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TMI Blog1984 (2) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the increase was made in the paid up capital for bonus shares issued, should be reduced from general reserves as on the 1 St day of the previous year ? (3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount standing to the credit of the reserves for bad and doubtful debts account was a reserve and not provision, and, hence, includible in the capital computation ? " The facts relevant to the first two questions are as follows The assessment year in question is the assessment year 1968-69, the relevant previous year is the year July 1, 1966, to June 30, 1967. The computation of the capital for the purpose of the Surtax Act, it is common ground, has to be as on July 1, 1966. The relevant balance-sheet is the one as on June 30, 1966. Under rule 1 of the Second Schedule to the Surtax Act, the capital of the company shall be the aggregate of the amounts as on the first day of the previous year of the paid up share capital, development rebate reserves, " other reserves ", debentures and certain borrowed funds. The assessee claimed that the balance of Rs. 37,70,000 in the general reserve account as on July 1, 1966, was inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... become actually bad then it was debited straightaway to the profit and loss account of that year and the reserve account was not touched at all. In view of the aforesaid, the Tribunal agreed with the contention of the assessee that the said account was not in the nature of a " provision " but was only Reserve ". As far as question No. 1 is concerned, it is a well settled position in law that when the directors declare their decision to issue bonus shares no liability is incurred by the company at least till a resolution for the issue of bonus shares is passed at an extraordinary general meeting of the shareholders. The question whether such liability accrues at the time when such a resolution is passed or at the time when such shares are actually issued and allotted is a question with which we are not concerned. But it is well settled that no liability on that account accrues till the resolution as aforesaid is passed by the shareholders of the company. In view of this, it is quite clear that at least till the resolution was passed as aforestated on October 30, 1966, it could not be said that the amount of the general reserves stood reduced by the amount intended to be capitalis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... beginning of the accounts for the new year, and had to be treated as effective from that day was rejected and all the three items were added to the computation of the capital of the respondent as on April 1, 1963. We fail to see how this decision renders any support to the contention of the Department in this case. We may, moreover, point out that as far as the appropriation of certain items towards certain type of reserves by the directors is concerned, there was no question of any liability being thereby created against the company, whereas once there is a declaration of dividend or a resolution is passed by the shareholders for the issue of bonus shares, the situation might be different. Mr. Parekh next relied upon a decision of a Division Bench of the Madras High Court in Rane Brake Linings Ltd. v. CIT [1983] 144 ITR 340. In that case, out of the profits for the year ending on December 31, 1970, the directors of the assessee-company decided to credit a sum of Rs. 13,32,992 to the company's general reserve and also recommended payment of a dividend of Rs. 2,03,250 out of the general reserve. The recommendation of the directors made on May 4, 1971, was approved by the general ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The basis of the judgment seems to be that on the facts of that case, right at the time when the amount of Rs. 13,32,992 was transferred from the profit and loss account to the general reserve, the amount of Rs. 2,03,250 out of the same was earmarked for the payment of the dividend and that amount could be regarded as a provision and deducted out of the general reserve in the computation of capital. The facts, in this case, are altogther different. In the present case, there is nothing to show that the amount of Rs. 37,70,000 was brought into the general reserve from the profits of the year ended June 30, 1966. In fact, the balance-sheet shows that the bulk of this amount was general reserve which had been carried forward. Moreover, there is nothing to show that there was any amount earmarked for payment of bonus shares at the time when any part of the profits of the year ending June 30, 1966 were brought into the general reserve. All that happened was that by June 30, 1966, the directors had recommended the issue of bonus shares. The ratio of the Madras case (Rane Brake Linings Ltd. v. CIT [1983] 144 ITR 340) is, therefore, not applicable to the case before us. In view of what we ..... X X X X Extracts X X X X X X X X Extracts X X X X
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