TMI Blog1991 (1) TMI 455X X X X Extracts X X X X X X X X Extracts X X X X ..... he paid up capital, the reserve, the debentures, etc. under rule 1 of Second Schedule to the Surtax Act, is the calendar year 1963. The assessment year is 1964-65. The position of the capital was to be considered as on the 1st day thereof, i.e., 1-1-1963. The appellant claimed in its assessment a sum of ₹ 90 lakhs transferred to the dividend reserve as a reserve entering into capital computation. The assessing authority excluded this sum from the computation of the capital but on appeal the A AC found it to be a reserve created out of amounts which had not been allowed as deduction for computing the profits of that year. Accordingly, he held that ₹ 90 lakhs was the reserve fund qualified for inclusion under rule 1(III) of the Second Schedule. On appeal by the revenue, the Tribunal held that the assessee had appropriated ₹ 76 lakhs out of the year's profit and transferred the balance of ₹ 14 lakhs to the dividend reserve ; ₹ 76 lakhs was taken as liability as on 1-1-1963 and as the creation of ₹ 90 lakhs was to be taken as reserve on 1-1-1963 only a sum of ₹ 14 lakhs has been transferred to the reserve account. Accordingly, the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art I of Schedule VI to the Companies Act, 1956 (1 of 1956), shall not be regarded as a reserve for the purpose of computation of the capital of a company under the provisions of this Schedule. Section 217 of the Companies Act, 1956, enjoins the company to attach to every balance sheet laid before a company general meeting, a report by its Board of Directors, with respect to - ( a)the state of the company's affairs; (b)the amounts, if any, which it proposes to carry to any reserves in such balance sheet; and (c)the amount, if any, which it recommends should be paid by way of dividend;... Regulation 87 of Table A of the First Schedule empowers the Board to recommend any dividend set aside, out of the profits of the company, such sum as it thinks proper as a reserve or reserves, etc. 4. It is found as a fact that on 1-5-1963 in respect of the accounts for the year 1962 in the Directors' meeting of the assessee-company it approved the transfer of a sum of ₹ 90 lakhs out of the profits for the year to a 'Dividend Reserve Account' 12-1/2 per cent which amounted to ₹ 76 lakhs on the ordinary shares on the amount paid on those shares prior ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ains that it was not done for the obvious reason that the calculation or collection of the figures of all the items of income and expenditure of the company of the previous year ending 31-12-1962 was bound to take some time and it was not done. The fact remains that the shareholders in the general body meeting held on 31-5-1963 resolved to appropriate ₹ 76 lakhs towards dividend payable' to the shareholders and accordingly it was appropriated and paid over. The question, therefore, is whether the amount of ₹ 76 lakhs appropriated relates back as on 1-1-1963. On recommendation by the Board of Directors and acceptance thereof by the general body of the shareholders to pay dividend at a particular percentage, the liability came into existence and by their act of appropriation by adjusting the reserve as against the liability it became crystallised. There is nothing to withhold payment in species to the respective shareholders which is merely a ministerial act. The modus operandi adopted in making the entries or nomenclature chosen to be given are not conclusive but the heart of the matter is the nature and substance of the manner in which the company's accounts are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to form part of capital employed in their business. Provisions were usually shown in the balance sheet by deduction from the asset in respect of which those were made whereas general reserves and reserve fund were shown as part of proprietor's interest. An amount set aside out of profits and other surpluses, not designed to meet a liability, contingency, commitment or diminution in valuation of asset known to exist on the date of the balance sheet was a reserve but an amount set aside out of profits and other surpluses, was provided for known liability for which the amount could not be determined with substantial accuracy was a provision. In CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566, a constitution Bench of this Court held that the determination of the directors to appropriate the accounts to the three items of reserve on 8-8-1963 had to be related to 1-4-1963, i.e., the beginning of the accounts in the new year and had to be treated as effective from that date and the three items had to be added to the other items for computation of the capital of the respondent as on 1-4-1963 under rule 1 of Schedule II. In that case the revenue contended that since the appro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve. 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 clause 7 of Pt. HI the proper approach in our view would be first to ascertain whether the particular retention or appropriation of a sum falls within the expression 'provision' and if it does then clearly the concerned sum will have to be excluded from the computation of capital, but in case the retention or appropriation of the sum is not a provision as defined, the question will have to be decided by reference to the true nature and character of the sum so retained or appropriated having regard to several factors as mentioned above and if the concerned sum is in fact a reserve then it will be taken into account for the computation of capital. (p. 570) 8. This Court in Hyco Products ( P.) Ltd. v. CIT [Reference Case No. 5 of 1978] approved the ratio of the Bombay High Court in Hyco Products (P.) Ltd.'s case (supra). The question therein relates to the assessment year 1974-75. The relevant provision being the calendar year 1963 and t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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