Law:

Section:

Second Schedule to the Companies (Profits) Surtax Act, 1964 - Capital - Computation of - Assessment year 1972-73 - Assessee company transferred certain amount out of profits for year ended 31-12-1971 to general reserve - Subsequently, its directors recommended on 16-7-1971 to declare dividend out of general reserve which was approved by general body - Dividend was distributed before close of year ended 31-12-1971 - Whether amount of dividend declared had to be deducted from general reserve for determining company's capital as on 1-1-1971 - Held, yes FACTS Out of the profits for the year ended 31-12-1970, the assessee-company decided to credit some amount to the company's general reserve. Thereafter, the directors recommended that a dividend be declared for the year ended 31-12-1970, and decided to declare and pay the dividend from out of the general reserves. The board's recommendation was approved by the general body on 16-7-1971. The dividend was actually distributed subsequently, but before the close of the year ended 31-12-1971. For the assessment year in question, the assessee claimed that the general reserve stood as on 1-1-1971 must be taken as such without alteration for purposes of capital computation under the Surtax Act, as on 1-1-1971. The ITO did not accept this claim. He held that if the dividend had been provided for out of the profits of the year ended 31-12-1970, under a provision for proposed dividend, that amount could not, at the same time, had been appropriated to the general reserve. He further held that although the dividend had been recommended by the directors and approved by the general body subsequent to the commencement of the year of account on 1-1-1971, it really related back to the year ended 31-12-1970, in which event the general reserve as on 1-1-1971, could not have included the amount of the dividend. The Tribunal upheld the order of the ITO. On reference: HELD It has been held by the Supreme Court in Vazir Sultan Tobacco Co. v. CIT [1981] 132 ITR 559 that the mere fact that the directors had recommended the distribution of a dividend from out of the reserves would show that the amount representing the proposed dividend was…

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