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TMI Blog1981 (11) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... December 31, 1970, at a rate which worked out to a total commitment of Rs. 2,03,250. They decided to declare and pay the dividend from out of the general reserves. The board's recommendation was on May 4, 1971. The general body met and approved of the dividend on June 16, 1971. The dividend was actually distributed subsequently, but before the close of the year ended December 31, 1971. In the assessment of the assessee to surtax for 1972-73, relevant to the year ended December 31, 1971, the assessee's capital as on January 1, 1971,had to be ascertained. As part of the computation of capital, the general reserves as on that day had to be ascertained. In that connection, the assessee claimed that since the general reserve stood at Rs. 13,32 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of the case, it has been rightly held that a sum of Rs. 2,03,250 was to be deducted from the general reserve for the purpose of arriving at the statutory deduction ?" The answer to this question is to be found in the recent decision of the Supreme Court in Vazir Sultan Tobacco Co. v. CIT [1981] 132 ITR 559. The decision was rendered in a group of cases in which the Supreme Court had to interpret the provisions of Sch. If of this Act as well as similar provisions in an earlier enactment (the Super Profits Tax Act, 1963). One of the cases dealt with by the Supreme Court related to a company called Hyco Products (P.) Ltd. [1981] 132 ITR 559. That company transferred to its general reserves, a sum of Rs. 29,77,000 out of its current year's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efor, the Supreme Court observed that the mere fact that the directors had recommended the distribution of a dividend from out of the reserves would show that the amount representing the proposed dividend was earmarked for distribution as dividend, and not to be retained as part of the general reserves. The Supreme Court's decision aforesaid is based on the principle that a dividend, in essence, involves the release of assets by the company to the shareholders, whereas a reserve has precisely the opposite effect, namely, retention of the assets as capital of the company. The creation of a reserve and the distribution of a dividend pull in different directions. It is in the context of this distinction that the question of intention of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to any extent for the purpose of reflecting a subsequent distribution of dividends from out of the reserve. Learned counsel said that the judgment of the Supreme Court in Vazir Sultan's case [1981] 132 ITR 559, does not show that their attention had been drawn to this new rule. He liked to imagine that if the Supreme Court had known about this rule, they might, not have decided the case in the way they did. According to Mr. Subramaniam, the Supreme Court might have laid down the law differently from r. 1A, in the view that the rule reflected a definite change in the law desired by Parliament. Learned counsel's argument was that the enactment of r. 1A by Parliament is an indication to show that prior to the introduction of that rule, the la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the position in law was any different from what the rule laid down. In one respect, perhaps, the new rule might be regarded, as having laid down rule of thumb. The Supreme Court had held that even though the actual distribution of dividend takes place later, since by that time the board of directors would have already recommended the dividend in question, it will have to reduce the figure of reserves in the balance-sheet for purposes of capital computation. The new r. 1A says nothing about the board's recommendation to declare dividend out of reserves. The rule says nothing about the proposal being made by the directors prior to the first day of the account year. The rule brings the axe down in all cases and reduces the reserve by the amou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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