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TMI Blog1974 (8) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... nder the I.T. Act, 1961, for any previous year or years, as the case may be, adjusted in accordance with the provisions of the First Schedule. Section 2(8) provides for " statutory deduction ", as an amount equal to ten per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule or an amount of two hundred thousand rupees, whichever is greater. The First Schedule provides for the rules for computing the chargeable profits. The Second Schedule provides rules for computing the capital of a company for the purposes of surtax. Rule 1 of the Second Schedule provides as follows; "1. Subject to the other provisions contained in this Schedule, the capital of a company shall be the aggregate of the amounts, as on the first day of the previous year relevant to the assessment year of (i) its paid-up share capital; (ii) its reserves, if any, created under the proviso (b) to clause (vi-b) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922 (XI of 1922), or under sub-section (3) of section 34 of the Income-tax Act, 1961 (XLIII of 1961); (iii) its other reserves as reduced by the amounts credited to such reserve as have been a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e qualified for inclusion under r. 1(iii) of the Second Schedule of the said Act. He, accordingly, allowed the assessee's contention. There was a further appeal before the Tribunal by the revenue. It was contended that with the transfer of the sum of Rs. 90 lakhs simultaneously to the dividend reserve a sum of Rs. 76 lakhs had been paid as dividends. According, to the revenue, the whole of Rs. 90 lakhs would only be a provision, as it was intended to meet a liability to the shareholders for dividend and, in the alternative, it was urged that the sum of Rs. 14 lakhs could alone be taken as reserve to the exclusion of Rs. 76 lakhs, which was immediately payable as dividend. On behalf of the assessee, the contention urged was that the situation to be considered was as on 1st January, 1963, and as the dividend declared was declared later, the sum of Rs. 76 lakhs could not be treated as a liability on 1st January, 1963. In the premises, it was urged that Rs. 90 lakhs should be treated as a reserve. The Tribunal on the language of r. 1 of the Second Schedule came to the conclusion that only Re. 14,00,000 could be taken to have been transferred to the reserve account. The Tribunal, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a dividend out of the dividend reserve at the rate of 12 1/2% on the ordinary shares on the amounts paid up on these shares prior to 31st December, 1962 the dividend will be paid after deduction of tax at the appropriate rate. " In this report it was stated that the auditors' report presented the company's affairs as on 31st December, 1962, and its profits for the years ended on that date. In the balance-sheet under the heading " Liabilities " as on 31st December, 1962, under the sub-heading " Provisions " there is an item called "Item (c)-Proposed Dividend" which shows the figure to be "nil". The Schedule forming part of the balance-sheet under the head Reserves and Surplus " under item (e) of the Dividend Reserve Account stated that the transfer from the profits and loss account was Rs. 90,00,000. The question, therefore, is whether under the Act this sum of Rs. 90,00,000 or any part thereof can be taken as reserve in computing the capital as on 1st January, 1963. In this connection, it has to be borne in mind that the purpose of the C. (P.) S.T. Act, as the preamble itself stated, was to impose a special tax on the profits of certain companies. Therefore, it was an Act inten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e were made, whereas general reserve and reserve fund were shown as part of the proprietor's interest. An amount set aside out of profits and other surpluses, not designed to meet a liability, contingency, commitment or diminution in the value of assets known to exist at the date of the balance-sheet, was a reserve but an amount set aside out of profits and other surpluses which was provided for a known liability for which the amount could not be determined with substantial accuracy was a provision. Relying on the aforesaid observation of the Supreme Court, it was contended by the counsel for the assessee that, in this case, Rs. 90,00,000 was not a provision for payment of liability but it was reserve taken out of the profits and as such formed part of the capital of the company as on the first day of the previous year, i.e., on the 1st January, 1963. Counsel submitted that on that date there was no liability known or unknown for payment of any dividend and as such this could not be treated as provision for payment of any liability for the payment of dividend. The position of the passing of the accounts and as to how it should relate back has been explained by a judgment of the Bom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the 8th August, 1963, Rs. 2,56,000, as plant modernisation and rehabilitation reserves and Rs. 1,00,000, as loss repatriation reserve and Rs. 89,557 as development rebate reserve. The question was whether these amounts could be included in computing the capital of the respondent as on the 1st April, 1963, under r. 1 of Sch. II to the C. (P.) S.T. Act, 1964, for the purpose of the statutory deduction for the assessment year 1964-65. The department contended that since the appropriations were made on August 8, 1963, these could not be treated as components of capital as on the 1st day of the previous year, namely, the 1st April, 1963. It was held by the Supreme Court rejecting the contention of the department that the determination of the directors to appropriate the amounts to the three items of reserves on August 8, 1963, had to be related back to April 1, 1963, namely, the beginning of the accounts for the new year, and had to be treated as effective from that day. The three items had to be added to other items for the computation of the capital of the respondent as on the 1st April, 1963, under r. 1 of Sch. II of the present Act. In the instant case, the directors' report, as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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