Sabyasachi Mukharji, J. - (1.) The assessee is a company incorporated under the Indian Companies Act, 1913. This reference arises out of the procedures under the C. (P.) S.T. Act, 1964, for the assessment year 1964-65, the relevant previous year being the calendar year 1963. As we are concerned with the C. (P.) S.T. Act, 1964, it would be material to refer to certain relevant provisions of the said Act. Section 4 of the said Act stipulates the imposition of tax. It provides that subject to the provisions contained in the said Act, there will be charged on every company for every assessment year commencing on and from the 1st day of April, 1964, a tax in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction, at the rate or rates specified in the Third Schedule. Section 2(5) of the Act defines chargeable profits as the total income of an assessee computed under the I.T. Act, 1961, for any previous year or years, as the case may be, adjusted in accordance with the provisions of the First Schedule. Section 2(8) provides for "statutory deduction", as an amount equal to ten per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule or an amount of two hundred thousand rupees, whichever is greater. The First Schedule provides for the rules for computing the chargeable profits. The Second Schedule provides rules for computing the capital of a company for the purposes of surtax. Rule 1 of the Second Schedule provides as follows: "1. Subject to the other provisions contained in this Schedule, the capital of a company shall be the aggregate of the amounts, as on the first day of the previous year relevant to the assessment year of--(i) its paid-up share capital ; (ii) its reserves, if any, created under the proviso (b) to Clause (vi-b) of Sub-section (2) of Section 10 of the Indian Income-tax Act, 1922 (XI of 1922), or under Sub-section (3) of Section 34 of the Income-tax Act, 1961 (XLIII of 1961); (iii) its other reserves as reduced by the amounts credited to such reserve as have been allowed as a deduction in computing the income of the company for the purposes of the Indian Income-tax Act, 1922 (XI of 1922), or the Income-tax Act, 1961 (XLIII of 1961); (iv) its debentures, if any ; and (v) any moneys borrowed by it from Government or the Industrial Finance Corporation of India or the Industrial Credit and Investment Corporation of India or any other financial institution which the Central Government may notify in this behalf in the Official Gazette or any banking institution (not being a financial institution notified as aforesaid) or any person in the country outside India. Provided that such moneys are borrowed for the creation of a capital asset in India and the agreement under which such moneys are borrowed provides for repayment thereof during a- period of not less than seven years. Explanation.--For the removal of doubts it is hereby declared that any amount standing to the credit of any account in the books of a company as on the first day of the previous year relevant to the assessment year which is of the nature of item (5) or item (6) or item (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 Schedule-VI to the Companies Act, 1956 (1 of 1956) shall not be regarded as a reserve for the purposes of computation of the capital of a company under the provisions of this Schedule."
(2.) In essence, under Rule 1 of the Second Schedule, the capital of a company is the aggregate of the amounts as on the first day of the previous year, relevant to the assessment year, of the paid-up capital, the reserves and debentures, etc. In the instant case, the previous year was the calendar year 1963. In the premises the position that requires consideration is the position of the capital as on the first day, that is to say, 1st January, 1963. In the assessment under the aforesaid Act, the assessee claimed a sum of Rs. 90 lakhs transferred to the dividend reserve as a reserve entering into the capital computation. The assessing authority excluded this sum from computation of capital. There was an appeal before the AAC. He found that the aforesaid sum was a reserve created out of amounts which had been allowed as deduction in computing the profits of the year. He thus found in effect that the said reserve qualified for inclusion under Rule l(iii) of the Second Schedule of the said Act. He, accordingly, allowed the assessee's contention.
(3.) There was a further appeal before the Tribunal by the revenue. It was contended that with the transfer of the sum of Rs. 90 lakhs simultaneously to the dividend reserve a sum of Rs. 76 lakhs had been paid as dividends. According, to the revenue, the whole of Rs. 90 lakhs would only be a provision, as it was intended to meet a liability to the shareholders for dividend and, in the alternative, it was urged that the sum of Rs. 14 lakhs could alone be taken as reserve to the exclusion of Rs. 76 lakhs, which was immediately payable as dividend. On behalf of the assessee, the contention urged was that the situation to be considered was as on 1st January, 1963, and as the dividend declared was declared later, the sum of Rs. 76 lakhs could not be treated as a liability on 1st January, 1963, In the premises, it was urged that Rs. 90 lakhs should be treated as a reserve. The Tribunal on the language of Rule 1 of the Second Schedule came to the conclusion that only Rs. 14,00,000 could be taken to have been transferred to the reserve account. The Tribunal, therefore, held that the sum of Rs. 14,00,000 only would be treated as provision and it directed modification of the capital computation accordingly. In the permises, the following question has been referred to this court under Section 256(1) of the I.T. Act, 1961: "Whether, on the facts and in the circumstances of the case, the sum of Rs. 76,00,000 appropriated for dividend at the annual general meeting held on 31st day of May, 1963, could be taken into account as reserve for the computation of capital as on January 1, 1963, under Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ?";