TMI Blog1981 (9) TMI 105X X X X Extracts X X X X X X X X Extracts X X X X ..... ovision was made and were not in respect of anticipated liabilities which might arise in future and, therefore, the court held that the said provision was not reserve but a provision In the context of the question whether while incurring any expenditure or making any disbursement a commercial concern will resort to current income or past savings, the normal rule, in the absence of express indication to the contrary, would be to resort to the current income rather than past savings. In our view, therefore, the Tribunal was right in excluding the sum of ₹ 3,10,450 from the general reserves while computing the capital of the assessee-company for the assessment year 1974-75 in the absence of express indication to the contrary. Civil Appeal is partly allowed and the issue whether the appropriation for retirement gratuity is a reserve or not is remanded to the taxing authority and the rest of the appeal is dismissed. - - - - - Dated:- 25-9-1981 - Judge(s) : E. S. VENKATARAMAIAH., AMARENDRA NATH SEN., V. D. TULZAPURKAR JUDGMENT [The judgment of TULZAPURKAR and VENKATARAMIAH JJ. was delivered by TULZAPURKAR J. A. N. SEN J. delivered a separate judgment.] TULZAPURKAR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l computation of the assessee-company and on that basis he determined the capital, and the standard deduction and levied super profits tax on that portion of the chargeable profits of the previous year which exceeded the standard deduction. In the appeal preferred by the assessee-company against the assessment, the AAC upheld the assessee's contentions and held that those items were reserves and took them into account while computing the capital of the assessee-company. In the further appeal preferred by the Super Tax Officer, the Income-tax Appellate Tribunal accepted the department's contention and held that these were not reserves within the meaning of r. 1 of the Second Schedule to the Act and as such these could not enter into the capital computation of the assessee-company. In the reference that was made under section 256(1) of the I.T. Act, 1961, read with s. 19 of the Super Profits Tax Act at the instance of the assessee-company, the following question of law was referred to the Andhra Pradesh High Court for its opinion : Whether, on the facts and in the circumstances of the case, the provisions, (a) for taxation ₹ 33,68,360, (b) for retirement gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration before the taxing authorities and the Income-tax Appellate Tribunal. It was not a case of proposed dividend but the assessee-company after transferring ₹ 29,77,000 out of the current year's profit amounting to ₹ 61,03,382 to general reserves, paid out of ₹ 3,10,450 as dividend to its shareholders from such augmented general reserves and the question was whether while computing the capital of the assessee-company for the purpose of levy of surtax the general reserves should or should not be reduced by the aforesaid sum of ₹ 3,10,450. In other words, the question was whether the amount of ₹ 3,10,450 could not form part of the general reserves on the relevant date (being January 1, 1973) for the computation of the capital ? The taxing authorities as well as the Appellate Tribunal, Bombay, held that the said amount of ₹ 3,10,450 had to be ignored for the purpose of computation of capital for surtax purpose because it was not a reserve. The assessee-company has challenged this view of the Tribunal before us in this direct reference made to this court under s. 257 of the I.T. Act, 1961 read with s. 18 of the C. (P.) S. T. Act, 1964. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther for taxation or for retirement gratuity or for proposed dividend in the concerned assessee's case had been allowed in computing the assessee's profits under the 1961 Act has not been disputed; in other words, the second condition indicated above has been satisfied. The question is whether any of these items could be treated as or falls within the expression other reserves occurring in the said rule. The expression reserve has not been defined in the Act and, therefore, one would be inclined to resort to its ordinary natural meaning as given in the dictionary 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 meanings 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: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt against gross receipts in the P. L. account and the balance-sheet. On the other hand, reserves are appropriations of profits, the assets by which they are represented being retained to form part of the capital employed in the business. Provisions are usually shown in the balance-sheet by way of deductions from the assets in respect of which they are made whereas general reserves and reserve funds are shown as part of the proprietor's interest. (See Spicer and Pegler's Book keeping and Accounts, 15th Edn. p. 42) . In other words the broad distinction between the two is that whereas a provision is a charge against the profits to be taken into account against gross receipts in the P. L. account, a reserve is an appropriation of profits, the asset or assets by which it is represented being retained to form part of the capital employed in the business. Bearing in mind the aforesaid broad distinction we will briefly indicate how the two concepts are defined and dealt with by the Companies Act, 1956. Under s. 210 of the Companies Act, 1956, it is incumbent upon the board of directors of every company to lay before the annual general meeting of its shareholders, (a) t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of expenditure contracted for and all disputed or contingent liabilities. (2) Where (a) any amount written off or retained by way of providing for depreciation renewals or diminution in value of assets, not being an amount written off in relation to fixed assets before the commencement of this Act; or (b) any amount retained by way of providing for any known liability ; is in excess of the amount which in the opinion of the directors, is reasonably necessary for the purpose, the excess shall be treated for the purposes of this Schedule as a 'reserve' and not a 'provision'. On a plain reading of cl. 7(i)(a) and (b) and cl. 7(2) above it will appear clear that though the term provision , is defined positively by specifying what it means the definition of reserve is negative in form and not exhaustive in the sense that it only specifies certain amounts which are not to be included in the term reserve . In other words the effect of reading the two definitions together is that if any retention or appropriation of a sum falls within the definition of provision it can never be reserve but it does not follow that if the retention or appro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation, which arises in Civil Appeal No. 860/1973 (Vazir Sultan Tobacco Company), Civil Appeal No. 1614 (NT)/1978 (Ballarpur Industries Ltd.), Review Petition No. 57/1980 (M/s. Bengal Paper Mills Co. Ltd.) and Tax Reference Cases Nos. 2 3/1977 (M/s. Echjay Industries Pvt. Ltd.)-the common question is whether the concerned amounts appropriated or set apart by these assessee-companies from out of the profits and other surpluses by way of making provision for taxation constitute a provision or reserve on the relevant date, being the first day of the previous year relevant to the assessment year in question? Taking Vazir Sultan Tobacco Company's case as an illustration, for the assessment year 1963-64, the relevant accounting period was the year which ended on September 30, 1962 ; under r. 1 of the Second Schedule to the S.P.T. Act, the first day of the previous year would be October 1, 1961, and, therefore, the balancesheet of that company as on September 30, 1961, and the profit and loss account which ended on September 30, 1961, would be relevant it cannot be disputed that on the expiry of September 30, 1961, the assessee-company incurred the taxation liability in respect of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all the ingredients of a debt were present and it was a present liability of an ascertainable amount and that, therefore, the amount of provision for payment of income-tax and super-tax in respect of the year of account ending March 31, 1957, was a debt owed within the meaning of s. 2(m) on the valuation date, namely, March 1, 1957, and was as such deductible in computing the net wealth. The ratio of this decision clearly suggests that the appropriation of the amounts set apart by the assessee-companies before us for taxation would constitute a provision made by them to meet a known and existing liability and as such the concerned amounts would not be includible in the capital computation. Counsel for the assessee-company in Vazir Sultan Tobacco Company's case, however, attempted to raise a further plea that the provision for taxation in the sum of ₹ 33,68,360 was an excess provision in the sense it was in excess of the amount which was reasonably necessary for the purpose of taxation and, therefore, the excess should be treated as a reserve and not a provision and in this behalf reliance was placed on cl. 7(2) of Pt. III of Sch. VI and three decisions of the M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rve and included in capital computation. On the other hand, counsel for the revenue seriously disputed the last submission and contended that it was never the case of the assessee-company either before the taxing authorities or before the Tribunal or before the High Court that the appropriation was of an ad hoc sum without undertaking any actuarial valuation. It must be observed that whereas the assessee-company did urge a contention before the lower authorities that different treatments for the same item could not be given for purposes of income-tax assessment and super profits tax assessment, the assessee-company did not clarify by placing material on record as to whether the appropriation of the amount was based on any actuarial valuation or whether it was an appropriation of an ad hoc amount,-an aspect which, as we shall presently point out, has a vital bearing on the question whether the appropriation could be treated as a provision or a reserve. In the absence of proper material touching this vital aspect, we are afraid, the issue in question will have to be remanded to the taxing authorities through the Tribunal for disposal in the light of the well settled principles in tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual time. The compensation so paid was an amount equivalent to one month's salary at the rate in force at the date of determination for every year of service. In the computation of taxable income under the I.T. Act, 1918, the company claimed to be entitled to charge against each year's receipts the cost of making provision for the retirement payments which would ultimately be thrown on it, calculating the sum required to be paid to each employee if he retired without forfeiture at the close of the year and setting aside the aggregate of what was required in so far as the year had contributed to the aggregate. The House of Lords rejected the deductions on the ground that in calculating the deductions the company had ignored the factor of discount. But, their Lordships recognised the principle that the company was entitled to charge, against each year's receipts, the cost of making the provision for the retirement payments which would ultimately be payable as the company had the benefit of the employee's services during that year Provided the Present value of the future Payments could be fairly estimated. Lord MacDermott observed at p. 345 (32 ITR) as follows : . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the available surplus and the allocable surplus for the payment of bonus to them under the Payment of Bonus Act, 1965. The court rejected the contention and adverting to the decision of the House of Lords in the case of Southern Rly. of Peru Ltd. [1957] 32 ITR 737, held that an estimated liability under gratuity schemes even if it amounted to a contingent liability and was not a debt under the W.T. Act, if properly ascertainable and its present value was fairly discounted, was deductible from the gross receipts while preparing the P L account. The material portion of the headnote appearing at p. 54 of the report (of 73 ITR) runs thus : Contingent liabilities discounted and valued as necessary, can be taken into account as trading expenses if they are sufficiently certain to be capable of valuation and if profits cannot be properly estimated without taking them into consideration. An estimated liability under a scheme of gratuity, if properly ascertainable and its present value is discounted, is deductible from the gross receipts while preparing the profit and loss account. This is recognised in trade circles and there is nothing in the Bonus Act which prohibits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. Ltd. v. Management of Jacks Co. Ltd., Madras [1971] (Supp.) SCR 540; AIR 1971 SC 1821 ; 39 FJR 399, another decision under the Payment of Bonus Act, 1965, this court, after referring to the distinction pointed out in Metal Box Co.'s case [1969] 73 ITR 53 (SC) between the two concepts provision and reserve , has observed on p. 547 as follows: The provision for gratuity, furlough, salary, passage, service and commission in the present case was all made in respect of existing and known liabilities, though, in some cases, the amount could not be ascertained with accuracy. It was not a case where it was an anticipated loss or anticipated expenditure which would arise in future. Such provision is therefore, not a reserve at all and cannot be added back under item 2(c) of the Second Schedule. In the above case also the court was concerned with the question whether a particular provision made for gratuity, furlough, salary, passage, etc., was a reserve or a provision for the purpose of the Second Schedule to the Payment of Bonus Act, 1965. At p. 546 of the report this court has categorically observed that all these items, namely, gratuity, furlough salary, passage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The directors cannot distribute dividends but they can only recommend to the general body of the company the quantum of dividend to be distributed. Under section 217 of the Indian Companies Act, there shall be attached to every balance-sheet laid before a company in general meeting report by its board of directors with respect to, inter alia, the amount, if any, which it recommends to be paid by way of dividend. Till the company in its general body meeting accepts the recommendation and declares the dividend, the report of the directors in that regard is only a recommendation which may be withdrawn or modified, as the case may be. As on the valuation date (under the Wealth-tax Act) nothing further happened than a mere recommendation by the directors as to the amount that might be distributed as dividend, it is not possible to hold that there was any debt owed by the assessee to the shareholders on the valuation date. All that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed in computing the profits of the assessee for the purposes of income-tax. On 28th February, 1946, the board of directors recommended that out of that amount the sum of ₹ 4,92,426 should be distributed as dividend and the balance of ₹ 16,211 was to be carried forward to the next year's account. This recommendation was accepted by the shareholders in their meeting on 3rd April, 1946, and the amount was shortly afterwards distributed as dividend. In computing the capital of the assessee-company on 1st April, 1946, under the Business Profits Tax Act, 1947, the assessee claimed that, the sum of ₹ 5,08,637 and the profit earned by it during the period 1st January, 1946, to 1st April, 1946, should be treated as reserves for the purpose of r. 2(1) of Sch. II. The High Court held that the sum of ₹ 5,08,637 must be treated as a reserve for the purpose of r. 2, but the profit made by the assessees during the period 1st January, 1946, to 1st April, 1946, could not be included in the reserves. On appeal to this court, it was held that the sum of ₹ 5,08,637 as well as the profits earned by the assessee during the period 1st January, 1946, to 1st April, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utomatically become a reserve and that somebody possessing the requisite authority must clearly indicate that a portion thereof has been earmarked or separated from the general mass of profits with a view to constituting it either a general reserve or a specific reserve, (b) the surrounding circumstances should make it apparent that the amount so earmarked or set apart is in fact a reserve to be utilised in future for a specific purpose and on a specific occasion, and (c) a clear conduct on the part of the directors in setting apart a sum from out of the mass of undistributed profits avowedly for the purpose of distribution as dividend in the same year would run counter to any intention of making that amount a reserve. It was because of these aspects obtained in the case that this court took the view that neither the sum of ₹ 5,08,637 nor the profits earned by the assessee during the period 1st January, 1946, to 1st April, 1946, constituted reserve within the meaning of r. 2(1) of the Second Schedule to the Business Profits Tax Act, 1947. Two more decisions of this court, one in First National City Bank v. CIT [1961] 42 ITR 17 and the other in CIT v. Standard Vacuum Oi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter allocation to specific reserves and payment of dividend are entered in the account under the caption `earned surplus', it is intended thereby to designate the fund which is to be utilised for the purpose of the business of the assessee. Such a fund may be regarded according to the Indian practice as 'general reserve'. This court in the first case held that the amount designated as it undivided profits which was available for continuous future use of the business of the bank was a part of the reserve and had to be taken into account while computing the capital under r. 2(1) of Sch. II to the Business Profits Tax Act; similarly, in the second case the court held that the amount which had been allocated to earned surplus which was intended for the purpose of the business of the assessee-company and was used in subsequent years in business, represented reserves within the meaning of r. 2 of Sch. II of the Business Profits Tax Act, 1947. From these two decisions two aspects emerge very clearly. In the first place, the nomenclature accorded to any particular fund which is set apart from out of the profits would not be material or decisive of the matter and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee-companies do not constitute reserves and the concerned amounts so, set apart would have to be ignored or excluded from capital computation. Since we have reached the aforesaid conclusion on first principles and on the basis of the guidelines discussed above it is unnecessary for us to go into or discuss the scope and effect of the Explanation, to r. 1 in the Second Schedule to the C. (P.) S.T. Act, 1964, though it seems to us prima facie that the Explanation, being clarificatory in nature, is declaratory of the existing legal position. Dealing with the last case of Hyco Products Pvt. Ltd., Bombay (Tax Reference Case No. 5 of 1978), where the question pertaining to dividend but in a different form arises for consideration, the admitted facts may briefly be stated. The question relates to the assessment year 1974-75, the relevant previous year being the calendar year 1973 and the material date being January 1, 1973. After the accounts of the calendar year 1972 were finalised the directors transferred out of the profits of ₹ 61,03,382 of that year a sum of ₹ 29,77,000 to the general reserve. With such transfer the general reserve of the assessee-company as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of proposed dividend , the Tribunal erred in holding that the sum of ₹ 3,10,450 representing the dividends paid out from the general reserve was liable to be excluded while computing the capital of the company as on January 1, 1973, for purposes of surtax assessment under the 1964 Act. According to him under s. 205(1) of the Companies Act, 1956, dividend can be paid from out of the current year's profits or profits of any previous financial year or years and there is no presumption in law or in commercial accounting that a dividend has to be paid either from the current year's profits or from the past years' profits. He further urged that once from out of the current year's profits a certain sum is transferred to the general reserve it merges into the latter and the general reserve so augmented becomes a conglomerate fund and if out of such conglomerate fund any sum is recommended or paid out as dividend it will be difficult to say that such payment has come out of a portion of the current year's profits that has been transferred and merged and there is no reason why the principle Last-in, First-out should be invoked, for drawing the inference that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the balance should be held to be includible in the capital computation, particularly because the payment of dividend has been from a conglomerate fund. It is not possible to accept either of these contentions urged by the counsel for the assessee-company. It is true that under s. 205(1) of the Companies Act, 1956, it is open to the directors to recommend and the shareholders to approve payment of dividends either from the current year's profits or from the past years' profits. It is also true that on transfer of a portion of current year's profits to the general reserve the augmented general reserve becomes a conglomerate fund but having regard to the natural course of human conduct of hard-headed men of business and commerce it is not difficult to predicate that the dividends would ordinarily be paid out from the current income rather than from the past savings, unless the directors in their report expressly or specifically state that payment of dividends would be made from the past savings. From the commercial point of view if any amount is required for incurring any expenditure or making any disbursement like distribution of dividends in a current year, then o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some of the questions and have expressed my views on the same in the judgment delivered by me in the said reference, I was wondering whether I should hear these appeals. The members of the Bar, however, represented to me that they had not only no objection to my hearing these appeals but they also wanted me to hear these appeals. They further represented that most of the judges of this court had on some occasion or other considered these questions. They further stated that if I would decline to take up these matters not only the members of the Bar who had come from various parts of the country for these appeals would be seriously inconvenienced, but also the litigant public who had been waiting for, years for the hearing of these matters would be prejudiced. It was further pointed out to me that the judgment which was delivered by me was not under appeal and further it would appear from the judgment which I had earlier delivered in Braithwaite matter ([1978] 111 ITR 729), there was in fact a concession made by the learned counsel appearing on behalf of the assessee that the said case was covered by the decision of the Supreme Court in the case of CIT v. Century Spinning and Manufa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved at pp. 503504 as follows: The term 'reserve' is not defined in the Act and we must resort to the ordinary natural meaning as understood in common parlance. The dictionary meaning of the word 'reserve' is: 1. (a) To keep for future use or enjoyment; to store up for some time or occasion; to refrain from using or enjoying at once. (b) To keep back or hold over to a later time or place or for further treatment. 6. To set apart for some purpose or with some end in view; to keep for some use. II. To retain or preserve for certain purposes (Oxford Dictionary, Vol. VIII, p. 513). In Webster's New International Dictionary, Second Edition, page 2118 'reserve' is defined as follows : 1. To keep in store for future or special use ; to keep in reserve to retain, to keep, as for oneself. 2. To keep back; to retain or hold over to a future time or place. 3. To preserve. The Supreme Court further observed at p. 504: What is the true nature and character of the disputed sum, must be determined with reference to the substance to the matter? The Supreme Court held at pp. 504-505 as follows : ...'A reserve in the sense in whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd. In this case the directors while recommending dividend took no action to set aside any portion of this sum as a reserve or reserves. Indeed, they never applied their mind to this aspect of the matter. The balance-sheet drawn up by the assessee as showing the profits was prepared in accordance with the provisions of the Indian Companies Act. These provisions also support the conclusion as to what is the true nature of a reserve shown in a balancesheet. In the case of CIT v. Standard Vacuum Oil Co. [1966] 59 ITR 685, this court had occasion to consider the decision in the case of CIT v. Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499 (SC). Dealing with the said decision, this court held at pp. 697-98 as follows : The court was dealing in this case with the accounts of an Indian company, the balance-sheet of which was prepared according to the provisions of the Indian Companies Act, 1913. Regulation 99 of the First Schedule, Table A, required that reserves must be set apart before the directors recommended any dividend, but out of the profits of the company no amount was set apart towards reserves before the directors recommended payment of dividend to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of the proprietor's interest (Spicer and Pegler's Book-keeping and Accounts, 15th Edn.,p.42). An amount set aside out of profits and other surpluses, not designed to meet a liability, contingency, commitment or diminution in value of assets known to exist at the date of the balance-sheet is a reserve but an amount set aside out of profits and other surpluses to provide for any known liability of which the amount cannot be determined with substantial accuracy is a provision: (William Pickles Accountancy, 2nd Edn., p.192); Part III, clause 7, Schedule VI to the Companies Act, 1956, which defines provision and reserve. In the case of CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566 (SC), the facts were briefly as follows ; Out of the profits of the company for the accounting period ending March 31, 1963, the directors of the company appropriated the following amounts towards reserves on August 8, 1963: (i) ₹ 2,56,000 as plant modernisation and rehabilitation reserve: (ii) ₹ 89,557 as development rebate reserve. The question was whether these amounts could be included in computing the capital of the respondent as on April 1, 1963, under r. 1 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the directors after the first of April, 1963. There determination to appropriate the sums mentioned to the three separate classes of reserves on the 8th August, 1963, must be related to the 1st of April, 1963, i.e., the beginning of the accounts for the new year and must be treated as effective from that day. Relying on the aforesaid decisions and also many other decisions of the various High Courts which have been considered by my learned brother Tulzapurkar J. in his judgment, the learned counsel for the assessee has argued that the word 'reserve' which has not been defined in the Act, has to be understood in its ordinary meaning as laid down by the Supreme Court in the case of Century Spinning Mills Ltd. [1953] 24 ITR 499. The further argument is that the recommendation for dividend by the directors of the company does not create any kind of liability, immediate or future. It is argued that the obligation to pay the dividend arises only when the shareholders at the annual general meeting of the company decided to accept the recommendation of the directors and pass a resolution for the declaration of dividend. It is submitted that it is open to the directors to withdr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y be set apart for payment of dividend recommended to be paid by the directors cannot constitute reserve within the meaning of the Act. The argument advanced on behalf of the assessee appears to be sound but to my mind the said arguments are not sufficiently convincing to lead the court to the conclusion that the amount set apart for the payment of dividend recommended by the board of directors can constitute reserve within the meaning of the Act for the purpose of computation of the capital of the company. The word reserve has not been defined in the Act. In the absence of any such definition the word has to be understood in its ordinary sense. It is, however, to be remembered that the word reserve in the instant case occurs in a taxing statute specially applicable to companies only. The word reserve should be so construed as to give the said word the meaning in which it is ordinarily understood by persons interested in companies or in dealing with companies. In other words, the word reserve for the purpose of this Act should be understood in the sense in which it is understood in company circles and by persons interested in companies and in dealing wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he board of directors of a company shall lay before the company the balance-sheet of the company and also the profit and loss account. Section 211 further provides that every balance-sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of the section, be in the form set out in Pt. I of Sch. VI, or as near thereto as circumstances admit or in such other form as may, be approved by the Central Govt. either generally or in a particular case. The preparation of a balance-sheet in the prescribed form and laying the same before the shareholders at the annual general meeting are statutory requirements which the company has to observe. Regulation 87 of Table A in Sch. I provides: (1) The board may, before recommending any dividend, set aside out of the profits of the company such sums as it thinks proper as reserve or reserves which shall, at the discretion of the board, be applicable for any purpose to which the profits of the company may be properly applied, including provisions for meeting contingencies or for equalising dividends; and pending such application, may, at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the shareholders accept the said recommendation, and though in law it may be open to the board to modify or withdraw the recommendation with regard to the payment of dividend before the acceptance by the shareholders and it may also be open to the shareholders not to accept the said recommendation in its entirety and to modify the same, yet, for business purposes, when the directors make any recommendation for payment of dividend and set apart any amount for the payment of dividend so recommended, the directors intended to make a provision for the payment of dividend recommended by them and not to create any reserve, as the directors very well know that the recommendation made by them with regard to the payment of dividend is not normally upset by the shareholders and it is generally accepted by the shareholders, as a matter of course. Any amount set apart by the directors for the payment of dividend to the shareholders recommended by them, is understood by persons interested in the company and in dealing with companies to mean a provision for the payment of dividend to the shareholders and is not understood to constitute a reserve. In my opinion, this true nature and character o ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
