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TMI Blog1996 (10) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... ividend of Rs. 2,40,000 should not be taken into account for the purpose of computation of capital for the purpose of allowing relief under section 80J as a debt owed as on January 1, 1971?" The assessee is a private limited company engaged in the business of manufacturing motor cycles, agro-industrial engines and other spare parts for the aforesaid items. While furnishing the return for the assessment year 1972-73, the assessee claimed relief under section 80J of the Income-tax Act as on Rs. 3,49,636 being 6 per cent. of the capital employed of Rs. 58,27,269. The Income-tax Officer, however, computed the capital at Rs. 38,45,962 and restricted the relief to Rs. 2,30,757. In so doing, he has excluded as sum a of Rs. 2,40,000 representing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18, 1971, would relate back to the date January 1, 1971, on which date, the directors recommended and that, therefore, on January 1, 1971, there is a "debt owed" by the assessee to the shareholders to the extent of Rs. 2,40,000, which has got to be excluded, while computing the capital under section 80J of the Act read with rule 19A of the Rules framed under the Act. However, learned counsel appearing for the assessee, relying upon the various decisions, submitted that this line of argument advanced by learned counsel for the Department was repelled by the various High Courts and that therefore, as on January 1, 1971, there is no "debt owed" by the assessee to the shareholders to the extent of Rs. 2,40,000. According to learned counsel fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 80J of the Act. In Kothari Textiles Ltd. v. CWT [1963] 48 ITR 816, this court while considering the provisions of section 2(m) and section 7(2) of the Wealth-tax Act, held that the mere recommendation of the directors that a certain dividend can be paid and appropriation can be made in the balance-sheet on the basis of that recommendation, does not create a liability on the company to pay any dividend. Both the right on the part of the shareholder to receive the dividend and the liability on the part of the company to pay any amount as dividend, arises only on and after the declaration of the dividend by the general body. In Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308, the Supreme Court held thus : "The deduction to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profit and loss appropriation account. The question was whether, for the previous year 1963 relevant to the assessment year 1964-65, the entire amount of Rs. 90 lakhs could be included in the capital computation as a reserve for the purposes of surtax under the Companies (Profits) Surtax Act, 1964. While answering this question, the Supreme Court held that though the general body of the shareholders resolved and appropriated the sum of Rs. 76 lakhs towards dividend from the reserve of Rs. 90 lakhs on May 31, 1963, the appropriation related back to the calendar year 1962 to which it related and, as on January 1, 1963, the sum of Rs. 76 lakhs was a provision and only Rs. 14 lakhs could be treated as a reserve in the computation of capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the date of proposal of dividend by the directors. Though there was a provision for dividend amounting to Rs. 2,40,000 in the balance-sheet of the assessee-company as on December 31, 1970, still, it cannot be treated as a "debt owed" by the assessee to the shareholders as on January 1, 1971, as the general body meeting, in which the declaration of dividend was approved took place subsequent to January 1, 1971. Thus, the provision for dividend crystallised into a debt owed only when the general body meeting approved the declaration of dividend. In fact, the Kerala High Court in CIT v. Transformers and Electricals Ltd. [1995] 213 ITR 397, has taken into consideration the decision of the Supreme Court in Kesoram Industries and Cotton Mills Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X
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