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TMI Blog1981 (11) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the benefit of deduction of proposed dividend from its cost of investments in terms of clause (ii) of rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ? " Therefore, the question before us is whether, in the computation of capital, it is proper to deduct the proposed dividend from its cost of investments in terms of cl. (ii) of r. 2 of the Second Schedule to the C. (P.) S.T. Act, 1964. In order to appreciate the controversy it would be necessary to refer to certain facts. The assessee is M/s. Duncan Brothers & Co. Ltd, and the accounting year of the assessee ended on 31st December, 1964, corresponding to the assessment year 1965-66. In the proceeding for assessment of surtax, the appropriate tax officer held that for the purpose of computation of capital the proposed dividend could not be treated as reserve or surplus. It would be appropriate to set out the relevant portion of the order of the ITO. In the order he computed the surtax as follows: Surtax assessment is computed as below : Rs. Total income assessed 48,86,730 Rs. Less : Donations 11,586 Dividend from Indian companies 4,34,604 Rebate on export profit 8,364 4,54,554 ------ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tta, it has been held that provision for taxation and the proposed dividend are not reserves and could not be deducted in computing the capital treating the amounts as reserves. However, now in the same order it has been held that proposed dividend is surplus and the surplus has to be deducted from investment in working out the capital. " Being aggrieved by the said order the Revenue went up in appeal before the Income-tax Tribunal and the Tribunal, after noting the rival contentions and the relevant sections, observed, inter alia, as follows : " Thus, our conclusion is that the amount standing to the credit of proposed dividend cannot be treated as reserve or fund or surplus and thus, it cannot be taken into account for the purpose of calculating the capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964. The amount standing to the credit of proposed dividend cannot be available for the purpose of capital or assets of the company. " Therefore, the question as indicated before has been referred and we have reframed the question that brings out the real controversy. Therefore, the short question is, whether the proposed dividend could be considered to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ictionary but it seems to us that the dictionary meaning, though useful in itself, may not be sufficient, for, the dictionaries do not make any distinction between the two concepts 'reserve' and ' provision ' while giving their primary meaning whereas in the context of the legislation with which we are concerned in the case, a clear distinction between the two is implied. According to the Dictionaries (both Oxford and Webster) the applicable primary meaning of the word 'reserve' is : ' to keep for future use or enjoyment ; to set apart for some purpose or end in view; to keep in store for future or special use ; to keep in reserve while 'provision' according to Webster means., 'something provided for future'. In other words, according to the dictionary meanings, both the words are more or less synonymous and connote the same idea. Since the rules for computation of capital contained in the Second Schedule to the Act proceed on the basis of the formula of capital plus reserves-a formula well known in commercial accountancy, it becomes essential to know the exact connotation of the two concepts 'reserve' and 'provision' and the distinction between the two as known in commercial accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich such retention or appropriation has been made because the substance of the matter is to be regarded and in this context the primary dictionary meaning of the term 'reserve' may have to be availed of. Bat it is clear beyond doubt that if any retention or appropriation of a sum is not a provision, that is to say, if it is not designated to meet depreciation, renewals or diminution in value of assets or any known liability, the same is not necessarily reserve. We are emphasising this aspect of the matter because during the hearing almost all counsel for the assessees strenuously contended before us that once it was shown or became clear that the retention or appropriation of a sum out of profits and surpluses was for an unknown liability or for a liability which did not exist on the relevant date it must be regarded as a reserve. The fallacy underlying the contention becomes apparent if the negative and non-exhaustive aspects of the definition Of reserve are borne in mind. Having regard to the type of definitions of the two concepts which are to be found in cl. 7 of Part III the proper approach in our view would be first to ascertain whether the particular retention or appropriati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... follows from the above is that in the instant cases the appropriation of the concerned amounts by the board of directors by way of providing for proposed dividend would not constitute 'provisions', for, the appropriations cannot be said to be by way of providing for any known or existing liability, none having arisen on the date when the directors made the recommendation, much less on the relevant date being the first day of the previous year relevant to the assessment year in question. Bat, as stated earlier, this by itself would not automatically convert the appropriations into 'reserves', regard being had to the negative and non-exhaustive character of the definition of ' reserve ' given in cl. 7(1)(b) of Pt. III at the Sixth Schedule to the Companies Act. The question whether the concerned amounts in fact constituted ' reserves ', or not will have to be decided by having regard to the true nature and character of the sums so appropriated depending on the surrounding circumstances particularly the intention with which and the purpose for which such appropriations had been made." In coming to its conclusion, after referring to the different submissions, the Supreme Court observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, of the opinion that the amount set apart for the payment of any proposed dividend on the basis of the recommendation of the directors cannot constitute reserve for the purpose of computation of the capital of the company. The view that I have taken, to my mind, appears to be in accord with the view earlier expressed by this court in the decisions to which I have already referred." Therefore, it appears to us that the Supreme Court was of the view that taking the commercial point of view, the proposed dividend, though it had not matured into an agreed liability on the first day of the relevant year, was for all practical Purposes a liability to be incurred and should not be treated as reserve or surplus available to the company in future. If that is the position it cannot be considered to be either reserve or surplus and cannot enter into the computation of capital and it cannot be, for similar reason, as has been pointed out immediately above, a surplus or fund in the hands of the company. This view is also in consonance with the views expressed by this court in the case of CIT v. Bird & Co. (P.) Ltd. [1982] 133 ITR 40 (Cal), and the relevant observations are at page 42. Our ..... X X X X Extracts X X X X X X X X Extracts X X X X
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