TMI Blog1976 (7) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... 5-66 ? 3. Whether, on the facts and in the circumstances of the case, the sum of Rs. 3,40,000 out of the dividend equalisation reserve of Rs. 13 lakhs as on November 1, 1963, was includible in the computation of capital for surtax purposes as a ' reserve ' for the assessment year 1965,66 ? 4. Whether, on the facts and in the circumstances of the case, the sum of Rs. 9,60,000 out of the dividend equalisation reserve of Rs. 13 lakhs as on November 1, 1963, was includible in the computation of capital for surtax purposes as a ' reserve ' for the assessment year 1965-66 ? " Out of these four questions the first three questions are referred at the instance of the revenue while the last question is referred at the instance of the assessee. So far as the first two questions are concerned, the facts relevant thereto need not be stated is it is conceded before us that in view of the decision of the Supreme Court in the case of Commissioner of Income-tax v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566 (SC) and our decision following the said Supreme Court decision in I. T. Reference No. 52 of 1969 decided on 26th/27th July, 1976 [Commissioner of Income-tax v. Otis Elevator Co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to as " the Act "), the question arose whether these two sums of Rs. 3,40,000 and Rs. 9,60,000 or any one of them was includible in computation of capital for surtax purposes as a reserve for the assessment year 1965-66. It was contended on behalf of the assessee-company before the Income-tax Officer and the Appellate Assistant Commissioner that as for the year ended October 31, 1963, the entire sum of Rs. 13,00,000 was transferred to the dividend equalisation reserve under the provisions of the Act, the entire sum of Rs. 13,00,000 was includible in the computation as on November 1, 1963, under the provisions of the Act irrespective of the fact that out of the said amount, a sum of Rs. 9,60,000 was distributed as dividend after the shareholders approved of the recommendations of the directors at the annual general meeting as regards declaration of dividend. Neither the Income-tax Officer nor the Appellate Assistant Commissioner accepted the contention urged on behalf of the assessee-company. Under their orders the entire sum of Rs. 13,00,000 was not included in the computation of capital as on November 1, 1963, for the assessment year 1965-66. In second appeal befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule II of the Act lays down the rules for computing the capital of a company for the purposes of surtax that under rule 1 the capital of a company shall be the aggregate as on the first day of the previous year relevant to the assessment year of the various amounts enumerated in clauses (i) to (v). He submitted that under clause (iii) of this rule, other reserves as reduced by the amounts credited to such reserves as have been allowed as a deduction in computing the income of the company for the purposes of the Indian Income-tax Act, 1922, or the Income-tax Act, 1961, have to be included and if, therefore, any amount is transferred by way of reserve on the first day of the previous year relevant to the assessment year, then such an amount has to be included in the computation of capital for the purposes of surtax. He submitted that the directors in their report dated June 19, 1964, allocated a sum of Rs. 13,00,000 to be credited to dividend equalisation reserve as forming part of " reserves and surplus " and, therefore, the whole of the amount of Rs. 13,00,000 ought to be included in computation of capital of the assessee-company for the purposes of surtax. He submitted that the me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tem 9 relates to " proposed dividends." He submitted that by the expression " proposed dividend " what is really meant is the extent of the dividend that may be declared by the board of directors prior to the close of the accounting year but payable after the end of that year. He submitted that any dividend recommended by the board of directors in the report for consideration by the shareholders at the annual general meeting cannot be regarded as " proposed dividend ". Such dividend will be regarded as recommended dividend and the expression " proposed dividend " referred to in the form of the balance-sheet will not include such dividend as recommended by the board of directors for consideration of the shareholders at the annual general meeting and accordingly the Explanation to rule 1 of Schedule II of the Act cannot be made applicable to such a case. Mr. Joshi, on behalf of the revenue, on the other hand, urged that neither the sum of Rs. 3,40,000 which was the balance of the dividend equalisation reserve nor the sum of Rs. 9,60,000 which was to be utilised for payment of dividend for the current year after it was approved by the shareholders at the general meeting could be regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder sub-section (3) of section 34 of the Income-tax Act, 1961 (43 of 1961) ; (iii) its other reserves as reduced by the amounts credited to such reserves as have been allowed as a deduction in computing the income of the company for the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or the Income-tax Act, 1961 (43 of 1961) ; ......... Explanation.--For the removal of doubts it is hereby declared that 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 item (5) or item (6) or item (7) under the heading ' RESERVES AND SURPLUS ' or of any item 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, shall not be regarded as a reserve for the purposes of computation of the capital of a company under the provisions of this Schedule. Part I of Schedule VI of the Companies Act, 1956, contains the form of balance-sheet. The items enumerated under the heading " Reserves and surplus " are as under : 1. Capital reserv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a particular dividend. As the sum of Rs. 9,60,000 was utilised for payment of dividend in respect of the profits of the year ended October 31, 1963, in substance only the sum of Rs. 3,40,000 was appropriated to the dividend equalisation reserve which may be utilised in future by the board of directors if the profits in future may not be sufficient for declaration of dividend. So far as the sum of Rs. 3,40,000 is concerned no submission whatsoever is advanced by Mr. Joshi why the said amount ought not to be treated as a part of the reserve to be included in the computation of capital for the purposes of surtax. The expression " reserve " is defined in sub-clause (b) of clause 7(1) of Part III of Schedule VI to the Companies Act as under : " The expression ' reserve ' shall not, subject as aforesaid, include any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability. This is merely a negative definition as not including certain items, but, apart from this, there is no other definition given of the word " reserve " either under the Act or under the Companies Act. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 item (5) or item (6) or item (7) under the heading " reserves and surplus " or of any item 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, shall not be regarded as a reserve for the purposes of computation of the capital of a company under the provisions of this Schedule. Though the sum of Rs. 9,60,000 is to be utilised for payment of dividend for the current year, it is described as forming part of dividend equalisation reserve. It is, in fact, an item of the nature of proposed dividend falling under entry 9 under the heading " Current liabilities and provisions " in the balance-sheet given in Part I of Schedule VI to the Companies Act. In substance, though it is described as forming part of dividend equalisation reserve, it is in the nature of a provision. If any item is of the nature of proposed dividend, then the Explanation will be attracted and it would not be regarde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the books is made on the first day of the previous year relevant to the assessment year, which is of the nature of item 9 (proposed dividend) under the heading " Current liabilities and provisions " in the column relating to " liabilities ", the amount of its capital as computed under rule 1 shall be reduced by the amount which has not been so credited, or, as the case may be, the amount of such shortfall. He submitted that it is for the first time by this provision that an amount set apart for proposed dividend is not included in the computation of capital for the purpose of surtax and as this provision is given retrospective effect only with effect from April 1, 1975, prior thereto any amount set apart even for payment of proposed dividend will be includible in the computation of capital for the purposes of surtax. It is not possible to accept this contention. If upon a plain reading of the language of the Explanation to rule 1 of the Second Schedule 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 proposed dividend, is not to be regarded as reserve for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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