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Commissioner of Income-tax, Bombay City-ii Vs. Geoffrey Manners and Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 154 of 1970
Judge
Reported in[1977]108ITR987(Bom)
ActsIncome Tax Act, 1961 - Sections 2(5) and 2(8), 4 and 34; Companies (Profits) Surtax Act, 1964 - Sections 2(5) - Schedule - Rule 1
AppellantCommissioner of Income-tax, Bombay City-ii
RespondentGeoffrey Manners and Co. Ltd.
Appellant AdvocateR.J. Joshi, Adv.
Respondent AdvocateS.E. Dastur, Adv.
Excerpt:
direct taxation - reserve - sections 2 (5), 2 (8), 4 and 34 of income tax act, 1961 and rule 1 of schedule and section 2 (5) of companies (profits) surtax act, 1964 - certain amount transferred to dividend equalization reserve out of aggregate profits of year - whether amount was includible in computation of capital for surtax as 'reserve' - amount constitutes balance amount in dividend equalization reserve after payment of dividend - it is 'reserve' within meaning of rule 1 and liable to be included in computation of capital for purpose of surtax. - - 13 lakhs was transferred to dividend equalisation reserve out of the aggregate profits of the year ended october 31, 1962. the directors in the report recommended dividend for the year ended october 31, 1963, at rs. as per last.....kantawala, c.j.1. in this reference the following four questions are referred for our determination : '1. whether, on the facts and in the circumstances of the case, the sum of rs. 5,65,000 transferred to general reserve out of the profits of the year ended october 31, 1962, was includible in the computation of capital for surtax purposes as a 'reserve' as on the first day of the 'previous year' november 1, 1962, to october 31, 1963, relevant to the assessment year 1964-65 2. whether, on the facts and in the circumstances of the case, the sum of rs. 2,35,000 transferred to general reserve out of the profits of the year ended october 31, 1963, was includible in the computation of capital for surtax purposes as a 'reserve' as on the first day of the 'previous year' november 1, 1963, to.....
Judgment:

Kantawala, C.J.

1. In this reference the following four questions are referred for our determination :

'1. Whether, on the facts and in the circumstances of the case, the sum of Rs. 5,65,000 transferred to general reserve out of the profits of the year ended October 31, 1962, was includible in the computation of capital for surtax purposes as a 'reserve' as on the first day of the 'previous year' November 1, 1962, to October 31, 1963, relevant to the assessment year 1964-65

2. Whether, on the facts and in the circumstances of the case, the sum of Rs. 2,35,000 transferred to general reserve out of the profits of the year ended October 31, 1963, was includible in the computation of capital for surtax purposes as a 'reserve' as on the first day of the 'previous year' November 1, 1963, to October 31, 1964, relevant to the assessment year 1965-66

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 ?'

2. 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 as it is conceded before us that in view of decision of the Supreme Court in the case of Commissioner of Income-tax v. Mysore Electrical Industries Ltd. : [1971]80ITR566(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. (India) Ltd. : [1977]107ITR241(Bom) ], questions Nos. 1 and 2 should be answered in the affirmative and in favour of the assessee.

Questions Nos. 3 and 4 arise out of the same set of facts relevant for the assessment year 1965-66. In terms of the directors' report dated June 19, 1964, in respect of the account for the year ended October 31, 1963, a sum of Rs. 13 lakhs was transferred to dividend equalisation reserve out of the aggregate profits of the year ended October 31, 1962. The directors in the report recommended dividend for the year ended October 31, 1963, at Rs. 3 per share subject to the deduction of tax on 3,20,000 equity shares of Rs. 10 each absorbing 9,60,000 which dividend, if approved by the shareholders at the forthcoming annual general meeting, would be paid out of the dividend equalisation reserve and no separate provision has been made therefor. In the balance-sheet as on October 31, 1963, which was put before the shareholders for their approval and adoption at the annual general meeting, the relevant entries as regards dividend reserve under the head 'reserves and surplus' are as under :

'RESERVES AND SURPLUS............................Dividend reserves :Rs.As per last balance-sheet 7,20,000Less : Transferred to profits & lossappropriation account 7,20,000----------Add : Set aside from this year's profit ------------Dividend equalisation reserve :Amount set aside from this year's profit(see Note 2) 13,00,000.'

Note 2 appended to the balance-sheet is an under :

'The directors have recommended a dividend of Rs. 9,60,000 (previous year Rs. 7,20,000) subject to deduction of tax, which dividend, if approved by the shareholders at the company's forthcoming annual general meeting, will be paid out of dividend equalisation reserve and no separate provision has been made therefore.'

Question No. 3 relates to the sum of Rs. 3,40,000 which is the balance of the amount of Rs. 13,00,000 being the dividend equalisation reserve after payment of Rs. 9,60,000 recommended by the board of directors which was ultimately approved by the shareholders at the annual general meeting held on July 14, 1964, and paid. When the assessment of the assessee-company came up, under the Companies (Profits) Surtax Act, 1964 (Act No. VII of 1964)(hereinafter 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.

3. 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.

4. In second appeal before the Tribunal it was urged on behalf of the assessee-company that the entire amount of Rs. 13,00,000 was the amount standing to the credit of the dividend equalisation reserve as on the 1st day of the previous year, i.e., as on November 1, 1963, and it ought to have been treated as a reserve and included in the computation of capital for surtax purposes for the assessment year 1965-66. The Tribunal partially accepted the contention on behalf of the assessee. The Tribunal took the view that to the extent of the dividends of Rs. 9,60,000 paid out, the same could not be regarded as a reserve but could only be treated as a provision. According to the Tribunal to the extent of the above-mentioned amount of Rs. 9,60,000 the appropriation made by the directors on June 19, 1964, out of the profits of the year ended October 31, 1963, was of the nature of proposed dividends and the directors themselves had treated the amount to the above extent as a provision and not a reserve. The Tribunal also referred to the expression 'reserve' and 'provision' as interpreted in clause 7 of Part III of Schedule VI of the Companies Act, 1956, and held that the said amount of Rs. 9,60,000 was an amount provided for the specific purpose of meeting the liability on account of payment of dividend and in no sense it constituted reserves of the company as on November 1, 1963. So far as the balance of the amount of Rs. 3,40,000 was concerned, the Tribunal accepted the contention urged on behalf of the assessee-company and held that the said amount had all the characteristics of a reserve and would constitute a reserve as on November 1, 1963, and would accordingly be includible in the computation of capital for surtax purposes for the assessment year 1965-66. It is out of this order of the Tribunal that question No. 3 is referred at the instance of the revenue while question No. 4 is referred at the instance of the assessee.

5. As the questions involved in the reference are likely to arise in a number of references, we have permitted the various counsel who were interested in such question on behalf of the assessee to make their submissions before the matter was finally decided. Mr. Dastur on behalf of the assessee-company in this reference submitted that capital of the assessee-company has to be computed for the purpose of the Act as provided in Schedule II of the Act; that Schedule 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 of 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 mere fact that the directors in their report stated that the dividend when declared would be paid out of the sum of Rs. 13,00,000 which was transferred to the dividend equalisation reserve and the fact that note 2 mentioned above was annexed to the balance-sheet was not by itself sufficient to come to the conclusion that as the sum of Rs. 9,60,000 which was ultimately distributed as dividend after the recommendation of the board of directors was approved by the shareholders at the annual general meeting, it should not be included as part of the reserve for the computation of capital of the company for the purposes of surtax. He submitted that dividend is payable as and from the date on which the shareholders at the annual general meeting direct it to be paid and it does not become a liability on the first day of the previous year. He, therefore, submitted that as for the purposes of surtax capital is to be computed as on the first day of the previous year relevant to the assessment year, the part of the dividend equalisation reserve, which will ultimately be utilised for payment of the dividend for the current year, ought not to be deducted. He submitted that the statement in the directors' report and note 2 appended to the balance-sheet should not be construed to mean that there was a present liability and the sum of Rs. 9,60,000 ought not to be treated as a provision within the meaning of Schedule VI to the Companies Act, 1956, and the liability in respect of such dividend does not arise in praesenti but it will arise only in futuro in case the shareholders at the annual general meeting approve of the recommendations of the board of directors as regards declaration of dividend. Such being the nature of dividend the entire amount transferred to the dividend equalisation reserve should be treated as a reserve. He emphasised that the situation ought to be considered as prevailing on the crucial date, namely, as on November 1, 1963, and, if it is looked at from that point of view, then it is quite apparent that in respect of dividend there is no liability as on that date. Mr. Toprani and other counsel supported the contention urged by Mr. Dastur. Mr. Toprani, in addition, submitted that under the form of the balance-sheet given is Schedule VI to the Companies Act, 1956, under sub-heading 'provision' under the main heading 'current liabilities and profits', item 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 half 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 annual general meeting could be regarded as includible in the computation of capital for the purposes of surtax. Except for making a feeble submission like this in respect of the sum of Rs. 3,40,000 no further submission was made by him, but, so far as the other item of RS. 9,60,000 was concerned, he urged that it was not a reserve within the meaning of rule 1, but it was really a provision as understood in the form of balance-sheet in Schedule VI of the Companies Act, 1956. He submitted that if regard be had to the provision of the Explanation to rule 1 of Schedule II of the Act then it is quite apparent that the said sum of RS. 9,60,000 cannot be regarded as a reserve for the purposes of the computation of capital of a company for purpose of surtax.

6. Section 4 of the Act is the charging section. That section provides that subject to the provisions contained in the Act, there shall be charged on every company for every assessment year commencing on the from the first day of April, 1964, a tax (in this Act referred to as 'the surtax') in respect of so much of its chargeable profits of the previous year or pervious years, as the case may be, as exceed the statutory deduction, at the rate or rates specified in the Third Schedule. The expression 'chargeable profits' is defined in section 2(5) of the Act as meaning the total income of an assessee computed under the Income-tax Act, 1961, for any previous year of years, as the case may be, and adjusted in accordance with the provisions of the First Schedule. The expression 'statutory deduction' is defined in section 2(8) and it means an amount equal to ten per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of two hundred thousand rupees, whichever is greater. There are two provisos to this definition but they are not relevant for the present purpose. The Second Schedule to the Act lays down rule for computing the capital of a company for the purposes of surtax. Rule 1 is as under :

'(1) Subject to the other provisions contained in this Schedule, the capital of a company shall be the aggregate of the amounts, as on the first day of the previous year relevant to be assessment year, of -

(i) its paid-up share capital;

(ii) its reserves, if any, created under the proviso (b) to clause (vib) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922, or under 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 items (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 reserves.

2. Capital redemption reserve.

3. Share premium account.

4. Other reserves specifying the nature of each reserve and the amount in respect thereof.

Less : Debit balance is profit and loss account (if any).

5. Surplus, i.e., balance in profits and loss account after providing for proposed allocations, namely : -

Dividend, bonus or reserves.

6. Proposed additions to reserves.

7. Sinking funds.

Under the head 'Current liabilities and provisions', items 8 to 13 deal with provisions. We are concerned with item 9 thereof which is 'proposed dividends'.

7. It may be stated at the outset that so far as the balance-sheet as on October 31, 1963, is concerned, there was no outstanding balance in the dividend reserve. As per the earlier year a sum of Rs. 7,20,000 was appropriated to the dividend reserve but for the balance-sheet as on October 31, 1963, the said sum was directed to be transferred to profit and loss account so that the balance in the dividend reserve account was zero prior to the allocation made by the allotment of Rs. 13,00,000 in dividend equalisation reserve. The directors have in their report for the year ended October 31, 1963, stated that the sum of Rs. 13,00,000 should be appropriated to dividend equalisation reserve, but both in the report as well as in the note appended to the balance-sheet it is made quite clear that the whole of the amount is not to be retained in the ensuring year as dividend equalisation reserve. The directors have in their report recommended dividend of Rs. 9,60,000 and if it was approved of by the share-holders at the annual general meeting, then it was to be paid out of the said sum of Rs. 13,00,000 which was appropriated towards the dividend equalisation reserve. To the same effect was the note appended to the balance-sheet. It is common ground that at the annual general meeting the recommendation of the board of directors to declare dividend was place before the shareholders and a sum of Rs. 9,60,000 was distributed as dividend in respect of the profits of the year ended October 31, 1963. Thus, the substance the whole of the amount of Rs. 13,00,000 was not intended to be dividend equalisation reserve. The normal characteristic of a dividend equalisation reserve is that it will be available to a company for distribution in future lean years when the profits will not be sufficient for declaration of 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.

8. The expression 'reserve' is defined in sub-clause (b) of clause 7(1) of Part III 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.'

9. 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 well-known distinction that exists between the concepts of 'reserve' and 'provision' is laid down by the Supreme Court in the case of Metal Box Company of India Ltd. v. Their Workmen : (1969)ILLJ785SC it is observed as under :

'The distinction between a provision and a reserve is in commercial accountancy fairly well-known. Provisions made against anticipated losses and contingencies are charges against profits and, therefore, to be taken into account against gross receipts in the profit and loss 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 respects 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).'

10. It is clear from this distinction that exists between a provision and a reserve that any 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. So far as the sum of Rs. 3,40,000 being the balance of the amount in the dividend equalisation reserve after payment of dividend of Rs. 9,60,000 is concerned, there can be no doubt that it is a reserve within the meaning of rule 1 and has been rightly included in the computation of capital for the purposes of surtax.

11. That takes us to the sum of Rs. 9,60,000 which was to be utilised in that very year for payment of dividend if it was approved of by the shareholders at the annual general meeting. The provisions of Explanation to rule 1 of Schedule II of the Act, however, are clear. Thereby it is 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. 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 regarded as a reserve for the purpose of computation of capital. Any amount set apart for proposed dividend is not includible in capital computation for the purpose of surtax as laid down by us in our decision in S.P.T. Reference No. 1 of 1972 Shree Ram Mills v. Commissioner of Income-tax : [1977]108ITR27(Bom) ] decided on 30th June, 1976/1st July, 1976.

12. It was urged by Mr. Toprani who appears for one of the assessees who is interest in a similar question, that the item 9 dealing with proposed dividend under the heading 'Current liabilities and provisions' only applies to interim dividend that may be declared by the board of directors prior to the end of the accounting year but which is payable after the end of the year; that this expression does not include any dividend which may be recommended by the board of directors in the report for consideration of the shareholders at the annual general meeting. Except for this bare submission, there is nothing to support the same. One fails to appreciate why a dividend recommended by the board of directors for consideration by the shareholders at the annual general meeting should not be regarded as proposed dividend. The contention of Mr. Toprani that on this ground the Explanation is not attracted cannot be accepted.

13. It was, however, urged by Mr. Dastur very strenuously that by the Finance Act, 1976, rule 1A was inserted in the Second Schedule to the Act with effect from 1st April, 1975. The said rule 1A is as under :

'1A. Where a company has not made any credit in any account in its books as on the first day of the previous year relevant to the assessment year which is of the nature of item (8) or item (9) under the heading 'Current liabilities and provisions' in the column relating to 'liabilities' in the 'form of balance-sheet' given in Part I of the Schedule VI to the Companies Act, 1956 (1 of 1956), or where the Income-tax Officer is of opinion that the amount credited in such account falls short of the amount which should have reasonably been credited by it, 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.'

14. His submission is that it is for the first time provided by this provision that when no credit of any amount in the books is made or when insufficient credit in any account in the books is made on the first day of the previous year relevant to the assessment year, which is of the nature of items 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 purposes 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 the purpose of computation of capital, it is quite clear that such a provision is not created by reason of rule 1A which has been added by the Finance Act, 1976. So far as the language of the Explanation to rule 1 is concerned, it has to be construed having regard to the words used. It is a well-recognised cannot of construction that in interpretation of a taxing statute, equitation considerations are entirely out of place. Nor can taxing statutes be interpreted on any presumptions of assumptions. The court must look squarely at the words of the statute and interpret them. It must interpret a taxing statute in the light of what is clearly expressed; it cannot imply anything which is not expressed; it cannot import provisions in the statutes so as to supply any assumed deficiency : See Commissioner of Sales-tax v. Modi Sugar Mills Ltd. : [1961]2SCR189 . Applying this principle, if upon interpretation of the Explanation to rule 1 of the Second Schedule to the Act the sum of Rs. 9,60,000 is not to be regard as a part of the reserve for the computation of capital, then it is quite clear that the view taken by the Tribunal is right.

15. Our attention has been invited to served decisions but we think that the only pertinent case to which reference ought to be made is the decisions of the Mysore High Court in the case of Mysore Electrical Industries Ltd. v. Commissioner of Surtax reported in : [1971]80ITR571(KAR) . In that case the directors in their report to the general body of shareholders proposed, inter alia, appropriation of Rs. 3,15,000 to dividend reserve out of the profits of the year ending March 31, 1963. The question arose for consideration whether this sum of Rs. 3,15,000 which was appropriated to dividend reserve should be regarded as reserve for the purpose of computation of capital having regard to rule 1 of the Second Schedule to the Act read with the Explanation thereto. The Mysore High Court laid down that the amount standing to the credit of the dividend reserve is in the nature of item 'proposed dividend' (item 9 in the form of balance-sheet) and consequently it could not be regarded as reserve for the purpose of computation of capital for the purposes of surtax. It was urged by Mr. Dastur that there is no express statement in the judgment showing that the amount of Rs. 3,15,000 was transferred to dividend reserve under the heading 'reserves and surplus'. If regard be had to the facts of the case as stated at pages 572-573 it is quite evident that the various items which are mentioned therein are items of reserves under the heading 'Reserves and surplus'. As, therefore, this case supports the submissions that have been made by Mr. Joshi before us, in respect of an all India statute it is a well-recognised convention that, to avoid uncertainty in law, one High Court should follow the decision of another High Court though it should be regarded as a persuasive authority. We have taken the same view as taken by the Mysore High Court in this case upon relevant consideration of the provisions of rule 1 read with the Explanation to the Second Schedule to the Surtax Act and the view taken by us is supported by the view taken by the Mysore High Court in the above case.

16. Thus, our answer to question No. 3 is in the affirmative and our answer to question No. 4 is in the negative. As the assessee as well as the reserve have partly succeeded in this reference, each party will bear its respective costs of the reference.


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