An amount credited to a 'dividend reserve' account, which is segregated from the profit and loss account and set aside for the purpose of declaring dividends in the future, is a 'reserve' under Rule 1 (iii) to the Second Schedule to the Companies (Profits) Surtax Act, 1964.

( 1 ) THIS reference arises out of the assessment of Standard Pharmaceuticals Ltd. , Calcutta, the assessee, to surtax under the C. (P.) S. T. Act, 1964, in the assessment year 1964-65, the previous year relevant whereto ended on the 31st March, 1964. The item in dispute is an amount of Rs. 2,97,277. The assessee claimed this fund to be a dividend reserve and submitted that it should be included in the computation of the capital of the assessee under Rule 1 (iii) of the Second Schedule to the said Act. The ITO held that this amount represented only a surplus in the profit and loss account and was not a reserve within the meaning of the said Act.

( 2 ) BEING aggrieved, the assessee preferred an appeal. The AAC rejected the contentions of the assessee on the ground that the said amount did not represent any reserve but was only a provision for the anticipated liabilities in connection with the declaration of dividends.

( 3 ) THE assessee appealed further to the Income-tax Appellate Tribunal. The Tribunal found that a reserve of the said amount of Rs. 2,97,277 had been created for the purpose of declaration of dividend in future. Though in the relevant year the said reserve had been transferred to the dividend account for the purpose of such declaration of dividend but at the beginning of the period the said amount was kept as a reserve. The Tribunal did not accept the contentions of the revenue that the said amount was set apart for meeting any contingent liability. It was held that the amount should be included in the computation of the capital of the company.

( 4 ) AT the instance of the Commissioner of Income-tax and Surtax, West Bengal-III, Calcutta, under Section 256 (1) of the I. T. Act, 1961, read with Section 18 of the C. (P.) S. T. Act, 1964, the Tribunal has drawn up a statement of case and has referred the following question of law for the opinion of this court:" Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the sum of Rs. 2,97,277 credited to ' dividend reserve ' account is a ' reserve' under Rule 1 (iii) to the Second Schedule to the Companies (Profits) Surtax Act, 1964 ?"

( 5 ) IT appears from the records that, after the draft statement was circulated, the revenue sought to include the following in the statement :"the movement of the

funds in this account above shows that Rs. 2,97,277 was actually paid in the accounting year 1963-64 under review as dividends for the preceding year. "

( 6 ) IT was admitted by the revenue that this fact had not been found by any of the authorities below. In the circumstances, the Tribunal did not allow it to be incorporated in the statement.

( 7 ) AT the hearing Mr. Ajit Sengupta, learned counsel for the revenue, invited us to look into the balance-sheet of the assessee for the relevant assessment year. He submitted that on a consideration of the balance-sheet it would appear that the amount in dispute could not be a reserve but was only a provision for a contingent liability inasmuch as dividend to the extent of the said amount was declared in the very same accounting year and was in fact paid and distributed as dividend. Mr. Sengupta contended further that the item, though described as dividend reserve, was nothing but proposed dividend which was in fact proposed and declared during the year in question. He cited a decision of the Bombay High Court in CIT v. Hindustan Sugar Mills Ltd. [1977] 107 ITR 659, where it was laid down that the proposed dividend could not be included in the computation of the dividend for the purpose of assessment of the C. (P.) S. T. Act, 1964. He also cited a decision of this court in Braithwaite and Co. (India) Ltd. v. CIT , wherein it was also held that a proposed dividend could not be treated as a reserve as the amount remained a mass of undistributed profits of the company.

( 8 ) LEARNED counsel for the assessee has, on the other hand, relied on a decision of the Supreme Cou