Law:

Section:

Explanation 2 to rule 1 of second schedule to the companies (profits) Surtax Act, 1964 - Capital - Computation of - In its accounts for calendar year 1966, assessee-company made no provision for dividend - Directors, however, recommended declaration of dividend for that year on 26-5-1967 which was ratified by shareholders on 29-6-1967 - Dividend eventually paid out of general reserves already created out of fund - Whether impugned amount of dividend became a known liability as on 1-1-1967 - Held, on facts, yes Facts The assessee, an Indian company, had adopted calendar year as its previous year. While computing its capital as on 1-1-1967, the ITO noticed that its directors submitted on 26-5-1967 their report for the year ending 31-12-1966. They recommended therein dividend at 10 per cent of its increased capital which was subsequently ratified by the shareholders on 29-6-1967 at the annual general meeting. They also mentioned therein that the said recommendation was made subsequent to the closure by the auditors of the company's accounts for 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 that the said amount, therefore, was appropriated from "general reserve", aggregating Rs. 47,50,660, that had been shown earlier in the accounts as having been taken out of the fund. The ITO further noticed from the auditor's report that no provision in respect of dividend, as required under the Companies Act was made in the accounts. By applying Explanation 2 to rule 1 to the Second Schedule and with reference to columns 5 and 6 of Part 1 of the Sixth Schedule to the Companies Act, the ITO, therefore, held that the amount of proposed dividend, though not specifically shown in the balance sheet, could not be treated as a "reserve" and, accordingly, excluded said amount of Rs. 3,60,000 from its computation of capital. On appeal, the AAC held that since no dividend was declared as on 1-1-1967 (being the relevant date), the said sum of Rs. 3,60,000 should not have been deducted from the general reserve for capital computation. On…

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