1. The Tribunal in this case has taken the view that 'general reserve' should not be reduced by the amount of dividend declared while computing the capital under the Surtax Act, 1964, as it cannot be said to relate back to the first day of the accounting year. The question is raised with a view to challenge the correctness of this finding.
2. There is a well-recognised distinction between a reserve and a provision and it is apparent from the judgment of the Supreme court in the case of Metal Box Company of India Ltd., v. Their Workmen : (1969)ILLJ785SC
'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 edition, page 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 (See William Pickles Accountancy, second edition, page 192; Part III, clause 7, Schedule VI to the Companies Act, 1956, which defines provision and reserve).'
3. It is thus clear from the test laid down that whenever there is no known liability on the last day of the year, the question of making provision will not arise. So far as dividend is concerned, the position is quite clear. As pointed out by the Supreme Court in Purshotamdas Thakurdas v. Commissioner of Income-tax : 48ITR206(SC) , a shareholder's right to dividend arises upon its declaration. It is thus clear that before dividend is declared at the annual general meeting by the shareholders there is not even a contingent liability and there is no question of liability arising which can be antedated or related back to the last day of the closing year. The liability for payment of dividend will only arise if the shareholders at an annual general meeting pass a resulting declaring such dividend and the liability is only prospective and will not relate back to any other date.
4. Reliance was placed by Mr. Joshi upon the decision of the Supreme Court in Commissioner of Income-tax v. Mysore Electrical Industries Ltd., : 80ITR566(SC) . This was a case where the question of dividend reserve as such did not arise but the question was considered in relation to the amount set apart for plant modernisation and rehabilitation reserve, loss repatriation reserve and development rebate reserve. In respect of these specific types of reserves the Supreme Court took the view that the determination of the directors to appropriate the amounts to the three items were reserve on August 8, 1963, had to be related to April 1, 1963, viz., the beginning of the accounts for the new year, and had to be treated as effective from that day. Such a thing does not arise at all in this case, because there was no question of known or anticipated liability whatsoever. The decision, therefore, does not assist us in determining the question with which we are concerned.
5. Reliance was also placed by Mr. Joshi upon the decision of this High Court in the case of Commissioner of Income-tax v. Aryodaya Ginning and ., : 31ITR145(Bom) . In this case a limited company made up its account at the end of December every year. For the year ending December 31, 1948, the directors made certain appropriations of the profits of that year and the profits brought forward from the previous year, and allocated certain amounts to the reserve fund and the dividend reserve fund. At a general meeting held on June 27, 1949, the shareholders of the company accepted the recommendations of the directors and passed the balance-sheet. In the assessment of the company to business profits tax for the chargeable accounting period January 1, 1949, to March 31, 1949, under the Business Profits Tax Act, 1947, the company claimed that the amounts allocated to the reserve fund and the dividend reserve fund should be taken into account in computing its capital for the purpose of abatement, inasmuch as these reserves appeared in the balance-sheet as of December 31, 1948, The income-tax authorities contended that, as the reserves were not sanctioned by the shareholders till June 27, 1949, they could not be treated as reserves for the chargeable accounting period of January 1, 1949, to March 31, 1949, The Division Bench of this court took the view that, as the shareholders had by their resolution of June 27, 1949, decided not only that these amounts should constitute reserves but also that these amounts should constitute reserves of the company as of December 31, 1948, and the profits out of which these amounts were reserved were profits made by the company before January 1, 1949, and the reserves were in existence on that date and could have been utilised for the working of the company as much as the capital, during the chargeable accounting period in question, the amounts transferred to the reserve funds must be taken into account in computing the capital for the purpose of allowing abatement under the Act for the relevant accounting period (i.e., from January 1, 1949, to March 31, 1949), This decision of this High Court cannot be attracted for application to the facts of the present case, because in the present case no amount whatsoever has been set apart even for dividend reserve. Actually, except for a bare recommendation in the director's report for declaration of dividend, no amount is set apart for payment of the said amount. In such a case, if and when the shareholders decide at an annual general meeting to declare dividend, the dividend shall have to be paid out of the general reserves. The liability to pay the dividend will arise only from and after the date of the resolution of the shareholders at the general meeting and it will be payable only from such date as may be specified in the resolution. When dividend is payable out of general reserves if declared by the shareholders at a general meeting, there is no question of making any provision for a known or anticipated liability and it is not possible for us to take the view that the amount to be paid pursuant to the resolution of the directors to declare a dividend should be treated as a provision or should be deducted from the amount of general reserve for the purpose of determining the capital under the Surtax Act, 1964. As the liability will arise prospectively, it can never relate back to the first day of the accounting year. Thus, in our opinion, the Tribunal was right in taking the view that the amount of dividend declared at a future date when the general meeting was held ought not to be deducted from the general reserves for the purposes of computing the capital under the Surtax Act, 1964.
6. In the result, the rule is discharged with costs.