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Issues:
1. Treatment of dividend equalisation reserve for computing the capital base. 2. Treatment of general reserves in the capital base computation. 3. Appropriation of proposed dividend to general reserve for the year 1972-73. Analysis: 1. The first issue pertains to the treatment of the dividend equalisation reserve in computing the capital base for sur-tax liability. The appellant, M/s. Rayala Corporation Ltd., contested the inclusion of the reserve by the Income Tax Officer (ITO) under section 6(2) of the Companies (Profits) Sur-tax Act, 1964. The ITO argued that the reserve was a provision for a future liability and should not be included. However, the appellant relied on precedents from the Bombay High Court, which held that such reserves should be considered as part of the capital base. The Appellate Tribunal agreed with the appellant, emphasizing that the reserve was validly appropriated and should be included in the capital base. 2. The second issue concerns the treatment of general reserves in the capital base computation. The general reserve amount had discrepancies due to pending disputes and lack of approval for appropriations after a certain date. The Appellate Tribunal found that the additional grounds raised by the appellant regarding the general reserves were valid and should have been considered by the ITO. The matter was remitted back to the ITO for further examination, especially regarding the approval of appropriations by the general body. 3. The final issue relates to the proposed dividend appropriation to the general reserve for the year 1972-73. The appellant argued that the Managing Director's appropriation was valid in the absence of general body meetings due to a court stay. However, the validity of the appropriation was in question, and the matter was sent back to the ITO for review. The Tribunal highlighted that the ITO would need to determine the validity of the appropriation and decide whether the provision for proposed dividend should be treated as a reserve based on legal considerations. In conclusion, the Appellate Tribunal allowed all the appeals, directing the ITO to reconsider the inclusion of reserves in the capital base and the validity of dividend appropriations in accordance with the law. The judgment emphasized the importance of following legal procedures and approvals in determining the company's sur-tax liability.
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