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] 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.;