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Bridge and Roof Co. (India) Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 162 of 1973
Judge
Reported in(1981)20CTR(Cal)250,[1981]132ITR279(Cal)
ActsCompanies (Profits) Surtax Act, 1964; ;Income Tax Act
AppellantBridge and Roof Co. (India) Ltd.
RespondentCommissioner of Income-tax
Appellant AdvocateD. Pal and ;P.K. Pal, Advs.
Respondent AdvocateAjit Kr. Sengupta and ;Prabir Kr. Majumdar, Advs.
Cases ReferredMetal Box Company of India Ltd. v. Their Workmen
Excerpt:
- sabyasachi mukharji, j. 1. in this matter after hearing the parties we had, on the 8th april, 1980, delivered our judgment. before, however, the judgment could be signed, the learned advocate for the revenue drew our attention to a decision of ours in income-tax reference no. 241 of 1970, india tube co. (p.) ltd. v. cit, judgment delivered on 23rd august, 1974 (unreported) (since reported in : [1981]132itr293(cal) . the matter was thereafter set down for further hearing and after considering the arguments afresh we proceed to deliver this judgment.2. in this reference made by the tribunal, in compliance with an order under section 256(2) of the i.t. act, 1961, the following question has been referred to this court :'whether there were any material before the tribunal to hold that the.....
Judgment:

Sabyasachi Mukharji, J.

1. In this matter after hearing the parties we had, on the 8th April, 1980, delivered our judgment. Before, however, the judgment could be signed, the learned advocate for the revenue drew our attention to a decision of ours in Income-tax Reference No. 241 of 1970, India Tube Co. (P.) Ltd. v. CIT, judgment delivered on 23rd August, 1974 (unreported) (since reported in : [1981]132ITR293(Cal) . The matter was thereafter set down for further hearing and after considering the arguments afresh we proceed to deliver this judgment.

2. In this reference made by the Tribunal, in compliance with an order under Section 256(2) of the I.T. Act, 1961, the following question has been referred to this court :

'Whether there were any material before the Tribunal to hold that the amount of the dividend proposed on 26th May, 1967, and ratified by the shareholders on 29th June, 1967, became a known liability as on 1st January, 1967, and whether the Tribunal's finding in this respect is perverse ?'

3. In order to appreciate this question, it is necessary to state that the assessee is an Indian company with its previous year as calendar year 1967. While computing the capital as on 1st January, 1967, under the C. (P.) S. T. Act, 1964, the ITO found that the assessee's directors submitted their report for the year ending 31st December, 1966, on 26th May, 1967, and therein had recommended dividend of 10 per cent. of the increased capital of the assessee-company which was subsequently ratified by the shareholders on 29th June, 1967, at the annual general meeting on the accounts for the calendar year 1966. It is pertinent to note that the directors had mentioned in the report that the recommendation for declaration of dividend was made subsequent to the closure of the accounts in 1966 and as such no provision had been made in the accounts for the proposed dividend. After ratification, a sum of Rs. 3,60,000 was, in fact, distributed as dividend among the shareholders and the said amount, therefore, was taken out of the fund as shown as general reserve. Prior thereto, in the accounts, a total sum of Rs. 47,50,660 had been shown as taken out of the fund as general reserve. The ITO found from the auditors' report that no provision in respect of dividend was created in the accounts but, according to him, this should have been done as per the Companies Act, 1956. In this connection, a reference may be made to item V of the Sixth Schedule to the Companies Act, 1956, providing for the nature of the balance-sheet. The ITO, by applying Expln. 2 to Rule 1 to Schedule II to C. (P.) S. T. Act, 1964, and with reference to cols. 5 and 6 of the form of balance-sheet given in Pt. I of Schedule VI to the Companies Act, 1956, held that the amount of proposed dividend, though not specifically shown in the balance-sheet, could not be treated as reserve for the purpose of computation of capital. Accordingly, a sum of Rs. 3,60,000 was excluded from the assessee's computation of capital.

4. Being dissatisfied, with the assessment order, the assessee preferred an appeal to the AAC. As no dividend was declared as on 1st January, 1967, being the relevant date, the AAC held that the amount of Rs. 3,60,000 should not have been deducted from the general reserve for the purpose of computation of capital. Being dissatisfied with the order of the AAC, the revenue went up in appeal before the Appellate Tribunal. After considering the rival contentions, the Tribunal found that a sum of Rs. 10,81,462 was transferred to the general reserve out of which the dividend recommended subsequently had been distributed. It would be relevant to set out the relevant portion of the order of the Tribunal, The Tribunal observed, inter alia, as follows :

'4. Before us it is vehemently submitted on behalf of the revenue that the assessee-company being an Indian company, should have adhered to the form of balance-sheet as provided for in the Companies Act, 1956.

According to him, the company had distributed dividend as recommended by the directors and after being ratified by the shareholders out of the profits of the calendar year 1966 and, as such, the AAC was not justified in his decision. On the other hand, the learned counsel appearing for the assessee-company submits that in the statement of accounts for the year ending 31st December, 1966, there was no provision for the proposed dividend nor did the directors of the company recommend any dividend up to 24th May, 1967, when the auditors finished the accounts for the said period. Thus, according to him, the AAC was justified in not disturbing the general reserves, and, more so, when the dividend proposed on 26th May, 1967 was ratified by the shareholders on 29th June, 1967, and dividend was thereafter distributed out of general reserves. According to him, the facts of the instant case are materially different from those in the case of CIT v. Mysore Electrical Industries Ltd. : [1971]80ITR566(SC) .

5. We have given careful consideration to the rival submissions. There is no dispute as to the facts of the case. The amount of dividend proposed did not appear in the body of the balance-sheet but the recommendation of the directors was very much there and the same was ratified by the shareholders. It is immaterial as to when the directors recommended the amount of dividend to be declared when such recommendation has been appearing in the statement of accounts. A sum of Rs. 10,81,462 was transferred to general reserve out of which the dividend recommended was distributed. If all the facts are examined together one will see that, instead of setting apart a portion of the profits towards dividend, the directors of the assessee-company created a general reserve out of which the dividend was distributed. The shareholders of the company ratified the recommendation of the directors. Evidently the dividend was to be paid out of general reserves. The difference between the facts of the instant case and those of the case reported in : [1971]80ITR566(SC) (Mysore Electrical Industries Ltd. v. CIT) lies in the form adopted by the assessee-company in setting apart the amount of dividend proposed to be declared. To our mind this deviation in form does not help the assessee and the decision of the Supreme Court referred to above does not very much apply to the facts of the instant case, in the sense that the amount of proposed dividend became a known liability as on 1st January, 1967. We are, therefore, of opinion that the Appellate Assistant Commissioner was not justified in his decision. The Income-tax Officer should accordingly revise the assessment.'

5. In the result, the appeal preferred by the revenue was allowed and the order of the ITO restored. Thereupon, there was an application for reference to this court and the Tribunal, under Section 256(1) of the I.T. Act, 1961, was not inclined to refer the question. Thereupon, on an application beingmade to this court and pursuant to an order made by this court, the question indicated before, has been referred to this court.

6. Before we consider the question, it may not be inappropriate to refer to certain provisions of the C. (P.) S. T. Act, 1964. Section 4 of the said Act provides, that subject to the provisions contained in the said Act, there should be a charge on every company for every assessment year commencing on and from the 1st April, 1964, a tax, which is referred to as surtax in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as may exceed the statutory deduction at the rate or rates specified in the Third Schedule. The chargeable profits are computed by excluding certain items and the First Schedule deals with the rule for computing the chargeable profits. Rule 1 of the First Schedule provides that the chargeable profits would be the total income which would be adjusted consisting of the income, profits and gains and other sums from which certain amounts mentioned in the clauses have been excluded. The Second Schedule deals with the rules for computing the capital of a company for the purpose of surtax and Rule 1 enjoins for the exclusion of reserves and surpluses or any other item under the head 'Current liabilities and provisions'. In essence under Rule 1 of the Second Schedule the capital of a company is the aggregate of the amounts as on the' first day of the previous year relevant to the assessment year of the paid up capital, the reserves and debentures, etc. The assessee-company claimed for exclusion of the share capital as well as general reserve from computation of capital but the revenue found that out of the general reserve a sum of Rs. 3,60,000 which was subsequently declared as dividend should be excluded and thereby diminishing the general reserve which should go in the addition of the capital. Now, in this case, admittedly, the relevant date is the first day of the accounting year, that is, 1st January, 1967. As per the balance-sheet, the general reserve was Rs. 47,50,669 and the revenue had deducted from the sum a sum of Rs. 3,60,000 and the assessee disputed the right of such deduction by the revenue. The main basis of the decision of the Tribunal and the case of the revenue is the decision of the Supreme Court in the case of CIT v. Mysore Electrical Industries Ltd. : [1971]80ITR566(SC) . But before that decision is appreciated properly it was urged on behalf of the assessee that it is necessary to refer to the decision of the Mysore High Court, out of which the decision went up in appeal to the Supreme Court. It appears from the said decision of the Mysore High Court in the case of Mysore Electrical Industries Ltd. v. Commr. of Surtax : [1971]80ITR571(KAR) that the company had made five appropriations, viz., (1) for plant modernisation and rehabilitation reserve, (2) loan redemption reserve, (3) reserve for development rebates, (4) dividend reserve, and (5) reserve for super profits tax. The HighCourt held that the amount standing to the credit of dividend reserve and reserve for super profits tax in the balance-sheet of the assessee-company were in the nature of appropriation for taxation and proposed dividends and could not be regarded as reserve for the purpose of computation of capital. The questions relating to these two appropriations were, therefore, answered by the High Court against the assessee. The other appropriations or reservations relating to the plant modernisation and rehabilitation reserve, loan redemption reserve and development rebate reserve were held by the High Court to be reserves for the purpose of computation of capital. In those circumstances, the revenue preferred an appeal to the Supreme Court with regard to these three reserves. The assessee, however, did not question the findings of the High Court on the question of dividend reserve and the provision for taxation. The Supreme Court considered only about three appropriations, viz., (1) the plant modernisation and rehabilitation reserve, (2) loan redemption reserve, and (3) reserve for development rebate. In that context, the Supreme Court observed that out of the profits of the respondent-company for the accounting period ending on 31st March, 1963, the directors of the company appropriated the following amounts towards the reserves on 8th August, 1963, viz.,(1) Rs. 2,56,000 as plant modernisation and rehabilitation reserve,(2) Rs. 1,00,000 as loan repatriation reserve, and (3) Rs. 89,587 as development rebate reserve. The question before the Supreme Court as mentioned before was whether this amount should be included in computing the capital of the assessee-company as on the 1st April, 1963, under Rule 1 of Schedule II to the C. (P.) S.T. Act, 1964, for the purpose of statutory deductions for the assessment year 1964-65. The revenue had contended that since the appropriations were made on the 8th August, 1963, this could not be treated as components of capital as on the 1st day of the previous year, that is, 1st April, 1963. It was held, rejecting the contention of the department, that the determination of the directors to appropriate the amounts to the three items of reserve on 8th August, 1963, had to be related back to the 1st of April, 1963, that is, the beginning of the accounts for the next year, i.e. the beginning of the accounts for the new year, and must be treated as effective from that date, and it was held that the three items had to be added to the other items for the computation of the capital of the respondent company as on 1st April, 1963, under Rule 1 of Schedule II to the C. (P.) S.T. Act, 1964. Dealing with this aspect, G.K. Matter J., who delivered the judgment of the Supreme Court, observed at p. 569 of the report as follows : ''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 therespondent 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 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, 1963. Their determination to appropriate the sums mentioned to 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.'

7. If the aforesaid observations are read as an enunciation of the principle of relating back in view of the reality of the manner of the passing of company accounts, then, it may be contended that though the declaration of dividend was made subsequent to the passing of the accounts it must relate back to the first day of the year of account to go to the diminution of the capital out of which that amount was ultimately declared. The Supreme Court referred to a decision of the Bombay High Court in the case of CIT v. Aryodaya Ginning & . : [1957]31ITR145(Bom) . In that case, the profits of the company for the year ended 31st December, 1948, were shown as Rs. 28,56,997-14-2. The directors had made certain appropriations which included Rs. 11,08,000 to reserve fund and Rs. 1,50,000 to dividend reserve fund. The report of the directors was made on 27th April, 1949, and a general meeting Of the shareholders was held on 27th June, 1949, and the same adopted the report and the recommendation of the directors. The company was assessed to business profits tax chargeable under the Business Profits Tax Act for the accounting period 1st January, to 31st March, 1949, and the question which arose there was what was the capital of the company for the accounting period. The company contended that its paid up capital should be increased by the amount of reserve, constituted by the recommendations made by the directors and accepted by the shareholders. The Commissioner went up to the High Court on a reference contending that as the reserve was not sanctioned till 27th June, 1949, it could not be looked at or considered as reserves on a day prior thereto. The learned judges of the Bombay High Court were of the opinion that the resolution of 27th June, 1949, had retrospective effect inasmuch as it referred to the profits of the year ending on 31st December, 1948, the appropriation to be made in the balance-sheet as of that date and the reserves which should be constituted and shown in the balance-sheet as on 31st December, 1948. The High Court observed that when one looked at the balance-sheet of the year ended 31stDecember, 1948, the amounts mentioned were shown respectively in the reserve fund and the dividend reserve fund and the shareholders by passing a resolution on 27th June, 1949, did not decide that these amounts should constitute reserves as from that date but they accepted the recommendation of the directors that these amounts should constitute reserves as of 31st December. The Supreme Court approved the said decision in contradistinction to the Madras decision in the case of CIT v. Vasantha Mills Ltd. : [1957]32ITR237(Mad) . It is significant to bear in mind that in that case the dividend amount was shown in the account as dividend reserve at the closing of the account which was ultimately accepted by the shareholders. In this case, it is also important to bear in mind that the accounts as it stood on the last date of the previous calendar year, that is, on the first day of the relevant accounting year, indicated that a sum of Rs. 47,50,669 would be transferred to the general reserve. The question which one has to consider is what is the effect of a subsequent declaration of dividend subsequent to the closing of the accounts and subsequent to the accounts standing on the first day of the accounting year in computing or constituting the general reserve or the capital of the company? The dividend has to be paid out of the profits of the company--profits as standing on the first day of the accounting year. The right to dividend or the participation in the profit arises out of the profits of the company and not because of the membership of the shareholders of the company. Though until the declaration of dividend or until the company goes into liquidation a particular shareholder has no right to claim or appropriate the share of profit or any assets of the company, yet the right to participate in the share arises by being a member of the company and naturally the profits accrue on the first day of the year. In that light, in our opinion, the observations in the decision in the case of Mrs. Bacha F. Guzdar v. CIT : [1955]27ITR1(SC) will have to be appreciated. The right to participate in the profit exists independently of any declaration by the company but the enjoyment of the profit is only on the declaration of the dividend by the company or on the winding up of a company. It is also true that there is a well-marked demarcation between a liability and a debt. Learned advocate for the revenue drew our attention to the observations of Mr. Justice Sinha, as the Chief Justice then was, in the case of Kasur Chand Jain v. GTO : [1961]42ITR288(Cal) , where the learned judge has drawn the distinction between a debt and a liability. The learned judge had, however, observed that the dividend, when proposed, did not become a debt but would become a debt when declared. But, in this case, we are not concerned with the question whether the proposal of a dividend created any liability or a debt until and unless it was declared or accepted by the shareholders. This identical question, with which we are concerned in thepresent reference, was considered by this court in the case of Income-tax Reference No. 241 of 1970 [Indian Tube Co. Ltd. v. CIT : [1981]132ITR293(Cal) (Appendix)] a decision to which, as we have mentioned before, learned advocate for the revenue drew our attention subsequently. In that case, on the 1st of May, 1963, in respect of its accounts for the year 1962, the assessee-company in the directors' meeting approved the transfer of a sum of Rs. 90,00,000 out of the profits for the year to a 'dividend reserve account'. Thereafter, on the 3rd of May, 1963, the directors recommended the payment of a dividend, out of that 'dividend reserve account', of 12 1/2%, which amounted to Rs. 76,00,000 on the ordinary shares on the amount paid on those shares prior to 31st of December, 1962. On the 31st of May, 1963, in the general meeting, the accounts were passed by the shareholders and the dividend as recommended by the directors were declared. Subsequently, the dividend thus declared was paid later on and it was adjusted by transferring the sum of Rs. 76,00,000 from the 'dividend reserve account' through the profit and loss appropriation account'. In the annual report for the year 1962, which was due to be presented on 31st of May, 1963, it was stipulated that one of the agenda was to consider the company's audited balance-sheet as on 31st of December, 1962, and the profit and loss account as on 31st December, 1962. The directors in the report for the year 31st December, 1962, presented to the shareholders at its meeting held on 31st of May, 1963, had recommended payment at 12 1/2% dividend on the ordinary shares. The question that arose was whether under the present Act with which we are concerned this sum of Rs. 90,00,000 or any part thereof could be taken as reserve in computing the capital as on the 1st of January, 1963, Delivering the judgment of the court, I had discussed the purpose of the Act as was indicated from the preamble to the Act. Then I had referred to the decision of the Supreme Court in the case of Metal Box Company of India Ltd. v. Their Workmen : (1969)ILLJ785SC and to the decision of the Supreme Court in the case of CIT v. Mysore Electrical Industries Ltd. : [1971]80ITR566(SC) . We held in the said decision that the proximity of the directors' meeting recommending the creation of the reserve, declaration of dividend and simultaneous passing of the item at one meeting had indicated that these reserves were 'intended for the payment of the liability intended to be created as on the 1st of January, 1963'. We noted that though actually that liability was created subsequently, the liability was intended to be created in order to be related back to 1st of January, 1963. We held, therefore, that these two items formed part of an integrated transaction and these items had to be read as an integrated transaction. We, accordingly, upheld the revenue's contention in that case.

8. This identical question with which we are concerned was also considered by the Andhra Pradesh High Court in the decision in Super Spinning Mills Ltd. v. CIT : [1979]120ITR512(AP) . There, the Andhra Pradesh High Court held that the legal position that emerged from the various decisions on the question whether a particular amount was a provision or reserve for the purpose of computation of capital under the provisions of the C.(P.)S.T. Act, 1964, Schedule II, Rule 1, were as follows: (1) The true nature and character of the disputed sum must be determined with reference to the substance of the matter and not to the mere entry or nomenclature which the assessee-company might choose to give it. (2) An amount set aside out of profits and other surpluses not to meet a liability, contingency, commitment or diminution in value of assets known to exist at the time of the balance-sheet was a reserve. (3) An amount set aside out of profits and other surpluses to provide for any known liability for which the amount could be determined with substantial accuracy was a provision. (4) Under the I.T. Act an estimated liability ascertainable with substantial accuracy could be taken into consideration in arriving at the true profits and gains. Two reserves with which their Lordships of the Division Bench of the Andhra Pradesh High Court were concerned were, a general reserve of Rs. 28,43,984 and another reserve known by the name 'Section 80K tax-free dividend reserve' of Rs. 1,93,577 which found place in the balance-sheet of the assessee-company for the year ended 31st December, 1970. On the 30th June, 1970, the board of directors of the assessee-company decided to appropriate a sum of Rs. 4,00,000 from out of the general reserve for the declaration of dividend. The claim of the assessee to treat both these sums in dispute, viz., the general reserve of Rs. 28,43,984 and 'Section 80K tax-free dividend reserve' of Rs. 1,93,577 for the purpose of computation of capital under Rule 1 of Schedule II to the C. (P.) S.T. Act, 1964, was rejected by the ITO. But, on an appeal, the AAC held that out of the general reserve of Rs. 4,00,000 which was earmarked by the directors of the company for payment of dividend could not be considered as general reserve. He, further, held that only the balance sum in the general reserve to the tune of Rs. 24,43,985 and 'Section 80K tax-free dividend reserve' fell within the meaning of reserves for the purpose of computation of capital. On appeal, by both the assessee and the revenue, the Appellate Tribunal, applying the principle of relating back, as mentioned in the Supreme Court decision referred to hereinbefore, held that the decision of the board of directors of the assessee-company on the 30th June, 1970, to declare a dividend out of the general reserve related back to the relevant accounting year and, hence, the sum of Rs. 4,00,000 could not be construed as a reserve. The Tribunal dismissed both theappeals and accepted the view of the AAC. It was held by the Division Bench of the Andhra Pradesh High Court that the amount of general reserve was not set apart to meet any loan liability, commitment, contingency or diminution in the value of assets known to exist at the time of the balance-sheet. We may respectfully point out that though this is a crucial test, yet, as was pointed out by the Andhra Pradesh High Court, the true nature and substance of the matter is necessary to be determined and in so doing the actuality of the manner in which the company's accounts are prepared, as noticed by the Supreme Court, must be borne in mind. The Andhra Pradesh High Court observed that the board of directors and the general body of the shareholders might or might not declare any dividend, as, on the date of the balance-sheet, there was no known liability for which the amount could not be determined with substantial accuracy so that it could be treated as a provision. Hence, the assessee was justified in claiming that the entire general reserve of Rs. 28,43,984, which stood in the balance-sheet, as on the 1st April, 1970, should be treated as reserve for the purpose of computation of capital under Rule 1 of Schedule II to the C. (P.) S.T. Act, 1964. The tax-free dividend reserve had been created with the accumulated profits of the assessee-company and the same had been separately shown in the balance-sheet to have a clear picture of the financial position of the company. The assessee had shown it separately because it was entitled to the exemption under Section 80J of the I.T. Act, 1961, being the profits derived as a new industrial undertaking and the dividend, as and when declared by the company from out of the said profits would, in the hands of the shareholders of the company, be exempt from income-tax under Section 80K of the I.T. Act, 1961. A perusal of the balance-sheet of the board of directors showed that there was no proposal to pay a dividend to the shareholders from out of the said 'Section 80K tax-free dividend reserve'. It was patent that it was not set aside to meet any liability, commitment, contingency of diminution known to exist at the time of the preparation of the balance-sheet because there was no known liability at the time. Hence, the Tribunal was justified in holding that the sum constituted reserve for the purpose of computation of capital under the C.(P.)S.T. Act, 1964. For. the reasons mentioned before, with respect, we are unable to accept this conclusion. In the instant case, before us, the Tribunal had observed that if all the facts were examined together one would see that instead of setting apart a portion of the profits towards dividend the directors of the assessee-company created a general reserve out of which the dividend was distributed. Reference was made to the observations of the Bombay High Court in the case of CIT v. Indian Smelting & Refining Co. Ltd. : [1977]107ITR793(Bom) , where the Chief Justice observed that in accordance with the principles of accountancy when there was no known liability on thelast day of the year there was no question of making any provision to meet such liability. The Chief Justice further observed that before dividend was declared at the annual general meeting by the shareholders of a company there was not even a contingent liability and there was no question of any known or anticipated liability for which any provision was to be made. Therefore, where, except for a bare recommendation in the directors' report for declaration of dividend, no amount was set apart during the accounting year for payment of the amount, the liability to pay dividend will arise only from and after the date of the resolution of the shareholders at the annual general meeting declaring the dividend and it will be payable only from such date as may be specified in the resolution. When such dividend was payable out of the general reserve, there was no question of making any provision for the dividend which could be deducted from the general reserve for the purpose of determining the capital of the company under the C. (P.) S.T. Act, 1964. There is another decision of the Bombay High Court, viz., the decision in the case of CIT v. Bharat Bijlee Ltd. : [1977]107ITR30(Bom) , to which our attention was drawn. In that case, for the year ending 30th June, 1964, in the dividend reserve account of the assessee-company there was already a sum of Rs. 1,55,000. Out of the profits of the current year ending June 30, 1964, the directors appropriated a sum of Rs. 4,35,000 to be credited to the said account. Thus, the aggregate amount came to Rs. 5,90,000. The company resolved to distribute an aggregate amount of Rs. 2,30,000 as dividend for that year to be paid out of the dividend reserve. The assessee had claimed that the entire sum of Rs. 5.90,000 should be added to the capital as dividend reserve. The ITO rejected the claim but on appeals the AAC and the Appellate Tribunal held that only the balance of Rs. 3,60,000 in the dividend reserve account was includible in the computation of capital as on July 1, 1964, for surtax purposes for the assessment year 1966-67. In the reference before the High Court, it was submitted for the assessee that as a sum of Rs. 1,55,000 was already standing to the credit of the dividend reserve account, only a sum of Rs. 75,000 should be treated as being available from the current profits for payment of the sum of Rs. 2.30,000 as proposed dividend and, therefore, a sum of Rs. 5,15,000 should be regarded as includible in computation of capital for the purpose of surtax. It was held that for the year ending 30th June, 1964, the directors had recommended an aggregate amount of dividend of Rs. 2,30,000. No independent provision was made for payment of this amount but it was stated that it would be paid out of the dividend reserve. From the commercial point of view, if any amount is required for incurring any expenditure or making any disbursements in the current year, ordinarily the same would come out of the income of the company if available and, only if it was insufficient,then the past savings would be resorted to for the purpose of incurring the expenditure or making the disbursements. The case was not concerned actually with the controversy with which we are concerned. The Gujarat High Court also had occasion to consider some of these aspects in the case of CIT v. Mafatlal Chandulal & Co. Ltd. : [1977]107ITR489(Guj) . But that decision, in so far as it held that the provision for taxation account was not entitled to deduction, may be contrary to the views expressed by this court in the decision which I shall presently note, but we are not concerned with that controversy.

9. Our attention was also drawn to the decision in the case of Braithwaite & Co. (India) Ltd. v. CIT : [1978]111ITR825(Cal) . But this case was also not concerned with the question of dividend declared subsequently. Reliance was also placed on the decision in the case of Indian Steel 6- Wire Products Ltd. v. CIT : [1978]112ITR1(Cal) . There also the court was not concerned with the specific question with which we are concerned. A subsequent ratification for a certain appropriation may relate back, so far as the appropritation to be made subsequent to the first day of the year of the accounting, in the sense that it must be paid out of the fund standing to the credit of the account on the first day of the accounting year, and in the instant case as the Tribunal on a consideration of all the materials came to the conclusion that these formed part of an integrated transaction, we cannot say that the Tribunal acted without evidence or perversely.

10. But before we conclude we must note that there is one, argument advanced on behalf the revenue, that is to say, there was an application for a reference to the High Court and the first question sought for was as follows :

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 3,60,000 included in the figure of general reserves was to be excluded for the purpose of capital reserves was to be excluded for the purpose of capital computation under the Companies (Profits) Surtax Act, 1964 ?'

11. This was disallowed by the Tribunal. No reference was allowed on this question by the High Court, and, therefore, it was urged that the only question with which this court was concerned was :

'Whether there was any material to hold that there was known liability as on the 1st January, 1967 ?'

12. In the conclusion we have arrived at, it is not necessary to decide this controversy.

13. Though, as we have noticed, in a subsequent decision of the Andhra Pradesh High Court in the case of Super Spinning Mills Ltd. v. CIT : [1979]120ITR512(AP) , and the decision of the Bombay High Court in the case of CIT v. Indian Smelting & Refining Co. Ltd. : [1977]107ITR793(Bom) , as well asin another decision of the Bombay High Court in the case of CIT v. Bharat Bijlee Ltd. : [1977]107ITR30(Bom) , this aspect was considered from a different angle as we have indicated before, yet in view of the ratio of the decision of the Supreme Court in the case of CIT v. Mysore Electrical Industries Ltd. : [1971]80ITR566(SC) , as understood by the Division Bench of this court in the decision of Indian Tube Co. (see infra) referred to hereinbefore, the first part of the question is answered in the affirmative and the second part is answered in the negative, both in favour of the revenue in the manner indicated before.

14. Each party will pay and bear its own costs.

Sudhindra Mohan Guha, J.

15. I agree.


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