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Commissioner of Income-tax Vs. Bird and Co. (P.) Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 85 of 1976
Judge
Reported in(1981)23CTR(Cal)224,[1982]133ITR40(Cal)
ActsCompanies (Profits) Surtax Act, 1964 - Schedule - Rule 2; ;Companies Act, 1956
AppellantCommissioner of Income-tax
RespondentBird and Co. (P.) Ltd.
Appellant AdvocateAjit Kumar Sengupta and ;Sunil Mukherjee, Advs.
Respondent AdvocateNone
Excerpt:
- .....on the facts and in the circumstances of the case, the tribunal was justified in holding that the proposed dividend of rs. 11,55,908 was a surplus within the meaning of clause (ii) of rule 2 of the second schedule to the companies (profits) surtax act, 1964, and should, therefore, be deducted from the cost of investment in shares and only the balance should be deducted from the capital computation under clause (ii) of rule 2 of the second schedule to the said act ?'2. the assessment year involved is 1965-66. the assessee is a private limited company. in computing the chargeable profits under the companies (profits) surtax act, 1964, the assessee claimed that the proposed dividend of rs. 11,55,908 should not be deducted from the capital base as it constituted a surplus fund within the.....
Judgment:

Sabyasachi Mukharji, J.

1. In this reference for the assessment year 1965-66, the following question has been referred to this court:

'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the proposed dividend of Rs. 11,55,908 was a surplus within the meaning of Clause (ii) of Rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, and should, therefore, be deducted from the cost of investment in shares and only the balance should be deducted from the capital computation under Clause (ii) of Rule 2 of the Second Schedule to the said Act ?'

2. The assessment year involved is 1965-66. The assessee is a private limited company. In computing the chargeable profits under the Companies (Profits) Surtax Act, 1964, the assessee claimed that the proposed dividend of Rs. 11,55,908 should not be deducted from the capital base as it constituted a surplus fund within the meaning of Rule 2 of Schedule II to the aforesaid Act. But the ITO did not allow this claim, without stating any reason in his order.

3. On appeal, the AAC found that exactly a similar claim had been allowed in the earlier assessment year 1964-65 by him. Following this order for the earlier year, he held that the assessee's claim was admissible and he directed the ITO to modify the assessment accordingly.

4. Being aggrieved by the order of the AAC, the revenue went up in appeal before the Tribunal against the order of the AAC. It was submitted that the proposed dividend was not a reserve and could not be taken into account in computing the capital base under Rule 1 of the aforesaid Schedule. After considering the rival submissions of the parties, the Tribunal observed that there was no dispute that the proposed dividend was not a 'reserve'. The Tribunal agreed with learned counsel for the assessee that the proposed dividend, even if the same did not constitute a reserve, was a surplus. The Tribunal referred to Clause (ii) of Rule 2 of Schedule II to the C. (P.) S.T. Act, 1964, as clearly laying down that the cost of investment, the income of which was not to be included in the chargeable profits, was to be reduced by the amount of any fund or surplus or reserve which was not taken into account in the computation of the capital under Rule 1, and only the balance was to be deducted from the capital computed under Rule 1. In the view of the Tribunal, the proposed dividend was a surplus and had to be deducted from the cost of investment in shares and it was only the balance which had to be deducted from the capital computation as laid down under Clause (ii) of Rule 2 of Schedule II. The Tribunal also found support for this view in the order dated 18th September, 1974, of the Tribunal in S.T.A. No. 31 (Cal) of 1973-74. The Tribunal, therefore, upheld the order of the AAC.

5. Now, we are concerned with the expression 'surplus' in Rule 2 of Schedule II to the C. (P.) S.T. Act, 1964. The material portion of the said provision reads as follows:

'2. Where a company owns any assets the income from which in accordance with Clause (iii) or Clause (vi) or Clause (viii) of Rule 1 of the First Schedule is required to be excluded from its total income in computing its chargeable profits, the amount of its capital as computed under Rule 1 of this Schedule shall be diminished by the cost to it of the said assets as on the first day of the previous year relevant to the assessment year in so far as such cost exceeds the aggregate of-

(i) any moneys borrowed (other than the debentures referred to in Clause (iv) or moneys referred to in Clause (v) of Rule 1) and remaining outstanding as on the first day of the said previous year ; and

(ii) the amount of any fund, any surplus and any such reserve as is not to be taken into account in computing the capital under Rule 1...... '

6. The ordinary meaning of the expression 'surplus' is what remains after meeting the requirements. If, therefore, one goes by the ordinary meaning of the expression 'surplus', then in the context of the reality of a situation, where a dividend has already been proposed by the directors, the amount proposed as dividend cannot be considered to remain as a surplus with the company for any length of time to be taken into consideration. This view is corroborated by the form of the balance-sheet in Schedule VI to theCompanies Act, 1956, which under the head Reserves and Surplus' states as follows :

'(5) Surplus, i.e., balance in profit and loss account after providing for proposed allocations, namely, dividend, Joonus or reserves.'

7. Therefore, the surplus is after providing for the proposed allocations, inter alia, for dividend according to the form of the balance-sheet given under the Companies Act. Looked at from that point of view, in our opinion, in this case the proposed dividend cannot also be considered to be a surplus.

8. In the case of Duncan Brothers and & Co. Ltd. v. CIT : [1978]111ITR885(Cal) , the court was concerned with the provisions for taxation. The question was whether such a provision for taxation could be considered to be a fund within the meaning of the said rule to the Second Schedule of the C. (P.) S.T. Act, 1964. Provision for taxation may be a fund, because it would be payable upon quantification. But that position would not be applicable in the case of proposed dividend which becomes payable immediately upon the declaration and which automatically in all cases practically follows after the recommendation by the directors to the shareholders.

9. Similarly, the question involved in the case of Duncan Brothers & Co. Ltd. v. CIT : [1981]128ITR302(Cal) was again entirely different.

10. In that view of the matter, in our opinion, the Tribunal was in error in considering the proposed dividend as a surplus which could be said to be available with the company. In the premises, the question is answered in the negative and in favour of the revenue.

11. There will be no order as to costs.

Sudhindra Mohan Guha, J.

12. I agree.


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