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India Motor Parts and Accessories Ltd. (P), Madras Vs. the Commissioner of Income-tax, Madras - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberT.C. 147 of 1962
Judge
Reported inAIR1966Mad411; [1966]60ITR531(Mad)
ActsIndian Income-tax Act - Sections 10, 12, 13 and 66(2)
AppellantIndia Motor Parts and Accessories Ltd. (P), Madras
RespondentThe Commissioner of Income-tax, Madras
Excerpt:
.....on the road began to decline from year to year. for the purpose of assessment for the assessment year 1958-59, the assessee made a return showing an income of certain amount. in valuing their opening and closing stock of the spare parts taken over by the assessee company from the general motors they adopted the following method. the entire stock was valued at cost and out of this a deduction of certain amount was made in view of the fact that the demand for those parts was declining. the assessee treated a part of this stock as obsolete and some other stock as slow moving and valued them notionally at hundred per cent and fifty per cent less than the cost price as the case may be.; the income-tax officer taking into account the circumstance that when the assessee applied for..........dividend proposed by the directors represent any liability for the company from the 1st day of the year of account. any provision made by way of reserve of an amount for the purpose of a possible liability that may arise in the payment of dividend cannot be refused to be taken into account merely on the ground that the amount represented a provision or a reserve for an accrued liability, as there was 'no accrued liability as on the relevant date, namely, first day of the year [of account. it has been so held by the supreme court in kesoram industries and cotton mills ltd. v. cwt [1966] 59 itr 767. so, in all these cases, we think, where a proposal has been made by the directors and by virtue of this proposal, a reserve has been made for a possible liability towards dividend, that.....
Judgment:
1. The Income-tax Appellate Tribunal, Madras Bench, has referred the following questions relating to the assessment years 1963-64, 1964-65 and 1965-66, for the opinion of this court:

Assessment year 1963-64 ;

"Whether, on the facts and in the circumstances of the case, it has been rightly held in law that the sums of Rs. 6,25,000, being provision for taxation, Rs. 4,05,000, being proposed dividends, and Rs. 4,664, being the surplus in the profit and loss appropriation account, could not be considered as 'reserve' and, therefore, not includible in the computation of the capital of the company for the assessment year 1963-64, under the Second Schedule to the Super Profits Tax Act, 1963 ?"

Assessment year 1964-65:

"Whether, on the facts and in the circumstances of the case, it has been rightly held in law that the sum of Rs. 2,65,000, being proposed dividends, could not be considered as ' reserve ' and, therefore, not includible in the computation of the capital of the company for the assessment year 1964-65, under the Second Schedule to the Companies (Profits) Surtax Act, 1964?"

Assessment year 1965-66 :

"Whether, on the facts and in the circumstances of the case, it has been rightly held in law that the sum of Rs. 2,12,500, being proposed dividends, could not be considered as 'reserve' and, therefore, not includible in the computation of the capital of the company for the assessment year 1964-65, under the Second Schedule to the Companies (Profits) Surtax Act, 1964?"

2. The brief details relating to the above three assessment years may be stated thus : With regard to the assessment year 1963-64, the assessee was subjected to the Super Profits Tax Act of 1963. For the other two assessment years, the assessee was subjected to surtax under the Companies (Profits) Surtax Act, 1964. The dispute arose for all these assessment years regarding the computation of capital to work out the standard profit. The claim of the assessee for inclusion in the capital consisted of provision for taxation, surplus in the profit and loss appropriation account and proposed dividends.

3. So far as these references are concerned, the inclusion or otherwise of the dividend reserve is relevant for all the assessment years in question. The following are the proposed dividends claimed as "reserve" for the said three years:

__________________________________________________________________

Rs.

1963-64 4,05,000

1964-65 2,65,000

1965-66 2,12,500

__________________________________________________________________

4. The ITO negatived, the claim on the ground that these sums represented only proposed dividend and that they are liable to be included under the head "Current Liabilities and Provisions" in the form of balance-sheet prescribed under the Companies Act of 1956. Further, according to him, the Second Schedule to the Surtax Act has set out that any item which fell under the head "Current Liabilities and Provisions" should not be treated as "reserve" for the purpose of capital computation. On appeal by the assessee-company, the AAC confirmed the exclusion of these sums from the capital base, Thereupon, this matter came up before the Tribunal before which it was contended that these sums were only "reserve" and also had been termed as "reserve" in the account, that the dividends were only at the proposal stage and no liability existed for the company as on the date of making these provisions and that the liability arose only on or after the approval of the proposal in the general body meeting which was held long after the accounting years. Reliance was placed on the decision in CIT v. Security Printers of India (P.) Ltd. . So far as the assessment year 1963-64 was concerned, there were two further points which related to the provision for taxation amounting to Rs. 6,25,000 and Rs. 4,664, being the surplus in the profit and loss appropriation account. The departmental representative had relied on the decision of the Mysore High Court in T.R.C. No. 11 of 1977 for provision for dividends and taxation. The Tribunal, after considering the respective contentions of both the parties, dismissed the appeals, making the following observation ;

"We, therefore, hold that the Appellate Assistant Commissioner had rightly held that both provision for taxation and provision for proposed dividends would not constitute reserves of the company and, therefore, has rightly rejected the assessee's claim. We, therefore, uphold the order of the Appellate Assistant Commissioner."

5. The questions that have been referred to us arise in construing the provisions in Sch. II to the Super Profits Tax Act, 1963, and in Sch. II to the Companies (Profits) Surtax Act, 1964. At the outset we may point out that a Bench of this court, to which one of us was a party, had in Madras Motor and General Insurance Co. Ltd. v. CIT (judgment of this court in Tax Case No. 257/74, dated 9-11-1977) [1979] 117 ITR 534 [FB] elaborately discussed this aspect of the legal question in the judgment dated November 9, 1977, and hence we feel that it is not necessary for us to launch on a discussion referring to the various rules, Acts and judicial pronouncements touching, this question. Suffice to say that the opinion expressed by the Bench in the above decision would squarely apply to the facts of the present case.

6. As we have already indicated, one point is common in all these questions. As regards the assessment year 1963-64, there are two more points, viz., relating to the provision for taxation and the surplus in the profit and loss appropriation account, the amount under the first heading being Rs. 6,25,000 and the one under the second heading being Rs. 4,664. As pointed out by the Bench in the said decision, provision for taxation cannot be "reserve" for the simple reason that the tax had already accrued due and a specific liability towards the same had arisen. The matter is covered by the decision of the Supreme Court and hence we negative the contention of the assessee that the said sum of Rs. 6,25,000 should be included in the computation of capital.

7. Coming to the question relating to the surplus in the profit and loss appropriation account, it is significant to note that no particular point was made about this small amount by the learned counsel for the assessee and hence we do not deal with this sum.

8. Then, we come to the complicated question relating to the "proposed dividends". The total amount claimed under this head for the year 1963-64 is Rs. 4,05,000, the one claimed for 1964-65 is Rs. 2,65,000 and the amount claimed for 1965-66 is Rs. 2,12,000. After referring to various decisions, this court in Madras Motor and General Insurance Co. Ltd. v. CIT [1979] \ 17 ITR 534, 541 [FB] has made the following observations:

"The question, therefore, is whether any amount shown to represent a dividend proposed by the directors represent any liability for the company from the 1st day of the year of account. Any provision made by way of reserve of an amount for the purpose of a possible liability that may arise in the payment of dividend cannot be refused to be taken into account merely on the ground that the amount represented a provision or a reserve for an accrued liability, as there was 'no accrued liability as on the relevant date, namely, first day of the year [of account. It has been so held by the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. CWT [1966] 59 ITR 767. So, in all these cases, we think, where a proposal has been made by the directors and by virtue of this proposal, a reserve has been made for a possible liability towards dividend, that provision or reserve could not cease to be a reserve on the ground that it is a reserve for the purpose of payment of an accrued liability as on that date. On the facts of the case before us, it has not been contended that the shareholders had approved the proposal as on that date. There is, therefore, no liability to pay that amount as on that date. This aspect was not urged before this court when it decided the case in Nagammal Mills Ltd. v. CIT [1974] 94 ITR 387 and the question has not been considered at all in the judgment under consideration. We think, therefore, that the decision cannot be taken to be a precedent for the question which has to be dealt with in this judgment, but can be distinguished, as we propose to do, as a case where the emphasis had been on the payment out of the money which was at one time provided for dividend and in view of the fact that the proposal of the directors was later approved by the shareholders of the company and the money had been actually expended for the purpose. We are not called upon in this case to consider whether payment out during the year of account will deprive the right of an assessee to claim the benefit, for, that question does not arise before us, no point having been taken in that behalf. We, therefore, leave that question open to be considered in another appropriate case.

In the light of what we have stated above it is clear that the amount provided cannot be said to be not a reserve merely on the ground that it represented a sum set apart for the purpose of meeting a specific accrued liability."

9. In the light of the above observations, we hold that the various amounts mentioned under the head "Proposed dividends" for the assessment years 1963-64, 1964-65 and 1965-66 are "reserve" and as such they are includible in the computation of capital of the company for the respective assessment years.

10. In the result, we answer the three questions as follows : The first question is answered in the affirmative and in favour of the revenue, so far as the provision for taxation and the surplus in the profit and loss appropriation account is concerned, and it is answered in the negative and in favour of the assessee, so far as the provision for the proposed dividend is concerned. The second and third questions are answered in the negative and in favour of the assessee. In the circumstances, we award no costs.

11. A copy of this judgment under the signature of the Registrar and the seal of this court will be sent to the Income-tax Appellate Tribunal.


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