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1980 Supreme(Cal) 315
High Court Of Calcutta
SABYASACHI MUKHERJI, SUDHINDRA MOHAN GUHA
BRIDGE AND ROOF CO.(INDIA) LTD. - Appellant
Versus
COMMISSIONER OF INCOME-TAX - Respondent
Income-Tax Reference 162 Of 1973
Decided On : 08/07/1980
AJIT KUMAR SEN GUPTA, D.PAL, P.K.PAL, Prabir Kumar Majumdar
The amount of 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 should be excluded from the computation of capital.
Headnote:
COMPANIES (PROFITS) SURTAX ACT, 1964 - SECTION 4, 6 - CAPITAL - COMPUTATION - GENERAL RESERVE - DIVIDEND - LIABILITY - KNOWN LIABILITY - RELATION BACK - INTEGRATED TRANSACTION - COMPANY LAW - DIRECTORS' REPORT - BALANCE SHEET - APPROPRIATION OF PROFITS - STATUTORY DEDUCTIONS - COMPANY'S ACCOUNTS - ACCOUNTING PERIOD - SHAREHOLDERS' MEETING - ANNUAL GENERAL MEETING - BUSINESS PROFITS TAX ACT - INCOME TAX ACT, 1961 - SECTIONS 80J, 80K - COMPANIES ACT, 1956 - SCHEDULE VI, PART I, ITEM V - RULES 1, 5, 6 - C. P. S. T. ACT, 1964 - SCHEDULE II, RULE 1 - FIRST SCHEDULE, RULE 1 - SECOND SCHEDULE, RULE 1 - EXPLANATION 2.
Fact of the Case:
The assessee, an Indian company, proposed a dividend of 10% of the increased capital on 26th May, 1967, and the same was ratified by the shareholders on 29th June, 1967. The ITO found that the proposed dividend, though not specifically shown in the balance sheet, was part of the general reserve and excluded a sum of Rs. 3,60,000 from the assessee's computation of capital. The AAC held that the amount should not have been deducted from the general reserve. The Tribunal found that a sum of Rs. 10,81,462 was transferred to the general reserve out of which the dividend was distributed and held that the proposed dividend became a known liability as on 1st January, 1967.
Finding of the Court:
The Supreme Court held that the amount of proposed dividend became a known liability as on 1st January, 1967, and should be excluded from the computation of capital. The court held 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.
Issues: Whether 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.
Ratio Decidendi: The court held that 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 should be excluded from the computation of capital. The court held 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.
Final Decision: The court answered the question in the affirmative and held 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.
( 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] 132 ITR 293 (infra ). 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. A
