1993 (3) TMI 37 - HC - Income Tax

Summary

Issues:
- Validity of reassessment proceedings under section 8(b) of the Companies (Profits) Surtax Act, 1964
- Reduction of general reserve by interim dividends for assessment years 1974-75 and 1975-76

Analysis:
The judgment pertains to a reference under the Companies (Profits) Surtax Act, 1964, for the assessment years 1971-72, 1974-75, and 1975-76. The first issue revolves around the validity of reassessment proceedings under section 8(b) of the Surtax Act for the assessment year 1971-72. The Tribunal referred two questions to the High Court, primarily focusing on whether Internal Audit Objection constitutes 'information' and the justification of reducing the general reserve by interim dividends. The High Court, in line with the decision of the Supreme Court, ruled in favor of the assessee regarding the Internal Audit Objection, thus negating the need to address the second question.

Moving on to the second issue concerning the reduction of general reserve by interim dividends for the assessment years 1974-75 and 1975-76, the facts highlighted the declaration and subsequent payment of interim dividends after the respective accounting years. The Income-tax Officer proposed reducing the general reserve by these amounts, which the assessee contested, arguing that the dividends were paid from current year's profits, not the general reserve. The Appellate Assistant Commissioner sided with the assessee, citing a Supreme Court decision differentiating between general body meeting dividends and board-declared interim dividends.

However, the Tribunal overturned the Appellate Assistant Commissioner's decision, leading to the High Court's involvement. The High Court analyzed the submissions made by the assessee, emphasizing that interim dividends, regardless of accounting treatment, must be deducted from the general reserve as of the first day of the relevant accounting year. The Court disregarded the manner of dividend declaration and referred to established legal precedents indicating that dividends declared should be subtracted from the general reserve on the first day of the accounting year. Consequently, the High Court ruled in favor of reducing the general reserve by the interim dividends, answering both questions in the affirmative against the assessee.