Law:

Section:

Rule 2(ii) of second schedule to the companies (profits) surtax act, 1964-Capital-Computation of-Whether for purpose of deduction from assessee-company's cost of investment while computing capital, "proposed dividend" constitutes a "surplus" or "reserve" within the meaning of clause (ii) of rule 2 of second schedule-held, no Facts In the proceedings for assessment to surtax for the assessment year 1965-66, the assessee claimed that a certain amount shown by it as "proposed dividend" should be treated as "surplus" or "reserve" within the meaning of clause (ii) of rule 2 of the Second Schedule for the purpose of deduction of the same from the assessee's cost of investments while computing the capital. The ITO negatived the assessee's claim. On appeal, the AAC upheld the assessee's claim but, on further appeal, the Tribunal restored the ITO's order. On reference: Held Rule 2 of the Second Schedule uses the expression "such" before "reserve" indicating that the "reserve" referred to therein is only such reserve as is treated as reserve under rule 1 of the same Schedule. The question to be decided, therefore, in the instant case, would be whether the proposed dividend would be a "reserve" for the purpose of rule 1. The appropriation of the amount concerned by the board of directors by way of providing for "proposed dividend" would not constitute provision, for the appropriation cannot be said to be by way of providing for any known or existing liability, none having arisen on the date when the directors made the recommendation much less on the relevant date being the first day of the relevant previous year. But this by itself would not automatically convert the appropriation into "reserve", regard being had to the negative and non- exhaustive character of the definition of "reserve" given in clause 7(1)(b ) of Fart III of Schedule VI to the Companies Act. However, though the "proposed dividend" had not matured into an agreed liability on the first day of the relevant year, taking the commercial point of view, it was, for all practical purposes, a liability to be incurred and should not be treated as reserve or surplus available to the company in future. As such the…

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