1992 (1) TMI 100 - SC - Income Tax

Whether the sum of ₹ 90,00,000 or any part thereof would be a reserve for computing the capital as on January 1, 1963? Held that - No hesitation to hold that though the general body of the shareholders resolved and appropriated on May 31, 1963, the dividend of ₹ 76,00,000 from the reserve of ₹ 90,00,000, it related back to the relevant assessment year and, therefore, as on January 1, 1963, ₹ 76,00,000 was a provision and cannot be computed as capital. Only ₹ 14,00,000 would be treated to be a reserve. The Tribunal and the High Court, therefore, have correctly laid down the law and it does not warrant interference. The appeal is, accordingly, dismissed

Issues Involved:
1. Whether the sum of Rs. 76,00,000 paid as dividend for the year 1962 out of the dividend reserve of Rs. 90,00,000 as on January 1, 1963, should be considered in the computation of capital as on January 1, 1963, under the Companies (Profits) Surtax Act, 1964.

Issue-wise Detailed Analysis:

1. Computation of Capital under the Surtax Act:
The core issue was whether the sum of Rs. 76,00,000 paid as dividend should be included in the computation of the capital of the company as on January 1, 1963. The appellant claimed the entire Rs. 90,00,000 transferred to the dividend reserve as part of the capital computation. However, the assessing authority excluded this amount, and the Appellate Assistant Commissioner included it, considering it a reserve fund. The Tribunal later held that Rs. 76,00,000 was a liability and only Rs. 14,00,000 should be treated as a reserve. The High Court upheld the Tribunal's decision.

2. Legal Definitions and Provisions:
Section 4 of the Surtax Act imposes a tax on chargeable profits exceeding the statutory deduction. Section 2(5) defines chargeable profits, and Section 2(8) provides for statutory deductions. The First Schedule outlines the computation of chargeable profits, while the Second Schedule details the computation of capital, including paid-up share capital and reserves. The Explanation to Rule 1 of the Second Schedule clarifies that certain amounts are not considered reserves for capital computation.

3. Company's Financial Actions and Their Timing:
The company transferred Rs. 90,00,000 to the dividend reserve on May 1, 1963, and declared a dividend of Rs. 76,00,000 on May 31, 1963. The balance-sheet as on December 31, 1962, showed no proposed dividend under "Provisions." The crucial date for capital computation was January 1, 1963. The court examined whether the appropriation of Rs. 76,00,000 related back to this date.

4. Nature of Reserve vs. Provision:
The court distinguished between reserves and provisions. A reserve is an amount set aside from profits for future contingencies, while a provision is for known liabilities. The appropriation of Rs. 76,00,000 as dividend was considered a provision, not a reserve, as it was a known liability crystallized by the shareholders' resolution.

5. Judicial Precedents:
The court referred to previous judgments, including Metal Box Co. of India Ltd. v. Their Workmen and CIT v. Mysore Electrical Industries Ltd., to emphasize the distinction between reserves and provisions. The court noted that the appropriation of profits for dividend payment, once recommended and approved, becomes a liability and not a reserve.

6. Conclusion:
The court concluded that the Rs. 76,00,000 appropriated for dividend payment was a provision and not part of the capital as on January 1, 1963. Only the remaining Rs. 14,00,000 was considered a reserve. The Tribunal and the High Court correctly applied the law, and the appeal was dismissed with each party bearing its own costs.

Judgment:
The appeal was dismissed, affirming that Rs. 76,00,000 was a provision and only Rs. 14,00,000 was a reserve for the purpose of capital computation under the Surtax Act.

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