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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 NumberS.T. Reference No. 138 of 1973
Judge
Reported in[1977]109ITR172(Bom)
ActsCompanies (Profits) Surtax Act, 1964 - Sections 4 - Schedule - Rule 1
AppellantCommissioner of Income-tax, Bombay City-ii
RespondentGeoffrey Manners and Co. Ltd.
Appellant AdvocateR.J. Joshi, Adv.
Respondent AdvocateJ.I. Patel, Adv.
Excerpt:
.....years as in the present case the directors have recommended a sum of..........after deducting the proposed dividend of rs. 8 lakhs should be taken as reserve for purposes of capital computation. in further appeal before the tribunal it confirmed the order passed by the appellate assistant commissioner. the tribunal observed that to the extent of the provision made (rs. 8 lakhs) for proposed dividends, such amounts would not constitute reserve but the surplus remaining thereafter (rs. 60,000) in the dividend equalisation reserve would constitute a reserve as on the first day of the previous year and would be includible in the computation of capital of the assessee-company for surtax purposes. the two questions referred to above arise out of this order of the tribunal. 4. mr. joshi, on behalf of the revenue, submitted that the view taken by the appellate.....
Judgment:

Kantawala, C.J.

1. In this reference the following two questions are referred for out determination :

'Whether, on the facts and in the circumstances of the case, the sum of Rs. 60,000 out of the dividend equalisation reserve of Rs. 8,60,000 was includible in the computation of capital for surtax purposes as a reserve as on November 1, 1964

(2) Whether, on the facts and in the circumstances of the case, the sum of Rs. 8,00,000 out of the dividend equalisation reserve of Rs. 8,60,000 was includible in the computation of capital for surtax purposes as a reserve as on November 1, 1964 ?'

2. The above two questions relate to the assessment year 1966-67. The relevant crucial date for computation of capital is the first day of the previous year, i.e. as on November 1, 1964. The position of reserve as disclosed by the balance-sheet for the period ended October 31, 1964, shows thus : Under the heading 'dividend Equalisation Reserve' in the main heading 'Reserves and Surplus' as on November 1, 1963, a sum of Rs. 3,40,000 was standing to the credit of dividend reserve. Out of the profits for the period ended October 31, 1964, a sum of Rs. 5,20,000 was appropriated towards dividend reserve account. Thus, with the addition of this sum, the total sum will be Rs. 8,60,000. The directors in their report dated May 19,1965, recommended an aggregate dividend of Rs. 8 lakhs and stated that if the recommendation was approved by the shareholders at their forthcoming annual general meeting it will be paid out of the dividend equalisation reserve and no separate provision has been made therefor. The annual general meeting of the shareholders for the year ended October 31, 1964, was held on June 15, 1965, and at the said meeting the shareholders accepted the recommendation of the directors to pay the sum of Rs. 8 lakhs as dividend. Two aforesaid questions arise having regard to these facts which clearly appear on record.

3. The income-tax Officer did not include any part of the dividend equalisation reserve in computation of capital for surtax purposes as on November 1, 1964, as he was of the view that the said amount was nothing but a provision and it was not a reserve. In an appeal by the assessee the Appellate Assistant Commissioner took the view that the surplus of Rs. 60,000 after deducting the proposed dividend of Rs. 8 lakhs should be taken as reserve for purposes of capital computation. In further appeal before the Tribunal it confirmed the order passed by the Appellate Assistant Commissioner. The Tribunal observed that to the extent of the provision made (Rs. 8 lakhs) for proposed dividends, such amounts would not constitute reserve but the surplus remaining thereafter (Rs. 60,000) in the dividend equalisation reserve would constitute a reserve as on the first day of the previous year and would be includible in the computation of capital of the assessee-company for surtax purposes. The two questions referred to above arise out of this order of the Tribunal.

4. Mr. Joshi, on behalf of the revenue, submitted that the view taken by the Appellate Assistant Commissioner and the Tribunal is right and their finding that the sum of Rs. 8 lakhs, which was to be utilised for dividend in respect of the year ended October 31, 1964, should not be included in the computation of capital ought to be confirmed. He submitted that only the balance of Rs. 60,000 which was surplus in the dividend equalisation reserve after payment of dividend should be treated as capital as on November 1, 1964, for the relevant purpose. On the other hand, it was urged by Mr. Patel on behalf of the assessee that it is only the sum of Rs. 5,20,000, which was appropriated from the current profits, should be treated as an amount available for proposed dividend but so far as the balance of Rs. 3,40,000 in the dividend equalisation reserve was concerned, it should be treated as capital for computation for the purpose of surtax as on the crucial date, i.e. as on November 1, 1964. He, therefore, submitted that even though the submission of the assessee was that the whole of the amount should be treated as capital, it should be restricted to the sum of Rs. 3,40,000,

5. It is clear from the provisions of the Companies (Profits) Surtax Act, 1964, that for the purpose of statutory deduction what is required to be computed is the capital employed as on the first day of the previous year, which admittedly in the present case is November 1, 1964. In respect of the income of the assessee-company for the year ended October 31,1964, a sum of Rs. 5,20,000 out of the profits was appropriated to the dividend equalisation reserve and the same was still to be utilised for part payment of dividend which aggregated to Rs. 8 lakhs. The principle that so far as the sum of Rs. 5,20,000 is concerned it will not be includible in the computation of income for the purpose of surtax is clear from our decision in Commissioner of Income-tax v. Geoffrey Manners & Co. Ltd. : [1977]108ITR987(Bom) .

6. We are, therefore, to consider the question as regards the balance amount of Rs. 3,40,000 (Rs. 8,60,000 - Rs. 5,20,000 = Rs. 3,40,000), whether the sum (Rs. 3,40,000) or any part thereof is to be treated as capital employed in the business on the crucial date, i.e., November 1, 1964. Mr. Joshi emphasised the fact that part of this sum is to be utilised for payment of current dividend in respect of the profits for the year ended October 31, 1964. So if that part of Rs. 3,40,000 is to be so utilised, the same ought not to be treated for the computation of capital. Whether it should be done or not will depend upon the provisions in the company law as regards the liability in respect of the dividend. It is clear from the provisions of company law that no company has a right to declare dividend out of its capital as understood under the Companies Act. Under section 205 of the Companies Act, 1956, dividend can only be declared out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of that statute or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with the provisions of that statute. So far as the assessee's final dividend is concerned, the directors have merely a power of recommendation. The directors themselves have no power to distribute any sum as final dividend. The position about the final dividend is that it could only be recommended by the directors and it will be up to the shareholders of the company to accept the recommendation in which case alone distribution could take place. Where the balance-sheet and profit and loss account of the company is approved of and adopted by the shareholders at their annual general body meeting there are certain things which relate back to the last date of the previous year for which the accounts are to be approved. But, so far as dividend is concerned, it is clear, having regard to the provisions of the Companies Act, 1956, that the liability to pay dividend will not revert back to the last date of the previous year for which the accounts are approved by the shareholders. In respect of dividend the liability will only arise as and when it is approved by the shareholders in their annual general body meeting and it will become payable only when the shareholders decide the particular date when it should be payable. Such liability does not revert to the crucial date viz., November 1, 1964, in the present case. As for the purpose of surtax what is required is capital employed in the business as on the crucial date, i.e., November 1, 1964. In the present case we have to consider whether the whole of the sum of Rs. 3,40,000 answers the character of the word 'capital' as occurring in rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. There can be no doubt that the sum of Rs. 3,40,000 was in fact a part of reserve which was accumulated from the earlier years as in the present case the directors have recommended a sum of Rs. 8 lakhs to be distributed as dividend which is larger than the sum of Rs. 5,20,000 transferred to the dividend equalisation reserve account. The accumulated capital will be utilised by the board of directors as and when the dividend becomes payable but such utilisation will take place only from and after the date when the dividend becomes payable as the liability to pay dividend does not relate back to November 1, 1964. In the present case anything which genuinely answers the description of the word 'capital' as defined in rule 1 of the Second Schedule to the Companies (profits) Surtax Act, has to be included. It is quite clear that even though a part of the sum of Rs. 3,40,000, to be precise, a sum of Rs. 1,80,000, will be utilised for payment of dividend and when it becomes due and payable, the whole of the amount on the crucial date, viz., November 1, 1964, constituted part of the capital for the purpose of business and having regard to the peculiar provisions of rule 1 of the Second Schedule to the Companies (Profits) Surtax Act and the provisions contained in the charging section 4, it is quite clear that his sum of Rs. 3,40,000 should be regarded as capital as on the first day of the previous year, viz., November 1, 1964. Thus, our answers to questions referred to us are as under :

So far as question No. 1 is concerned, the sum of Rs. 3,40,000 out of the dividend equalisation reserve account was includible in the computation of capital for surtax purposes as a reserve as on November 1, 1964.

So far as question No. 2 is concerned, the sum of Rs. 5,20,000 out of dividend equalisation reserve account, being the amount transferred to the said account during the current year, was not includible in the computation of capital for surtax purposes as a reserve as on November 1, 1964.

7. Each party will bear its own costs.


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