Asbestos Cement Ltd. vs Commissioner of Income Tax

Smt. Sujata Manohar, J.—The following questions is referred to us under s. 256(1) of the IT Act, 1961, as applied to surtax by s. 18 of the Companies (Profits) Surtax Act, 1964 :

"Whether, on the facts and circumstances of the case, the Tribunal erred in law in holding that the said amount of Rs. 24,66,670 being the amount recommended by the Board of Directors for approval as dividend at the annual general meeting of the company should be excluded from the general reserve actually standing at Rs. 2,27,61,653 as on 1st April, 1973, while computing the capital for surtax purposes for the asst. yr. 1974-75 ?"

The relevant assessment year is 1974-75. The accounting year for this assessment year began on 1st April, 1973. On this day, in the books of account of the assessee-company, the balance to the credit of the General Reserve Account was Rs. 2,27,61,653. Out of this amount a final dividend of Rs. 24,66,670 was declared by the assessee-company at its annual general meeting held on 6th September, 1973.

The ITO excluded this amount of Rs. 24,66,670 from the computation of capital as on 1st April, 1973. In the appellate proceedings, the AAC, however, has held that the dividend which is subsequently declared cannot be deducted from the general reserve as on 1st April, 1973. This finding has been set aside by the Tribunal. Hence, the above question has been referred to us at the instance of the assessee-company.

Learned Advocate for the assessee-company has drawn out attention to a decision of the Division Bench of this High Court in the case of Commissioner of Income Tax Vs. Burmah Shell Refineries Ltd., . In that case also the general reserve of the assessee-company as on the first day of the accounting period was sought to be reduced by a dividend subsequently declared at the annual general meeting of the assessee-company. The Division Bench has held, after considering the Supreme Court judgment in Vazir Sultan Tobacco Co. Ltd., Hyderabad and Others Vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad, , that the liability for payment of the dividend arises only after the dividend has been declared at the annual general meeting of the assessee-company. This liability does not relate back to any earlier date. In the case before the Division Bench as no separate reserve had been created out of the profits of the company for payment of dividend in future as on the first day of the accounting period, the Division Bench said that the ratio of the Supreme Court judgment in Vazir Sultan Tobacco Company''s case would not apply. The general reserve as on the first day of the accounting period cannot, therefore, be reduced to the extent of a dividend which was subsequently declared and which was paid out of this general reserve. The ratio of this judgment directly applies to the facts of the present case where also no reserve had been separately created for payment of dividend on the first day of the accounting period.

Hence, the question which is referred to us is answered in the affirmative and in favour of the assessee. No order as to costs.