Commissioner of Income Tax vs Unichem Laboratories Ltd.

T.D. Sugla, J.—The only question of law referred to this court at the instance of the Revenue reads thus :

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sum of Rs. 5,40,000 being the amount of dividend declared from the general reserve of Rs. 50,65,750, was includible in computing the capital for the purpose of statutory deduction under the Companies (Profits) Surtax Act, 1964 ?"

Dr. Balasubramanian, learned counsel for the Revenue, stated that the question was squarely covered by the Supreme Court decision in the case of Vazir Sultan Tobacco Co. Ltd., Hyderabad and Others Vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad, in favour of the Revenue.

Shri Kolah, learned counsel for the assessee, on the other hand, stated that the aforesaid decision was not applicable in this case inasmuch as the dividend in this case was to be distributed out of the general reserve of the earlier years. Referring to a passage from the Tribunal''s order in the case of ITO. Com. Cir. III(4) Bombay v. Bajaj Auto Ltd. Bombay (at page 16 of the paper book), Shri Kolah pointed out that there was necessarily some gap between the last day of the previous year and the date of finalisation of the accounts for that year. Even when the accounts were finalised and the directors made their report to the shareholders, the directors could only make a recommendation for distribution of dividend which recommendation might or might not be accepted by the general body of shareholders. It was only when the general body accepted the recommendation that the liability for payment of dividend would arise and not at any earlier date. The Supreme Court decision in Commissioner of Income Tax, Mysore Vs. Mysore Electrical Industries Ltd., , according to Shri Kolah, was an authority for the proposition that the allocation of amount appropriated towards different reserves, though later than the close of the accounting year in point of time, related back to the last date of the previous year. But this was not so in the case of dividend.

In order to appreciate Shri Kolah''s submissions, we glanced through the balance-sheet of the company for the relevant financial year, i.e., 1969-70. The recommendation regarding the distribution of dividend is at page 7 in the following manner :

3.1 Your directors have pleasure in recommending a dividend for the year ended on 30th September, 1970, at the rate of Rs. 10 (Rupees ten only) per share of Rs. 100 each fully paid up subject to deduction of tax at appropriate rates. After your sanction, the dividend amounting to Rs. 5,40,000 will be paid out of the general reserve and hence no separate provision has been made therefor."

It is evident that the recommendation does not even remotely suggest that the dividend amounting to Rs. 5,40,000 recommended by the directors was to be paid out of the general reserve brought forward from the earlier years. It is true that the Tribunal has stated in its order that the dividend was to be distributed out of the general reserve created earlier. However, there appears no basis for this observation. Moreover, this observation, to our mind, is not of much consequence inasmuch as even the amount of Rs. 13,23,779 appropriated out of the profits of the year towards general year became a part of the general reserve as on the first day of the previous year in view of the decision of the Supreme Court in Commissioner of Income Tax, Mysore Vs. Mysore Electrical Industries Ltd., . The Supreme Court has stated in the case of Vazir Sultan Tobacco Co. Ltd., Hyderabad and Others Vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad, , that the dividends are ordinarily paid from current income rather than from past savings. Unless the directors in their report expressly or specifically state that the payment of dividends is to be made from past savings, the general reserve will have to be reduced by the amount of dividend distributed. We have already referred to the balance-sheet of the company to show that the directors in their report have merely stated that the dividend will be paid out of the general reserve.

Further, dividend is to be distributed out of the general reserve. The amount standing to the credit of the general reserve at the close of the year is Rs. 50,65,750. This amount is made up of general reserve of Rs. 42,81,971 brought forward from the earlier years plus a sum of Rs. 13,23,779 being an amount appropriated out of the profits of that year, reduced by the amount of Rs. 5,40,000 representing the amount of proposed dividend. This is how the amount to the credit of the general reserve at the end of the year is Rs. 50,65,750.

From the above discussion, it is clear that the dividend was distributed from out of the general reserve and not from out of the general reserve of the earlier years. The case is, therefore, squarely covered by the Supreme Court decision in Vazir Sultan Tobacco Co. Ltd., Hyderabad and Others Vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad, . The question is, accordingly, answered in the negative and in favour of the Revenue. No order as to costs.