1974 (8) TMI 1 - HC - Income Tax

Issues Involved:
1. Whether the sum of Rs. 76,00,000 appropriated for dividend could be considered a reserve for the computation of capital as on January 1, 1963, under Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Detailed Analysis:

1. Background and Relevant Provisions:
The assessee, a company incorporated under the Indian Companies Act, 1913, was assessed under the Companies (Profits) Surtax Act, 1964, for the assessment year 1964-65. The key provisions under consideration were:
- Section 4: Imposition of tax on chargeable profits exceeding the statutory deduction.
- Section 2(5): Definition of chargeable profits adjusted as per the First Schedule.
- Section 2(8): Definition of statutory deduction.
- First Schedule: Rules for computing chargeable profits.
- Second Schedule: Rules for computing the capital of a company for surtax purposes.

2. Rule 1 of the Second Schedule:
Rule 1 specifies that the capital of a company includes paid-up share capital, reserves, debentures, and certain borrowed moneys as of the first day of the previous year relevant to the assessment year. The specific date in question was January 1, 1963.

3. Assessee's Claim:
The assessee claimed that Rs. 90 lakhs transferred to the dividend reserve should be included in the capital computation. The assessing authority excluded this amount, leading to an appeal before the AAC, who found that the reserve qualified for inclusion under Rule 1(iii) of the Second Schedule.

4. Revenue's Contention:
The revenue argued that Rs. 90 lakhs was a provision for dividend payment and not a reserve, as Rs. 76 lakhs was intended for immediate dividend payment. They contended that only Rs. 14 lakhs could be considered a reserve.

5. Tribunal's Decision:
The Tribunal concluded that only Rs. 14 lakhs could be treated as a reserve, modifying the capital computation accordingly.

6. Legal Question:
The core question referred to the court was whether Rs. 76 lakhs appropriated for dividend could be considered a reserve for capital computation as on January 1, 1963.

7. Court's Analysis:
The court examined the facts from the Tribunal's order and the balance-sheet. The directors approved the transfer of Rs. 90 lakhs to the dividend reserve account on May 1, 1963, and recommended a dividend payment of Rs. 76 lakhs on May 3, 1963. The shareholders approved this on May 31, 1963.

The court emphasized the purpose of the C. (P.) S.T. Act to impose a special tax on company profits, allowing certain deductions. The court noted that the reserve had to be considered as on the first day of the previous year, i.e., January 1, 1963.

8. Relevant Case Laws:
- Metal Box Company of India Ltd. v. Their Workmen (1969): Differentiated between a provision and a reserve.
- CIT v. Aryodaya Ginning and Manufacturing Co. Ltd. (1957): Held that reserves sanctioned by shareholders could be considered as reserves from the date of the balance-sheet.
- CIT v. Mysore Electrical Industries Ltd. (1971): Appropriations by directors related back to the beginning of the accounting year.

9. Conclusion:
The court concluded that the Rs. 76 lakhs was intended to meet a liability for dividend payment and was part of an integrated transaction with the creation of the reserve. Thus, it could not be considered a reserve as on January 1, 1963. The Tribunal's decision was upheld.

10. Final Judgment:
The question was answered in the negative, in favor of the revenue. Each party was to bear its own costs.

11. Concurring Opinion:
The concurring opinion agreed with the judgment.

Summary:
The High Court held that Rs. 76 lakhs appropriated for dividend could not be considered a reserve for the computation of capital as on January 1, 1963, under Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The court emphasized the purpose of the Act and relevant case laws to conclude that the amount was intended to meet a liability and was part of an integrated transaction, thus not qualifying as a reserve. The Tribunal's decision was affirmed, and the judgment was in favor of the revenue.

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