Madras Auto Service and Others vs Commissioner of Income Tax

Ismail, J.—The question referred to this court in Tax Case No. 275 of 1972 is :

Whether, on the facts and in the circumstances of the case, it has been rightly held that the sum of Rs. 7,44,000 representing, proposed dividends

and Rs. 16,34,494 representing provision for taxation could not be taken into account for the purpose of computation of capital of the assessee-

company under the Second Schedule to the Super Profits Tax Act, 1963 ?

The question referred to this court in T.C. No. 277 of 1972 is :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the two sums of Rs. 8,35,800 being

proposed dividends and Rs. 14,07,933 being provision for taxation could not be regarded as reserves and, therefore, not includible in the

computation of capital under the Second Schedule to the Super Profits Tax Act 1963 ? "" The question referred in T.C. No. 280 of 1972 is ;

Whether, on the facts and in the circumstances of the case, it has been rightly held that the provision for taxation amounting to Rs. 7,76,231 and

provision for proposed dividends amounting to Rs. 6,22,500 are not-reserves within the meaning of the term in Rule 1 of the Second Schedule to

the Super Profits Tax Act, 1963 ?

Two questions have been referred in Tax Case No. 284 of 1972 and they are as follows :

Whether it has been rightly held that the proceedings initiated u/s 9(b) of the Super Profits Tax Act, 1963, are valid ?

Whether, on the facts and in the circumstances of the case, it has been rightly held that the sums of Rs. 19,53,291 being provision for taxation

and Rs. 7,87,500 being proposed dividends are not reserves and, therefore, not includible for the purpose of computation of capital under the

Second Schedule to the Super Profits Tax Act, 1963 ?

Again, two questions have been referred in Tax Case No. 294 of 1972 and they are as follows :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 1,82,500 could not be

taken into account for the purpose of computation of capital of the appellant-company under the Second Schedule to the Super Profits Tax Act,

1963 ?

Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that the sum of Rs. 1,82,500 was not

''reserves'' within the meaning of the term in Rule 1 of the Second Schedule to the Super Profits Tax Act, 1963 ?

We may mention in this context that the reference to "" Super Profits Tax Act, 1963 "" in the above two questions is a mistake for "" the Companies

(Profits) Surtax Act, 1964 "".

Thus, it will be seen that the first four references deal with the Super Profits Tax Act, 1963, and the sole question in the first three references and

tge second question in the fourth reference deal with the same point, though the amounts differ. In the last reference, though there are two

questions, they also deal with the same points, viz., provision for proposed dividend and that too with the Companies (Profits)'' Surtax Act, 1964.

All these questions, in our opinion, are covered by the earlier decisions of this court.

In Nagammal Mills Ltd. Vs. Commissioner of Income Tax, , this court held that the amount set apart as provision for dividend is for payment

towards a specific liability and cannot be said to be a reserve for future use of the company. With regard to the provision for taxation, this court

again held that the amount paid out by the company for discharging the actual tax liability cannot be taken to be an amount set apart or

appropriated for a specific purpose or for future use of the company and it is only a provision made for discharging a specific liability and hence it

cannot be treated as a reserve. For this conclusion on the second point this court relied on the decision of the Supreme Court in Kesoram

Industries and Cotton Mills Ltd. Vs. Commissioner of Wealth Tax, (Central) Calcutta, , where the Supreme Court held that the liability to pay

Income Tax was a present liability though the tax became payable after it was quantified in accordance with ascertainable data. In view of this

decision of the Supreme Court as well as the aforementioned decision of this court in Nagammal Mills Ltd. Vs. Commissioner of Income Tax, ,

Mr. Swaminathan, learned counsel for the assessee in all these references, had very little to argue on the question regarding the provision for

taxation. However, with regard to the provision for proposed dividends, the learned counsel very strenuously contended that the decision of this

court in Nagammal Mills Ltd. Vs. Commissioner of Income Tax, requires reconsideration.

In Nagammal Mills Ltd. Vs. Commissioner of Income Tax, , referred to already, this court observed at page 391 as follows :

Coming to the provision for dividend of Rs. 3,43,485 it is seen that the said dividend has actually been paid out by the company to its

shareholders. Though the same was set apart for a specified purpose, it cannot be said to be available for the future use of the company so as to

partake the character of capital. The said sum set apart for payment towards a specific liability cannot be said to be a reserve for future use of the

company. This sum has, therefore, to be treated as not a reserve.

However, Mr. Swaminathan contended that the Supreme Court in Kesoram Industries and Cotton Mills Ltd. Vs. Commissioner of Wealth Tax,

(Central) Calcutta, , to which we have already adverted, has held that the provision for dividend is not a provision for an enforceable liability,

because the payment of dividend becomes a debt only when the company in its general body meeting declares the dividend and that even when the

board of directors recommends to the company to declare a particular amount as dividend, it still remains only as a recommendation which can be

withdrawn and the recommendation does not become an enforceable obligation on the part of the company till the company in its general body

meeting declares the dividend. Learned counsel accordingly contended that the decision of this court holding that the provision for proposed

dividend is not a reserve but is only a provision requires reconsideration. We are unable to accede to this request. In Kesoram Industries and

Cotton Mills Ltd. Vs. Commissioner of Wealth Tax, (Central) Calcutta, , the Supreme Court was considering the provisions of the Wealth-tax

Act, 1957, and as to what constitutes a debt for the purpose of ascertaining the net wealth. The Supreme Court observed at page 772 thus :

The second question does not call for a detailed scrutiny. u/s 2(m) of the Wealth-tax Act, '' net wealth '' means the amount by which the aggregate

value computed in accordance with the provisions of the said Act of all the assets of the assessee on the valuation date is in excess of the aggregate

value of all the debts owed by the assessee on the said date. The directors of the assessee-company showed in the profit and loss account a sum

of Rs. 15,29,855 as the amount of dividend proposed to be distributed for the year ending March 31, 1957; but the said dividend was declared

by the company at its general body meeting only on November 27, 1957. The question is whether the amount set apart as dividend by the

directors was a debt owed by the company on the valuation date.

The directors cannot distribute dividends but they can only recommend to the general body of the company the quantum of dividend to be

distributed. u/s 217 of the Indian Companies Act, there shall be attached to every balance-sheet laid before a company in general meeting a report

by its board of directors with respect to, inter alia, the amount, if any, which it recommends to be paid by way of dividend. Till the company in its

general body meeting accepts the recommendation and declares the dividend, the report of the directors in that regard is only a recommendation

which may be withdrawn or modified, as the case may be. As on the valuation date nothing further happened than a mere recommendation by the

directors as to the amount that might be distributed as dividend, it is not possible to hold that there was any debt owed by the assessee to the

shareholders on the valuation date.

Thus, it is clear that what the Supreme Court was considering in that case was whether the amount set apart for proposed dividend constituted a

debt due by the company to its shareholders or not. We are of opinion that such a provision, which has been held to be not a debt, does not

automatically become a reserve for the purpose of the present case. Therefore, in our view, the earlier decision of this court on this point does not

require any reconsideration.

We may also point out that Section 211 of the Companies Act, 1956, refers to the form of balance-sheet and the contents and form of the profit

and loss account contained in Schedule VI, Parts I and II, of the Act. With regard to the form of the balance-sheet, there are separate heads under

the major head of "" liabilities "", one such head being "" reserves and surplus "" and the other head-being ""current liabilities and provisions"". There is a

sub.-head "" B. Provisions "". Immediately under this sub-head "" B. Provisions "", we have two items, "" provision for taxation "" and "" proposed

dividends"". Thus, it will be clear that under the Companies Act, these two are treated as different from reserves and are treated only as provisions.

The relevancy of our reference to the Companies Act, 1956, acquires further strength in view of the fact that Schedule VI to the Companies Act is

actually referred to in the Explanation to Rule 1 under the Second Schedule to the Companies (Profits) Surtax Act, 1964.

We have already referred to the first question in Tax Case No. 284 of 1972. But no argument is advanced on that question.

Under these circumstances, all the questions referred to this court in the above references are answered in the affirmative and in favour of the

revenue. The Commissioner is entitled to the costs of these references. Counsel''s fee is fixed at Rs. 250 in each.