Suhas Chandra Sen, J. - (1.) The Tribunal has referred the following question of law to this court under Section 256(1) of the Income-tax Act, 1961, read with Section 18 of the Companies (Profits) Surtax Act, 1964 : "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that the Appellate Assistant Commissioner was justified in holding that the dividend of Rs. 4,20,022 which was declared at the annual general meeting held after the close of the accounting period should be excluded from computation of capital for purpose of surtax assessment ?" The facts as narrated by the Tribunal in the statement of case are as under : While computing the capital for the purpose of assessment under the Surtax Act for the assessment year 1974-75, the Income-tax Officer added development rebate reserve and general reserve shown at Rs. 1,13,579 and Rs. 33,11,275 respectively to the paid up capital of the company. Before the Appellate Assistant Commissioner, the assessee claimed that, in its books, the balance in the general reserve account was Rs. 38,44,876 and, therefore, contended that the amount of dividend of Rs. 4,20,022 should not be deducted from the balance in the general reserve account as on the first day of the previous year as there was no specific liability on account of dividend before the annual general meeting was held. The Appellate Assistant Commissioner accepted this contention and held that the amount of Rs. 4,20,022 could not be deducted while computing the capital for the purpose of surtax assessment and, therefore, directed that the amount of general reserve should be taken at Rs. 38,44,876.
(2.) Before the Appellate Tribunal, the Department contended that the dividend of Rs. 4,20,022 was declared at the annual general meeting of the company held on June 24, 1973, but, after the declaration, it would relate back to the first day of the previous year. For this, reliance was placed on the decision of the Supreme Court in the case of CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566 and thus submitted that dividend, though declared later became the liability on the last day of the previous year and hence, on the first day of the accounting period, it should be excluded from the general reserves. In addition, it was pointed out that the Appellate Assistant Commissioner committed an arithmetical error when he mentioned about the difference between Rs. 38,44,876 and Rs. 53,11.275. But, in fact, the difference was Rs. 34,24,854. This difference arose as the Appellate Assistant Commissioner did not see that the Income-tax Officer had separately taken the development rebate reserve in the computation of capital.
(3.) The Tribunal, after hearing the parties, held as under : "We have considered the facts of the case and we find that a similar question came up for consideration before us while sitting in A. Bench in the case of Jiwan Lal (1929) Ltd. v. ITO in STA No. 1 of 1977-78, There, one of the questions for consideration was the exclusion of the provision for purposes of dividend in the computation of capital. After considering the various provisions of the Act and various decisions of the Calcutta High Court and other High Courts, we took a view that such provision could not be excluded from the computation of capital. It was held that any such provision was 'reserve' for being included in the capital computation base. We find that this question was considered by the Bombay High Court in the case of CIT v Indian Smelting and Refining Co. Ltd. [1977] 107 ITR 793, wherein it was held that before dividend is declared at an annual general meeting by the shareholders of a company, there was not even a contingent liability and there is no question of any known or anticipated liability for which any provision has to be made. It was further held that as the liability was to arise prospectively, it can never relate back to the first day of the accounting year While deciding the above case, they distinguished this case from the decision of the Supreme Court in the case of Mysore Electrical Industries Ltd.as in respect of the dividend there was no anticipated liability whatsoever on the last day of the accounting year. We also find that this question was considered by the Calcutta High Court in the case of Indian Standard Wagon Co. Ltd. [1979] 116 ITR 539, where the general principles were considered and it was held that the expression 'reserve' should be construed in the ordinary meaning. Though the question in the above case was regarding the provision for labour retiring gratuity, the principles discussed will have application to the present case also. For the reasons given in our order in STA No. 1 of 1977-78 and the decision of the Bombay High Court referred to above, we hold that the Appellate Assistant Commissioner was justified in excluding the dividend which was declared at the annual general meeting held after the close of the accounting period. However, we agree that there is a mistake in the order of the Appellate Assistant Commissioner and the amount of general reserve which was to be taken for this purpose would be an amount of Rs. 38,44,876 as reduced by the development rebate reserve of Rs. 1,23,579 which has separately been included by the Income-tax Officer in the computation of capital. We, therefore, direct that the amount to be taken for general reserve should be Rs. 37,31,297 and not Rs. 38,44,876 as stated by the Appellate Assistant Commissioner. The Income-tax Officer is directed to work out on the above figure accordingly." The rules for computation of capital of companies for the purpose of surtax have been laid down in the Second Schedule to the Companies (Profits) Surtax Act, 1964. Certain reserves, as mentioned in rule 1(ii), are to be included in the capital. It has been stated specifically in the Explanation that any amount standing to the credit of any account in the books of the company as on the first day of the previous year relevant to the assessment year which is of the nature of item (5) or (6) or (7) under the heading "RESERVES AND SURPLUS" or of any item under the heading "CURRENT LIABILITIES AND PROVISIONS" in the column relating to "LIABILITIES" in the "FORM OF BALANCE-SHEET" given in Part I of the Sixth Schedule to the Companies Act, 1956, shall not be treated as reserve for the purpose of computation of the capital of a company under the provisions of this Schedule.;