TMI Blog1998 (9) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... t year 1970-71, the assessee had filed a return on December 9, 1970, for the accounting period from April 1, 1969, to March 31, 1970, showing the chargeable profit of Rs. 34,33,577. The Surtax Officer issued notice under section 6(1) of the said Act. In those proceedings, the assessee, by its letter dated January 19, 1971, intimated the Surtax Officer that it had no objection if the reserve for additional depreciation and rehabilitation and development rebate reserve were not considered as reserve in the computation of capital. In the order passed on August 28, 1974, the Surtax Officer, taking the figure of general reserve of Rs. 1,61,83,570 as on April 1, 1969, deducted the reserve for additional depreciation, rehabilitation and reserve for gratuity. No deduction was, however, made by the Surtax Officer in respect of the proposed dividend for 1968-69 which was shown to have been deducted in the accounting year 1969-70 on page 20 of the balance-sheet of the year ending March 31, 1969, being a sum of Rs. 29,25,000. That balance-sheet, which is a part of the record, shows that certain sums were transferred from tax exempt profit reserve, statutory development rebate reserve and profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and provisions" in the statutory form of the balance-sheet. It was held that the amount proposed as dividend was for a known liability for which there could be no two opinions and, therefore, non-deduction of the proposed dividend from the general reserve was a mistake apparent from the record. It was held that the board of directors recommends dividend subject to the approval by the shareholders in the annual general meeting and when the share holders give such approval at a later date, the liability becomes due as on the first day of the accounting year. Therefore, the objection of the assessee that there was no liability on the first day of the accounting year was incorrect. It was held that the recommendation of the directors for distribution of the dividend when approved at the annual general meeting of the shareholders related back to the first day of the accounting year on the ratio of the decision of the Supreme Court in Mysore Electrical Industries Ltd.'s case [1971] 80 ITR 566. The Surtax Officer, therefore, rectified the mistake by deducting the amount of proposed dividend from the general reserve. It will be noted that the amount of proposed dividend to be deducted f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing chargeable profits of rupees nil in respect of the accounting period from April 1, 1971, to March 31, 1972, The figure of general reserve for the said accounting year as on April 1, 1971, was admittedly Rs. 2,74,00,912 as per the balance-sheet for the accounting year 1971-72 which is on record. In the said balance-sheet, admittedly, dividend amount of Rs. 39 lakhs was deducted from the general reserve as on April 1, 1971. However, in the assessment order dated September 24, 1975, the Surtax Officer, while deducting certain amounts which were not treated as reserve, omitted to deduct from the general reserve as on April 1, 1971, the amount of dividend of Rs. 39 lakhs which was proposed for the year 1970-71 and paid in the year 1971-72. The Surtax Officer, noticing the mistake of not deducting the proposed dividend from the amount of general reserve as it stood as on April 1, 1971, issued a notice under section 13 of the Act to the assessee for showing cause as to why the general reserve should not be reduced to the extent of Rs. 40,04,000 on the first day of the accounting year before its inclusion in the computation of capital base. Contentions similar to those which were canva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt in Volkart Brothers' case [1971] 82 ITR 50 in support of his contentions. The contention raised for the Department was that, in the assessee's own case for the assessment years 1965-66, 1966-67 and 1967-68, the Income-tax Tribunal had, following !he decision of the Gujarat High Court in Karamchand Premchand Pvt. Ltd., held that the proposed dividend could not form part of reserves. It was contended that rule 1 of the Second Schedule to the said Act specifically provided that such proposed dividend should not be treated as a reserve. It was contended on behalf of the Department that the decision in Karamchand Premchand's case, was given by the High Court on December 13, 1976, while the STO had passed his orders under section 13 on April 7, 1977, and that such rectification orders could be passed in keeping with the decision of the jurisdictional High Court. The Department had also relied upon the decisions of this court in Parshuram Pottery Works Co. Ltd. v. D. R. Trivedi, WTO [1975] 100 ITR 651 and Padmavati Jaykrishna v. CWT [1976] 105 ITR 115 in support of these contentions. Learned counsel for the assessee had in reply urged that the matter appeared to be debatable in spit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to contend that at the time when the original orders of assessment under the said Act were made in respect of these two years, the point was highly debatable and the subsequent decision of this court which settled the point was not available at the stage when the original assessment orders were made. After such detailed arguments on this point, learned counsel submitted that he would not pursue the question as to whether the point was debatable and that he would confine his challenge to the following two contentions : (1) That the Tribunal had fallen into an error in upholding the jurisdiction of the STO in spite of the fact that there was no mistake in the assessment order dated August 28, 1974, for the assessment year 1970-71 and dated September 24, 1975, for the assessment year 1972-73. (2) In absence of any mistake which is a prerequisite condition for initiating proceedings under section 13 of the said Act, the rectification orders for both the years were not followed in law. Elaborating these contentions, learned counsel submitted that for the assessment year 1970-71 the relevant previous year would be 1969-70 covering the accounting period from April 1, 1969, to Marc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccounting year 1971-72 was payable only from the profits standing at the end of the said accounting year, i.e., as on March 31, 1972, and if profits are transferred to the general reserve, then from such general reserve as on April 1, 1972, and the said amount of Rs. 40,04,000 could not have been deducted from the general reserve as on the first day of the previous year, i.e., as on April 1, 1971. He pointed out from page 20 of the balance-sheet in respect of the accounting year 1971-72 that the dividend which was proposed for the year ending March 31, 1971, was Rs. 39 lakhs which was relatable to the first day of the previous year, i.e., April 1, 1971, and not the sum of Rs. 40,04,000 which was relatable only to April 1, 1972. It was, therefore, contended that in the original assessment order, the STO did not commit any mistake when he did not deduct any proposed dividend from the general reserve as on April 1, 1971. It was submitted that thus, in the rectification order a wrong basis has been adopted by making deduction of the proposed dividend of Rs. 16,38,000 as on April 1, 1969, being the first day of the previous year of 1969-70 and similarly a wrong basis even for the accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t there was no mistake in the original orders made by the STO-in which he had omitted to make any deduction of the proposed dividends from the general reserves as on the first day of the relevant previous year in respect of these two years. We may at the outset again emphasise that the controversy before the Tribunal which was raised by both the sides was entirely on the question as to whether the dividend proposed should form part of general reserve and that even if it did not, since that question was debatable at the relevant time when the assessment orders were made, it could not be said that there was a mistake committed by the STO which required to be rectified under section 13 of the said Act. The new dimension which is now given to the matter on behalf of the assessee in the midst of the hearing of this reference for the first time focuses on the erroneous figures taken by way of proposed dividend in the rectification orders for the purpose of making deductions from the general reserves standing on the first day of the relevant previous years. On the basis of these erroneous figures, it was argued that it should have been held that there was no mistake in the assessment or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en given a reasonable opportunity of showing cause against such enhancement: A person who is aggrieved by an order of the Appellate Assistant Commissioner made under section 11 or by an order made by the Commissioner in exercise of his revisional jurisdiction under section 16 of the Act can appeal to the Appellate Tribunal as provided by section 12 of the said Act. Under sub-section (2) of section 12, even the Commissioner, if he objects to any order passed by the Appellate Assistant Commissioner under any provisions of the Act, may direct the Income-tax Officer to appeal to the Appellate Tribunal against such order. As provided by sub-section (7) of section 12, in hearing and making an order on any appeal under the said provision, the Appellate Tribunal is empowered to exercise the same powers and follow the same procedure as it exercises and follows in hearing and making an order in any appeal under the Income-tax Act. Under section 13 of the said Act, there is a provision made for rectification of mistakes and it, inter alia, lays down that, with a view to rectify any mistake apparent from the record, the Commissioner, the Income-tax Officer, the Appellate Assistant Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Schedule VI to the Companies Act, 1956 (1 of 1956), shall not be regarded as a reserve for the purposes of computation of the capital of a company under the provisions of this Schedule." In clause (iii) of rule 1, the "other reserves" would also include general reserve. As per the Explanation to rule 1, any amount standing to the credit of any account in the books of a company as on the first day of the previous year relevant to the assessment year which is of the nature of any item including the one under the heading "Current liabilities and provisions" in the column relating to "liabilities" "in the form of balance-sheet" given in Part I of Schedule VI to the Companies Act, 1956, was not to be regarded as a reserve for the purposes of computation of the capital of a company under the provisions of the said Second Schedule. The form of balance-sheet prescribed in Schedule VI to the Companies Act, 1956, as required by the provisions of section 211 of the Act requires the company to mention its "current liabilities and provisions". Under that heading there is the sub-heading "B. Provisions" below which appears the item of "proposed dividends" at serial No. 9. It is, therefore, cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profits being transferred to general reserve, it was required to be deducted from the general reserve as it stood on the first day of the previous year immediately following the end of the financial year for which the dividend was recommended and was to be paid out of the profits of that year. One thing that clearly stares from the provisions of rule 1 read with the Explanation is that the proposed dividend can never be regarded as reserve. It therefore follows that when a dividend is proposed with a decision of the directors to pay it from the general reserve, then such proposed dividend cannot be regarded as a part of that general reserve as it stands on the first day of the previous year because it ought to have been paid out of the profits as worked out on the day immediately preceding that first day of the previous year. If this legal position is kept in mind and the original assessment orders made by the STO on August 28, 1974, in respect of the assessment year 1970-71 and on September 24, 1975, in respect of the assessment year 1972-73 are examined, it would become at once clear that from the figure of the general reserve of Rs. 1,61,83,570 as it admittedly stood on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd from the general reserve as on April 1, 1969, which he was required to make by virtue of the provisions of rule 1 read with its Explanation of the Second Schedule to the said Act. This omission was clearly a mistake of law and there was no question of any debatable point involved in the face of the clear provisions of the Explanation to rule 1, as noted above. Even as regards the assessment year 1972-73 the relevant accounting period of which was from April 1, 1971, to March 31, 1972, we find from the assessment order that, while taking the general reserve of the company as on April 1, 1971, being the first day of the previous year at Rs. 2,74,00,912, the Assessing Officer did not deduct the dividend proposed for the year ending March 31, 1971, which was payable from the profits as worked out at the end of the accounting year on March 31, 1971, and when the profits were transferred to the general reserve as on April 1, 1971, with a note that the dividend recommended for the year ending March 31, 1971, was required to be paid from the general reserve as and when accepted by the general body. Obviously, in view of the Explanation to rule 1, any proposed dividend which was requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision for a known and existing liability, the quantification whereof has to be done later, and cannot be regarded as a "reserve". It was further held that section 217 of the Companies Act, 1956, and regulation 87 and Table A in Schedule I to that Act, read together, clearly show that creating reserves out of the profits is a stage distinct in point of fact and anterior in point of time to the stage of making a recommendation for the payment of dividend and the scheme of the provisions suggests that an appropriation made by the board of directors by way of recommending a payment of dividend cannot, in the nature of things, be a reserve. Appropriation made by the directors for the proposed dividend does not constitute "reserve" and the concerned amounts so set apart would have to be, ignored or excluded from capital computation. In the said case, where after accounts for the current year 1972 were finalised, the directors transferred out of the profits a certain sum to the general reserve of the company without making any provision for the proposed dividend but recommending a dividend which was declared at the annual general meeting and paid thereafter, it was held that the dividend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xplanation to rule 1 of Schedule II to the said Act, could be rectified by the Tribunal under section 13 of the said Act. It was held that the amounts set apart for proposed dividends, profit-sharing bonus, pension scheme were not "reserves" and could not be included in the computation of the capital of the assessee under the provisions of rule 1 in Schedule II to the said Act. Thus, the fact that the Assessing Officer had rendered his orders of assessment without taking note of the aforesaid Explanation to rule 1 in Schedule II was undoubtedly a ground for rectification of the order under section 13 of the Act since it was a mistake apparent from the record. Even when the decision in Karamchand Premchand's case was rendered by the jurisdictional High Court, it was only a declaration of the law as it already existed. In S. A. L. Narayana Row, CIT v. Model Mills Nagpur Ltd. [1967] 64 ITR 67 (SC), where the levy of additional tax on excess dividend was held to be illegal by the High Court and therefore an application for refund of the additional tax was made, relying on that decision of the High Court but the Income-tax Officer declined to accede to the request on the ground that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scribed under the Companies Act under the heading "Provisions" could never be regarded as a "reserve". Therefore, even on the reading of rule I and Explanation itself, there was no scope for any doubt over the said proposition that the proposed dividend was not to be regarded as a reserve for the purpose of rule 1 while computing the capital of the company on the first day of the previous year. In our view, therefore, the Assessing Officer, by not at all deducting the provisional dividends which were required to be deducted from the general reserve of these two years, completely overlooked the Explanation to rule 1 and thereby committed a mistake apparent from the record which required to be rectified under section 13 of the said Act. In this view of the matter, the Tribunal was justified in holding that the STO was well within his jurisdiction in passing rectification orders under section 13 of the said Act for the assessment years 1970-71 and 1972-73. It will be noted from the record that the only question which was argued before the Tribunal was whether the dividend proposed should form part of the general reserve and hence there was no mistake at all in the record and even if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he proposed dividends which were required to be disbursed from the general reserve as on April 1, 1969, for the assessment 1970-71 and as on April 1, 1971, for the assessment year 1972-73 as was required to be done for working out the capital under rule 1 read with its Explanation contained in the Second Schedule to the said Act and that he committed irregularity in exercise of his jurisdiction by deducting wrong figures of proposed dividends instead of the correct figures. The balance-sheets of the relevant accounting years 1969-70 and 1971-72 admittedly show that the amounts of dividends were deducted from the general reserve. that stood as on the respective first day of the previous year. This was, however, in all probabilities, not done in the return of surtax and that is why the original orders did not reflect any similar deduction from the general reserve as on the first day of the previous year, entirely overlooking the Explanation to rule 1. This was a mistake which was required to be rectified by making the deduction of the proposed dividend from the general reserve as it stood on the first day of the respective previous years. The requirement of section 13, was therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve as it stood on April 1, 1971, instead of Rs. 39 lakhs also, no one had so far disputed the correctness of the amount which was sought to be deducted in the rectification order. The assessee did not even allege that the actual figure was Rs. 39 lakhs and not Rs. 40,04,000 and, even if it wanted to do so, the remedy was to get the figure rectified at an appropriate stage. In principle and on the question of law, our opinion therefore is that the STO was within his jurisdiction to rectify the mistake but he committed an error in favour of the assessee by deducting a lesser amount by way of proposed dividend from the general reserve as on April 1, 1969, and the assessee cannot challenge the same on the ground that some higher amount was liable to be deducted and since that was not done, even the lower amount should not be deducted. The assessee, as noted above, did not challenge the quantum figure of Rs. 40,04,000 on the ground that it was higher than the actual figure of Rs. 39 lakhs which was the dividend proposed for the year ending March 31, 1971. Therefore, since the validity of the rectification orders was not earlier challenged on these grounds of error in the amounts of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
