Law: Income Tax Act, 1961

Section: 256(1)

Law: Indian Companies Act, (I of 1956)

Section: 205(1)

Schedule II to the Companies (Profits) Surtax Act 1964 - Capital - Computation of - Assessment years 1971-72, 1974-75 and 1975-76 - Whether amount of interim dividend declared by assessee have to be reduced from general reserve as it stands on first day of relevant accounting year - Held, yes FACTS The assessee company declared interim dividends for the year 1974-75 and 1975-76 which were actually paid after the end of the respecting accounting years. In working out the capital base under the Second Schedule to the Act, the ITO had proposed to reduce the general reserve by the amount of declared dividends for the two years. The assessee resisted the action of the ITO on the ground that these dividends were declared and paid out of the current year's profits and not out of the general reserve. It was, therefore, urged that the general reserves as it stood on the first day of the respective accounting year, should not be reduced by these two amount respectively, for the two years under reference. The ITO, however, overruled the assessee's stand and reduced the general reserve by these two amounts resulting in reduction in the capital base as computed under the Second Schedule to the Act. On appeal, the AAC directed the ITO not to reduce the general reserve by the amount of interim dividends declared by the assessee. On appeal by the revenue, the Tribunal, however, reversed the order of the AAC and confirmed the action of the ITO. On reference: HELD Interim dividends declared by the assessee had to be deducted from the general reserve as on the first day of the relevant accounting year irrespective of the accounting treatment given by the assessee in its books of account. Further, the fact that interim dividends were declared by the board of directors, and not in the annual general body meeting would not in any way effect the provisions of the Second Schedule to the Act. Editor's note In view of the decision of the Supreme Court in Indian and Eastern Newspaper Society v CIT [1979] 119 ITR 996, it was also held that the Internal Audit Objection could not be held to constitute 'information' and the reassessment proceedings under section 8(b) on basis of such…

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