1981 (4) TMI 71 - HC - Income Tax

Summary

Issues:
1. Interpretation of whether the proposed dividend constitutes a surplus fund under the Companies (Profits) Surtax Act, 1964.
2. Application of rule 2 of Schedule II to the Act in determining the treatment of the proposed dividend.
3. Analysis of the term "surplus" as defined in the Act and its relevance to the case.
4. Comparison with previous case law regarding the treatment of provisions for taxation and proposed dividends.

Detailed Analysis:
1. The primary issue in this case is the interpretation of whether the proposed dividend of Rs. 11,55,908 constitutes a surplus fund within the meaning of clause (ii) of rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The Tribunal held that the proposed dividend, although not a reserve, qualifies as a surplus and should be deducted from the cost of investment in shares before calculating the capital base under the Act.

2. Rule 2 of Schedule II to the Companies (Profits) Surtax Act, 1964, plays a crucial role in determining the treatment of the proposed dividend. The rule specifies that the cost of investment should be reduced by any fund, surplus, or reserve not taken into account in the capital computation. The Tribunal relied on this rule to support its decision that the proposed dividend should be considered a surplus and deducted accordingly.

3. The term "surplus" as defined in the Act is analyzed extensively in the judgment. The court examines the ordinary meaning of surplus, which is what remains after meeting requirements. It is argued that a proposed dividend cannot be considered a surplus as it becomes payable immediately upon declaration, following the directors' recommendation to the shareholders. The court also refers to the form of balance sheet under the Companies Act, which clarifies that surplus is what remains after providing for proposed allocations like dividends.

4. The judgment compares the present case with previous case law, specifically Duncan Brothers & Co. Ltd. v. CIT [1978] 111 ITR 885, which dealt with provisions for taxation. The court distinguishes between provisions for taxation, which may constitute a fund, and proposed dividends, which are payable immediately upon declaration. The court also references another case, Duncan Brothers & Co. Ltd. v. CIT [1981] 128 ITR 302 (Cal), highlighting the different issues involved.

In conclusion, the High Court held that the Tribunal erred in considering the proposed dividend as a surplus available to the company. The court ruled in favor of the revenue, stating that the proposed dividend should not be treated as a surplus fund under the Companies (Profits) Surtax Act, 1964.