Bombay High Court
1. Commissioner Of Income-Tax vs Unichem Laboratories Ltd. (And Vice ... on 9 February, 1993
Equivalent citations: (1993)113CTR(BOM)64, [1993]205ITR33(BOM)
JUDGMENT
The judgment of the court was delivered by MRS. SUJATA MANOHAR J. - Income-tax Reference No. 233 of 1978 :
This reference pertains to the assessment years 1973-74 and 1974-75. The first dates of the previous years are October 1, 1971, and October 1, 1972, respectively. For the purposes of capital computation under the Companies (Profits) Surtax Act, 1964, the capital has to be computed as on the first day of the previous year relevant to the assessment year.
The directors of the assessee-company in their reports dated January 25, 1972, and January 20, 1973, recommended equity dividends of Rs. 5,40,000 and Rs. 6,30,000, respectively, from out of the profits of the years ending on September 30, 1971, and September 30, 1972. These were approved by the shareholders in the annual general meeting held on March 17, 1972, and March 15, 1973, respectively.
It was contended by the assessee that the recommendation for the declaration of dividend was not done on the first day of the previous year much less was there any declaration of dividend on that date and hence the general reserves cannot be reduced by the quantum of dividends which have been subsequently declared. The Tribunal has held that there was no liability to pay dividends on the first day of the previous year. The recommendation by the directors was made after the first day of the previous year and hence the Surtax Officer was wrong when he held that the dividend declared out of general reserve, which was not a free reserve to the extent of the dividend declared, is deductible from the capital of the company. From this decision of the Tribunal, the following question of law has been referred to us under section 256(1) of the Income-tax Act, 1961 :
"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 (1973-74)/Rs. 6,30,000 (1974-75), being the amount of dividend declared from the general reserve was includible in computing the capital for the purpose of statutory deduction under the Companies (Profits) Surtax Act, 1964 ?"
Income-tax Reference No. 335 of 1978 :
This reference pertains to the assessment years 1970-71 and 1971-72, the respective previous years ending on September 30, 1969, and September 30, 1970. The capital which is, therefore, required to be determined for the purposes of assessment of surtax for these assessment years has to be determined as on October 1, 1968, and October 1, 1969. The credit balance outstanding in the general reserve account on October 1, 1968, and October 1, 1969, was Rs. 40,27,470 and Rs. 42,81,971, respectively. This credit balance was inclusive of profits of the immediately preceding year appropriate and transferred to the general reserve account. The company declared dividends out of the general reserve as follows :
Rs.
For 1967-68 on 1-10-1968 4,50,000 For 1968-69 on 1-10-1069 5,40,000 The Tribunal has held that the general reserves on the first day of the accounting period have to be reduced by the amount of dividends so declared. Hence, the following question has been referred to us under section 256(1) of the Income-tax Act, 1961 :
"Whether, on the facts and in the circumstances of the case, the amounts of proposed dividends have to be excluded from the general reserve for the purposes of assessments to surtax for the assessment years 1970-71 and 1971-72, respectively ?"
Income-tax Reference No. 230 of 1978 :
In this reference, the assessment years are 1971-72, 1972-73 and 1973-74. The relevant previous year for the assessment year 1971-72 is from April 1, 1970, to December 31, 1970. The relevant previous year for the assessment year 1972-73 is the calendar year 1971, while the relevant previous year for the assessment year 1973-74 is the calendar year 1972. For the purposes of capital computation under the Companies (Profits) Surtax Act, 1964, the following facts are relevant. The assessee had shown general reserves as on April 1, 1970, as Rs. 53,50,000. The assessee had not created a dividend reserve. The directors recommended a dividend of Rs. 13,20,000, which if approved by the shareholders was to be paid out of the general reserves. The shareholders accepted this recommendation on August 26, 1970. The Tribunal has held that the general reserves as on April 1, 1970, have to be reduced by the dividend so declared subsequently. Similarly, for the assessment year 1972-73, the general reserve as on January 1, 1971, which is shown at Rs. 80,52,000 has been reduced by the Tribunal by the proposed dividend of Rs. 13,20,000 for the period January 1, 1970, to December 31, 1970, declared and paid after January 1, 1971. For the assessment year 1973-74 also, the general reserves as on January 1, 1972, have been reduced by the proposed dividend for the period January 1, 1971, to December 31, 1971, of Rs. 16,50,000 which was declared and paid on May 17, 1972. In view of these findings of the Tribunal, the following common question of law for the three assessment years is referred to us :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount standing to the credit of the general reserve as on the first day of the previous year should be reduced by the dividend declared from it after the first day of the previous year for the purpose of computing the capital base under the Companies (Profits) Surtax Act, 1964 ?"
In the case of Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559, the Supreme Court has dealt at length with the distinction between a reserve and a provision. It has held that if any retention or appropriation of a sum falls within the definition of a provision, it can never be a reserve. But it does not follow that if the retention or appropriation is not a provision, it is automatically a reserve and the question will have to be decided having regard to the true nature and character of the sum so retained or appropriated depending on several factors including the intention with which and the purpose for which such retention and appropriation have been made. The true nature and character of the sums so appropriated must be determined with reference to the substance of the matter. It has referred to some aspects which would indicate whether the sum is set apart as an appropriation or as a reserve. The relevant aspect for our purpose is that if there is a clear conduct on the part of the directors in setting apart a sum from out of the mass of undistributed profits avowedly for the purpose of distribution as dividend in the same year, this would run counter to any intention of making that amount a reserve. But basically the question will have to be decided having regard to the surrounding circumstances. On the facts which were before the Supreme Court in the above case, the directors had made a recommendation that a certain sum be paid as dividend during the relevant previous year. However, the declaration of dividend at the annual general meeting was made in the subsequent year. The court held that the appropriation made by the directors about the proposed dividend did not constitute reserves and the concerned amounts so set apart would have to be ignored or excluded from the capital computation although they were so set apart after the first day of the relevant year.
In the case of Indian Tube Co. P. Ltd. v. CIT [1992] 194 ITR 102 (SC), which was also a case under the Companies (Profits) Surtax Act, 1964, in respect of the accounts of the appellant-company for the calendar year 1962, its board of directors, in a meeting held on May 1, 1963, approved transfer of Rs. 90 lakhs out of the profits to the Dividend Reserve Account. In the general meeting held on May 31, 1963, the shareholders declared a dividend of Rs. 76 lakhs as recommended by the board. The dividend was paid subsequently by transferring the sum of Rs. 76 lakhs from the Dividend Reserve Account to the Profit and Loss Appropriation Account. The question was whether for the previous year 1963 relevant to the assessment year 1964-65, the entire amount of Rs. 90 lakhs could be included in the capital computation as a reserve for the purposes of surtax under the Companies (Profits) Surtax Act, 1964, or whether the reserves would be reduced by Rs. 76 lakhs which were appropriated subsequently for distribution as dividend. The Supreme Court has held that only Rs. 14 lakhs out of Rs. 90 lakhs would be treated as a reserve in the computation of capital for the purposes of surtax.
The Supreme Court after referred to Vazir Sultan Tobacco Co. Ltd.s case [1981] 132 ITR 559, as also several other decisions including CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566 (SC), held that though the general body of the shareholders resolved and appropriated on May 31, 1963, the dividend of Rs. 76,00,000 from the reserve of Rs. 90,00,000, it related back to the relevant assessment year and, therefore, as on January 1, 1963, rupees 76,00,000 was a provision and could not computed as capital. The Supreme Court has, therefore, clearly indicated that even a subsequent declaration of dividend can relate back to the appropriate year for the purposes of determining capital computation under the Companies (Profits) Surtax Act.
In Indian Tube Co. P. Ltd.s case [1992] 194 ITR 102 above, the Supreme Court approved the decision of the Bombay High Court in the case of Hyco Products (P.) Ltd. v. [1981] 132 ITR 559, which has also been one of the matters dealt with by the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. [1981] 132 ITR 559. Our attention in this regard is drawn by Mr. Mistry, learned counsel for the assessee (in Income-tax Reference No. 230 of 1978), to the case of CIT v. Burmah Shell Refineries Ltd. [1990] 186 ITR 138 (Bom). In the above case, the relevant date for capital computation was December 31, 1963. In the report for the year dated March 17, 1964, the directors had recommended a final dividend to be paid out of the general reserves, if approved by the shareholders at the annual general meeting. In May, 1964, the annual general meeting approved the directors recommendations and the final dividend was paid out of the general reserve. The Division Bench said that the dividend declared in the year 1964 would not relate back to December 31, 1963, and the amount of general reserves as on that date should not be reduced by the dividend subsequently declared. The Division Bench distinguished the decision of the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. [1981] 132 ITR 559, by pointed out that in the case before the Supreme Court, the recommendation of the directors for the dividend was made before the relevant date for computation of capital, while in the case before it both the recommendation of the board of directors as well as the declaration of dividends were made at a subsequent date. The attention of the Division Bench does not appear to have been drawn to the case of Hyco Products Pvt. Ltd. v. CIT, which was expressly referred to and approved in Vazir Sultan tobacco Co. Ltd.s case [1981] 132 ITR 559, by the Supreme Court. Moreover, now, in view of the express findings of the Supreme Court in the subsequent case of Indian tube Co. P. Ltd. [1992] 194 ITR 102, that such a declaration of dividend can relate back to the first date of the relevant accounting year for the computation of the capital, the judgment of the Bombay High Court in Burmah Shell Refineries case [1990] 186 ITR 138, no longer holds the field. Mr. Mistry has sought to make a distinction between cases where there is only a mass of undistributed profits on the first day of the computation period and cases where either a general reserve or a dividend reserve has been expressly created on the first day of the subsequent year. He has submitted that when a reserve has been expressly made on the first day of the computation period, it cannot be subsequently diminished with reference to the dividend subsequently paid out of the reserve. This argument cannot be accepted in view of the decision of the Supreme Court in the case of Indian tube Co. P. Ltd. [1992] 194 ITR 102.
In the premises, the questions which are referred to us re answered as follows :
Income-tax Reference No. 233 of 1978 :
The question is answered in the negative and in favour of the Revenue.
Income-tax Reference No. 335 of 1978 :
The question is answered in the affirmative and in favour of the Revenue.
Income-tax Reference No. 230 of 1978 :
The question is answered in the affirmative and in favour of the Revenue.
No order as to costs.