1976 (7) TMI 26 - HC - Income Tax

Summary

Issues:
1. Inclusion of Rs. 60,000 from dividend equalisation reserve in capital computation for surtax purposes as of November 1, 1964.
2. Inclusion of Rs. 8,00,000 from dividend equalisation reserve in capital computation for surtax purposes as of November 1, 1964.

Analysis:
The High Court of BOMBAY was tasked with determining the inclusion of specific amounts from the dividend equalisation reserve in the computation of capital for surtax purposes as of November 1, 1964. The case revolved around the treatment of Rs. 60,000 and Rs. 8,00,000 from the total reserve of Rs. 8,60,000. The Income-tax Officer initially excluded the entire dividend equalisation reserve from the capital computation, considering it a provision rather than a reserve. However, the Appellate Assistant Commissioner and the Tribunal held that the surplus amount of Rs. 60,000 after deducting the proposed dividend should be treated as a reserve for capital computation. The Tribunal further clarified that the amount reserved for dividends would not constitute capital, but the surplus remaining would. The key question was whether the amounts in question should be considered part of the capital employed by the company on the crucial date of November 1, 1964.

The Court examined the provisions of the Companies (Profits) Surtax Act, 1964, which required the computation of capital employed as of the first day of the previous year. It was noted that Rs. 5,20,000 had been appropriated from profits to the dividend equalisation reserve, intended for dividend payment. The Court referred to a previous decision to establish that this amount would not be included in the surtax computation. The focus shifted to the remaining balance of Rs. 3,40,000 and whether any part of it should be treated as capital employed on November 1, 1964. The argument presented emphasized the utilization of a portion of this sum for current dividend payments, raising the question of whether such usage should affect its classification as capital.

The Court delved into company law provisions regarding dividend declarations, highlighting that dividends could only be paid out of profits and not from the capital of the company. Directors could recommend dividends, but shareholders had the ultimate authority to approve and distribute them. The liability to pay dividends only arose upon shareholder approval, not retroactively to the crucial date for capital computation. Ultimately, the Court determined that the entire sum of Rs. 3,40,000 from the dividend equalisation reserve constituted part of the capital for business purposes as of November 1, 1964, as it met the definition of capital under the Surtax Act. The Court's decision clarified that the surplus amount should be considered capital, while the specific amount earmarked for dividends should not be included in the capital computation.

In conclusion, the High Court of BOMBAY ruled that Rs. 3,40,000 from the dividend equalisation reserve was includible in the capital computation for surtax purposes as a reserve on November 1, 1964. However, the amount of Rs. 5,20,000 transferred to the reserve during the year was not to be considered in the capital computation for surtax purposes on the same date. Each party was directed to bear its own costs in the matter.