COMMISSIONER OF INCOME TAX Vs. GEOFFREY MANNERS AND COMPANY LIMITED

JUDGEMENT

(1.) IN this reference the following two questions are referred for our determination :

(2.) THE above two questions relate to the asst. year 1966 67. The relevant crucial date for computation of capital is the first day of the previous year, i.e., as on 1st Nov., 1964. The position of reserve as disclosed by the balance sheet for the period ended 31st Oct., 1964, shows thus: Under the heading "Dividend Equalisation Reserve" in the main heading "Reserves and Surplus" as on 1st Nov., 1963, a sum of Rs. 3,40,000 was standing to the credit of dividend reserve. Out of the profits for the period ended 31st Oct., 1964, a sum of Rs. 5,20,000 was appropriated towards dividend reserve account. Thus, with the addition of this sum, the total sum will be Rs. 8,60,000. The directors in their report dt. 19th May, 1965, recommended an aggregate dividend of Rs. 8 lakhs and stated that if the recommendation was approved by the share holders at their forthcoming annual general meeting it will be paid out of the dividend equalisation reserve and no separate provision has been made therefor. The annual general meeting of the shareholders for the year ended 31st Oct., 1964, was held on 15th June, 1965, and at the said meeting the shareholders accepted the recommendation of the directors to pay the sum of Rs. 8 lakhs as dividend. Two aforesaid questions arise having regard to these facts which clearly appear on record. The ITO did not include any part of the dividend equalisation reserve in computation of capital for surtax purposes as on 1st Nov., 1964, as he was of the view that the said amount was nothing but a provision and it was not a reserve. In an appeal by the assessee the AAC took the view that the surplus of Rs. 60,000 after deducting the proposed dividend of Rs. 8 lakhs should be taken as reserve for purposes of capital computation. In further appeal before the Tribunal it confirmed the order passed by the AAC. The Tribunal observed that to the extent of the provision made (Rs. 8 lakhs) for proposed dividends, such amounts would not constitute reserve but the surplus remaining thereafter (Rs. 60,000) in the dividend equalisation reserve would constitute a reserve as on the first day of the previous year and would be includible in the computation of capital of the assessee company for surtax purposes. The two questions referred to above arise out of this order of the Tribunal.

(3.) IT is clear from the provisions of the Companies (Profits) Surtax Act, 1964, that for the purpose of statutory deduction what is required to be computed is the capital employed as on the first day of the previous year, which admittedly in the present case is 1st Nov., 1964. In respect of the income of the assessee company for the year ended 31st Oct., 1964, a sum of Rs. 5,20,000 out of the profits was appropriated to the dividend equalisation reserve and the same was still to be utilised for part payment of dividend which aggregated to Rs. 8 lakhs. The principle that so far as the sum of Rs. 5,20,000 is concerned it will not be includible in the computation of income for the purpose of surtax is clear from our decision in CIT vs. Geoffrey Manners & Co. Ltd. (1977) 108 ITR 987 (Bom).