Hindustan Ferodo Ltd. vs Commissioner of Income Tax

Smt. Sujata Manohar, J.—The present application relates to the assessment years 1972-73 and 1973-74. For the assessment year 1972-73, the relevant previous year ended on March 31, 1972, while for the assessment year 1973-74, the relevant previous year ended on March 31, 1973. The questions which are before us relate to the computation of capital for the purposes of the Companies (Profits) Surtax Act, 1964, as on April 1, 1971, for the assessment year 1972-73 and as on April 1, 1972, for the assessment year 1973-74. The questions which are referred to us are as follows :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the dividend amounting to Rs. 32,26,214 declared at the annual general meeting of the assessee on September 17, 1971, and paid out of the general reserves was not includible in the computation of the capital for the purposes of the Companies (Profits) Surtax Act, 1964, for the assessment year 1972-73 ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the dividend amounting to Rs. 32,26,214 declared at the annual general meeting of the assessee on September 15, 1972, and paid out of the general reserves was not includible in the computation of the capital for the purposes of the Companies (Profits) Surtax Act, 1964, for the assessment year 1973-74 ?"

For the assessment year 1972-73, the general reserves as on April 1, 1971, were shown by the assessee-company as Rs. 1,30,45,216. The general reserves shown by the company as on April 1, 1972 (for the assessment year 1973-74) were Rs. 1,22,53,216. For the assessment year 1972-73, the company declared a dividend of Rs. 32,26,214 on September 17, 1971, at its annual general meeting. As the company was subsidiary of Turner and Newall Ltd., a U. K. company, the shareholders were non-residents. u/s 9(1) (g) of the Foreign Exchange Regulation Act, 1973, permission of the Reserve Bank of India was required for payment of the dividend so declared to the non-resident shareholders. The permission of the Reserve Bank was so obtained for payment of the Dividend declared on September 17, 1971, in the next month on October 13, 1971.

In respect of the assessment year 1973-74, the dividend of Rs. 32,26,214 was declared at the annual general meeting held on September 15, 1972. The permission of the Reserve Bank to pay this amount to the non-resident shareholders was granted on October 13, 1972.

The question is whether the general reserves of the company as on April 1, 1971, and April 1, 1972, are to be reduced by the dividend declared on September 13, 1971, and September 15, 1972, respectively, for the assessment years in question.

In our view, the question is covered by the decision of the Supreme Court in the case of Indian Tube Co. P. Ltd. Vs. Commissioner of Income Tax, . In the case before the Supreme Court, which related to the assessment year 1964-65, the relevant previous year was the calendar year 1963. As on December 31, 1962, the balance-sheet showed under the head "Liabilities", that the liability to pay proposed dividend was "nil". The general reserves as on January 1, 1963, shown was Rs. 90 lakhs. On April 3, 1963, the directors recommended dividend of Rs. 76 lakhs to be paid from the general reserves of the company. The said dividend was declared at the annual general meeting of the shareholders held on May 31, 1963. The Supreme Court held that as on January 1, 1963, the general reserves have to be calculated by reducing the sum of Rs. 90 lakhs by Rs. 76 lakhs which was declared as dividend. The court said that the true nature and character of the disputed sum must be determined with reference to the substance of the matter and not by the mere entry or nomenclature which the assessee-company had chosen to give it. If an amount is to set aside out of profits and other surpluses, not to meet any liability, contingency, commitment or diminution in the value of assets known to exist at the time of balance-sheet, it is a reserve. The amount set aside out of the profits and other surpluses to provide for any known liability of which the amount could be determined with certainly is a provision. The court said that a conjoint reading of the scheme of the Surtax Act and the Companies Act suggests that the appropriation made by the board of directors by recommending payment of dividend, in the nature of things, does not constitute a reserve. The resolution by the general body of shareholders to declare dividend out of profits at a particular percentage crystallised into a liability and subsequent payment related back to the relevant date, viz., the closing of the accounting year during which the liability had arisen. Therefore, the resolution of the shareholder dated May 31, 1963, had retrospective effect inasmuch as it referred to the profits of the previous year ending December 31, 1962.

The same ratio directly applies to the present case. It was strenuously urged before us on behalf of the assessee that in the present case, in view of the provisions of section 9(1)(g) of the Foreign Exchange Regulation Act, 1973, the liability to pay the dividend to a non-resident shareholder did not crystallise until the approval of the Reserve Bank of India was obtained and hence the ratio of the Supreme Court in Indian Tube Co. P. Ltd. Vs. Commissioner of Income Tax, , did not apply. In support, the following cases were cited before us :

(i) Mst. Jhimi Bajoria Vs. Commissioner of Income Tax (Central), Calcutta, ;

(ii) Commissioner of Wealth-tax, (Central), Bombay Vs. Bhogilal H. Patel, ;

(iii) Ramesh R. Saraiya Vs. Commissioner of Income Tax, Bombay City I, ;

(iv) Commissioner of Income Tax, Bombay City-II Vs. Public Utilities Investment Trust Ltd., .

We need not examine this aspect at any length because for the present purposes, even if we assume what the assessee contends to be correct, viz., that the ability to pay the dividend to the non-residents did not crystallise until the Reserve Bank permission was obtained by the assessee-company, it makes no difference to the question before us. We will assume that the liability to pay the dividend to a non-resident did not crystallise until the Reserve Bank of India permission was obtained. Nevertheless the fact remains that by virtue of the dividend declared at the annual general meeting in question and by virtue of the Reserve Bank of India permission obtained on October 13, 1971, and October 13, 1972, for the assessment years 1972-73, and 1973-74, respectively, the company did become liable to pay dividend to its non-resident shareholders on October 13, 1971, and October 13, 1972. The liability to pay the dividend was for the accounting years ending March 31, 1971, and March 31, 1972, respectively. In view of the fact that this liability was crystallised as aforesaid, the general reserve from which this liability was discharged must stand diminished by the liability which was so crystallised.

Hence, as on April 1, 1971, and April 1, 1972, the general reserves cannot be considered as including the dividends which were declared for the years ending March 31, 1971, and March 31, 1972, in the annual general meetings of September 17, 1971, and September 15, 1972, respectively, and for which the Reserve Bank approval was obtained one month later. The amount of the dividend so declared and which the assessee-company became liable to pay on the approval of the Reserve Bank of India, cannot be considered as a part of the general reserve of the company on April 1, 1971, and April 1, 1972, respectively. These amounts of dividend will have to be treated as a provision. The relevant general reserve therefore stood reduced accordingly, in view of the Supreme Court decision in the case of Indian Tube Co. P. Ltd. Vs. Commissioner of Income Tax, . The resolution of the general body of the shareholders along with the permission obtained from the Reserve Bank of India had retrospective effect inasmuch as these pertained to the profits of the previous years ending on March 31, 1971, and March 31, 1972. The dividends so declared must be deducted from the relevant general reserves.

Accordingly, the questions are answered in the affirmative and in favour of the Revenue. No order as to costs.