1976 (7) TMI 39 - HC - Income Tax

Summary

Issues involved: Computation of capital for surtax for assessment years 1970-71 and 1971-72 based on dividends paid out of general reserve.

For assessment year 1970-71: The balance-sheet as on May 31, 1968, showed a general reserve balance of Rs. 4,81,501, with Rs. 2,44,000 transferred to the general reserve from profits. Directors recommended Rs. 2,10,000 as final dividend to be paid out of the general reserve. The question was whether this Rs. 2,10,000 should be included in the company's capital for surtax computation.

For assessment year 1971-72: The balance-sheet as on November 30, 1969, showed a general reserve balance of Rs. 5,15,501, with Rs. 5,78,000 transferred to the general reserve from profits. Directors recommended Rs. 2,25,000 as final dividend to be paid out of the general reserve. The issue was whether this Rs. 2,25,000 should be considered in the capital computation for surtax.

The court held that unless directors expressly state that past reserves are to be used for dividends, current income should be used for expenses and disbursements. Following this principle, the Rs. 2,10,000 and Rs. 2,25,000 dividends recommended by the directors could not be included in the capital computation for surtax. The decision favored the revenue.