Satish Chandra, C.J. - These two references raising similar questions have been made by the Tribunal in cases relating to the same assessment company in respect of two different assessment years, namely, 1963-64 and 1965-66.
2. In respect of the assessment year 1963-64 the following question has been referred at the instance of the Commissioner in I.T.R. No. 503 of 1974 :
'Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the amount of Rs. 33,45,417/- on account of provisions of taxation and Rs. 11,00,844/- on account of proposed dividend was to be included in the computation of capital under the Super Profits tax Act, 1963 ?'
3. In respect of the assessment year 1965-66 the following question has been referred at the instance of the assessee in I.T.R. No. 504 of 1974 :-
'Whether on the facts and in the circumstances of the case the Income-tax Appellate Tribunal erred in law in confirming the exclusion of a sum of Rs. 8,80,675/- in the computation of capital by the appellant for purposes of sur-tax under the Second Schedule to the Companies Profits Surtax Act, 1964 ?'
4. In both the relevant enactments, namely, the Super Profits Tax Act, 1963, and the Companies (Profits) Surtax Act, 1964, tax was due at specified rate on so much of the chargeable profits of the previous year as exceeded the statutory deduction as defined in the respective enactments. This statutory deduction was a percentage of the capital of the company as computed in accordance with each Act. The rules laid down in either Act for computation of the capital of a company provide that its paid-up share capital, reserves created under certain specified provisions of the I.T. Ac, 1922 or the Income Tax Act, 1961, and, inter-alia, 'its other reserves' shall be aggregated. In the Companies (Profits) Surtax Act, 1964, this rule in followed by an Explanation, which is in the following terms :
'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 column relating to Liabilities' in the 'Form of Balance-sheet' given in Part-I of Schedule VI to the Companies Act 1956 (I of 1956) shall not be regarded as a reserve for the purposes of computation of the capital of company under the provisions of this Schedule'.
5. There was no such Explanation in the Super Profits Tax Act, 1963.
6. The relevant facts are that in the balance-sheet for the previous year relevant to the assessment year 1963-64 a sum of Rs. 33,43,417/- was earmarked as provision for taxation and another sum of Rs. 11,00,844/- was shown as representing proposed dividend. Both these amounts were shown under the Head 'Current Liabilities and Provisions'. While the Income-tax Officer, and the Appellate Assistant Commissioner excluded these amounts from the capital, the Tribunal relying on a decision of this Court reported in C.I.T. vs. Security Printers of India Ltd. included these amounts holding them as part of the 'other reserves' of the Company.
7. In the balance-sheet for the previous year (ending on 31st October, 1964) relevant to the assessment year 1965-66 an amount of Rs. 17 lakhs was shown to represent the dividend equalisation reserve as on 1st November, 1963. This included sum of Rs. 6 lakhs as standing in this reserve on 1st November, 1962 and Rs. 11 lakhs added out of the profits for the year ending on 31st October, 1963. There was no express provision for proposed dividend. The Directors, however, subsequently recommended as follows in their report to the share-holders while presenting the final accounts for the year :
'The Directors recommend for consideration of the share-holders at the Annual General Meeting to be hold on 30-4-64 the payment of dividend, subject to deduction of tax under the Income Tax Act, 1961, of 12 per cent on the equity shares from Dividend Equalisation Fund.'
8. The Companys general meeting held on 30th April, 1964 accepted this recommendation and accordingly a sum of Rs. 8,80,675/- was distributed as dividend. The Income-tax Officer took the view that omission to make specific provision for proposed dividend was made by the directors with the ulterior motive of escaping the reach of the Explanation quoted above, and that it should be deemed that to the extent of this amount the dividend equalisation reserve fund should be deemed reduced. This decision was up-held on appeal by the Appellate Assistant Commissioner and on further appeal by the Tribunal.
9. So far as the sum of Rs. 33,45,417/- shown as provision for taxation in the previous year relevant to the assessment year 1963-64 is concerned, learned counsel for the assessee Sri Raja Ram Agarwal has fairly conceded that in view of the decision of another Bench of this Court in C.I.T. vs. Hind Lamps Ltd. the exclusion was perfectly valid. It was a provision made for a current liability, the liability having already accrued when the income was earned and awaited merely quantification by assessment. It was not a reserve because it was designed to meet a liability know to exist on the date of the balance-sheet. So the only question that remains is about the other amounts shown in successive years either as provision for proposed dividend or as transferred to dividend equalisation reserve fund.
10. Regulation 99 of Schedule I, Table-A, of the Companies Act, 1913, and its successor Regulation 87 in the Companies Act, 1956 lay down that the directors may before recommending any dividend set aside out of the profits of the Company such sums as they think proper as a reserve or reserves which shall, at the discretion of the directors, be applicable for meeting contingencies, or for equalising dividends, if for any other purpose to which the profits of the Company may be properly applied.
11. The prescribed form of balance sheet, vide Schedule VI, Part-I, Companies Act, 1956, in the column of Liabilities shows, inter-alia the following entries, namely :
'Reserves and Surplus.
(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.......................
(5) Surplus i.e., balance in Profit and Loss Account after providing for proposed allocations, namely, Dividend, Bonus or Reserves. (6) Proposed Additions to Reserves. (7) Sinking Funds.......................
Current Liabilities and Provisions :
A. Current Liabilities :
(1) to (7) (not relevant)
(8) Provision for taxation.
(9) Proposed dividends.
(10) For contingencies................
(13) Other provisions................
12. It is undisputed that the authority for declaration of dividend rests in the general body of share-holders. The directors merely make a recommendation in that behalf but have no power to declare the dividend. However, as the above provisions go to show that the directors are well within their rights, and it is expected of them, to take a decision on :
(i) proposing or not proposing a dividend, and showing the same in the balance-sheet,
(ii) earmarking the whole or part of the profits for a dividend equalisation reserve fund;
(iii) neither proposing a dividend, nor earmarking the profits for such fund, but merely leaving them as undistributed profits.
13. Learned counsel for the assessee contends that even the sum shown as provision for proposed dividend (Assessment year 1963-1964) should be regarded as reserve. It is contended that inasmuch as the directors had no authority to declare a dividend there was no existing liability for which this provision was made. Any sum provided for merely continent liability, according to him, should be deemed part of the reserve. This is clearly untenable. The form of balance-sheet prescribed in the Companies Act itself shows that such a provision is different from reserve. Even if we ignore the directors proposal for dividend, the amount would at best constitute a mass of undistributed profits. Such amount would be a 'surplus' which is treated in the prescribed form of balance-sheet as distinct from a 'reserve'. What is required for constituting a reserve is that someone possessed of the requisite authority should clearly indicate that the amount was to be transferred to a specified reserve fund. The law does not contemplate that an amount in respect of which the manner of its disposal or destination is not indicated should automatically become 'reserve' In C.I.T.vs. Century Spinnin Mills Ltd. the Supreme Court has laid down in similar circumstances that such an amount cannot be treated as reserve. This case was followed in the Hind Lamps Case, (supra) in which it was pointed out that the insertion of the Explanation (quoted earlier by us) in the Companies (Profits) Surtax Act, 1964 was only by way of making the position abundantly clear and that even without the Explanation the same position obtained under the Super Profits Tax Act, 1963. The Bench which decided the Hind Lamps, case was the same which had earlier decided the Security Printers case, (supra), relied on by the Tribunal. Both these cases later came up for consideration before the Himachal High Court in Hotz Hotels Pvt. Ltd. vs. C.I.T., in which the judgment of that court was delivered by Pathak, C.J. (as his Lordship then was) who was party to both the Allahabad decisions. Hind Lamps case and the Hotz Hotels case (supra) were followed by the Bombay High Court in Shree Ram Mills Ltd. vs. Commissioner of Income Tax, wherein it was pointed out by Tulzapurkar, J. (as his Lordship then was) at pages 43-44 of the Report that the Security Printers case, which had taken 'exactly the contrary view' stood 'explained away' in the Hotz Hotels, case. We respectfully agree and are, therefore, unable to accept the contention of the learned counsel for the assessee. We hold that a provision for proposed dividend does not constitute reserve and cannot form part of the 'statutory deduction' under the Act.
14. Coming now to the assessment year 1965-66, the contention of learned counsel for the assessee is that the balance-sheet shows the amount as having been transferred to the Dividend Equalisation Reserve. It is true that ultimately the Directors recommended payment of dividend out of this amount but, according to his argument, that recommendation had no legal value for so long as it was not ultimately accepted by the general meeting of share-holders and further that the decision of the general meeting cannot be deemed to have retrospective effect. As noticed earlier, the income-tax authorities had held that non-showing of the sum of Rs. 8,80,675/- as provision for proposed dividend and showing it instead as transferred to Dividend Equalisation reserve was only a subterfuge with a view to avoiding liability to sur-tax. The validity of this conclusion is assailed by learned counsel for the assessee. According to assessees counsel, the amount could not be deemed to be by way of provision for proposed dividend as no such provision was, in fact, made by a person having the requisite authority. In a converse case the Supreme Court in the case reported in Commissioner of Income-tax, Mysore vs. Mysore Electrical industries Ltd. rejected the contention made on behalf of Revenue that an allocation to reserve fund made by the Directors in the balance-sheet could not be availed by the assessee until the Directors recommendation had been accepted by the share holders. Their Lordships repelled the contention of the Revenue in the following passage :
'It is well known that the accounts of the company have to be made up for a year up to a particular day. In this case that day was the 31st March, 1963. If it was reasonably practicable to make up the accounts up to the 31st March, 1963, and present the same to the directors of the respondent on April 1, 1963, they could have made up their minds on that day and declared their intention of appropriating the said and other sums to reserves of different kinds. But the fact that they could not do so for the simple reason that they could not do so for the simple reason that the calculation and collection of figures of all the items of income and expenditure of the company for the year ending March 31, 1963, was bound to take some time cannot make any difference to the nature or quality of the appropriation of the profits to reserves as determined by the directors after the first of April 1, 1963. Their determination to appropriate the sums mentioned in the three separate classes of reserves on the 8th August, 1963, must be related to the 1st of April, 1963, i.e., the beginning of the accounts for the new year and must be treated as effective from that day.'
15. The Bombay High Court has had occasion to deal with a similar question in a number of cases. In C.I.T. Bombay City-1 vs. Bharat Bijlee Ltd. the balance-sheet showed a sum of Rs. 4,35,000/- as transferred to the dividend reserve. Subsequently, the directors recommended payment of dividend aggregating to Rs. 2,30,000/- out of dividend reserve. It was held that the sum ultimately recommended for distribution as dividend, namely Rs. 2,30,000/- was not to be treated as reserve.
16. Similarly, in Commissioner of Income tax, Bombay City-II vs. Hindustan Sugar Mills Ltd., it was held that the 'nomenclature given to an account is not conclusive'. Accordingly, a sum shown as appropriated from the current profits to the 'general reserve' account was held not to form part of the capital to the extent that dividend was directed to be paid in the year out of the same.
17. Likewise, in Commissioner of Income tax, Bombay City II vs. Geoffrey Manners & Co. Ltd., a sum of Rs. 13,00,000/- was shown as appropriated to Dividend Equalisation Reserve out of which Rs. 9,60,000/- was recommended for distribution of dividend. It was held that the latter sum would not be deemed to be part of the reserve or to form a component of the capital. It was observed in this connection as follows :
'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'.
18. In coming to this conclusion their Lordships relied on a decision of the Mysore High Court in Mysore Electrical Industries Ltd. vs. Commissioner of Sur-tax, reported in which decision was affirmed by the Supreme Court in 80 ITR 566, supra, and observed that :
'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'.
19. The same view as regards the distinction between a reserve and a provision for dividend was expressed by the same Bench of the Bombay High Court in Commissioner of Income-tax vs. Geoffrey Manners & Co. Ltd. and Commissioner of Income-tax vs. Century Spinnin & Mfg. Co. Ltd. In the latter case, only the answer to the first question is relevant so far as this case is concerned, while as regards the second question of law, the amount in question was transferred to the dividend equalisation reserve account not from the current profits (as in the present case) but from the development reserve account.
20. We respectfully agree with the view expressed by the Bombay High Court in these cases, which is in accord with the principle enunciated by the Supreme Court in the Mysore Electrical Industries case, (supra). We, accordingly, hold that out of Rs. 11 lakhs shown in the balance-sheet as appropriated from the current profits to the dividend equalisation of fund reserve the sum of Rs. 8,80,675/- should be treated as provision for proposed dividend and only the balance of Rs. 2,19,325/- should be treated as addition to the reserve as rightly held by the Income-tax authorities. The doubt expressed by the Tribunal about the correctness of the sum of Rs. 2,19,375/- being treated as reserve is unfounded.
21. In the result, the questions referred in both the references are answered in the negative, against the assessee and in favour of the Revenue. The assessee shall pay costs of these references to the Revenue, which are assessed at Rs. 200/- in each case.