommendation by directors does not create an obligation until accepted by shareholders. Thus, the proposed dividend could not be treated as a liability or reserve. The court emphasized that the true nature and character of the appropriation must be considered, and the proposed dividend, intended for distribution, did not qualify as a reserve or surplus.

6. Conclusion and Affirmation of Tribunal's Decision:
The court concluded that the proposed dividend, being intended for distribution and not a reserve or surplus, could not be deducted from the cost of investments in the computation of capital. This view was consistent with previous decisions, including CIT v. Bird & Co. (P.) Ltd. The court affirmed the Tribunal's decision, answering the reframed question in the affirmative and in favor of the Revenue.

7. Costs:
The court ordered that each party would bear its own costs.

Separate Judgment:
C. K. Banerji J. concurred with the judgment.

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