Madras High Court
Southern Roadways Ltd. vs Commissioner Of Income-Tax, Tamil ... on 16 December, 1980
Equivalent citations: [1981]130ITR545(MAD)
Author: V. Ramaswami
Bench: V. Ramaswami
ORDER V. Ramaswami, J.
1. The following question has been referred at the instance of the assessee :
"Whether, on the facts and in the circumstances of the case, Rs. 18,64,065 which was distributed as dividend to the shareholders of the assessee-company should be excluded in the computation of the capital for ascertaining the 'statutory deduction' for the purpose of assessment under the Companies (Profits) Surtax Act, 1964, for the assessment year 1970-71 ?"
2. Since we are referring this matter to a Full Bench, we feel that it is not necessary to set out the facts or the arguments in detail. Suffice it to state that the learned counsel for the assessee relied on a Full Bench judgment in Madras Motor and General Insurance Co. Ltd. v. CIT [1979] 117 ITR 534 (Mad) as concluding this question. In this decision, this court considered the scope of r. 1, Second Schedule, to the Companies (Profits) Surtax Act, 1964. Since the assessee, in that case, was an insurance company, the argument on behalf of the revenue based on Expln. II to r. 1 was not considered and no definite answer was given. In the present case, since the assessee is not an insurance company, the computation of the capital will have to be done with reference to the Explanation. Though the Full Bench decision related to an insurance company, as if the principle laid down in that judgment was applicable even to non-insurance companies, a Division Bench, without going into the Explanation, simply purported to apply the principle in the decision in India Motor Parts & Accessories Ltd. v. CIT . It may also be mentioned that there was an earlier Bench judgment in Madras Auto Service v. CIT [1978] 112 ITR 540 (Mad), which held that a provision for dividends cannot be considered to be a general reserve either on principle or on the provisions of the Companies Act. But this decision was neither noticed by the Full Bench nor by the Division Bench. But even if it is to be treated as a general reserve whether in view of the Explanation to r. 1 of the Second Schedule to the Surtax Act, it will have to be excluded for the purpose of computation of the capital is the question that will have to be directly decided in this case. But having regard to certain observations made in the Full Bench judgment, we feel that this issue is better decided by a Full Bench rather that by a Division Bench.
3. We, accordingly, direct that the papers may be placed before My Lord the Chief Justice for posting this particular case before a Full Bench.
ORDER M.M. Ismail, C.J.
4. This matter comes before us on a reference made by a Division Bench of this court (V. Ramaswami and Balasubrahmanyan JJ.) by an order dated 2nd September, 1980. The learned judges were of the view that having regard to certain observations made in the judgment of a Full Bench of this court in Madras Motor and General Insurance Co. Ltd. v. CIT [1979] 117 ITR 534, it was better that the issue was decided by a Full Bench rather than by a Division Bench.
5. After having heard the case fully, we are clearly of the opinion that certain observations contained in the Full Bench judgment of this court referred to above, namely, Madras Motor and General Insurance Co. Ltd. v. CIT [1979] 117 ITR 534 require reconsideration. In view of this, we direct the case to be posted before a Fuller Bench.
ORDER Ismail, C.J.
6. The case originally came up for disposal before a Division Bench of this court consisting of V. Ramaswami J. and Balasubrahmanyan J. The learned judges by an order dated 2nd September, 1980, referred the case to a Full Bench, since they were of the view that having regard to certain observations contained in the judgment of a Full Bench of this court in Madras Motor and General Insurance Co. Ltd. v. CIT [1979] 117 ITR 534, it was better that the issue was decided by a Full Bench rather than by a Division Bench.
7. Pursuant to this order of reference, the case came before a Full Bench of this court consisting of the Chief Justice, Sethuraman J. and M. A. Sathar Sayeed J. The Full Bench was of the view that certain observations contained in the Full Bench judgment of this court referred to above required reconsideration. In view of this, the Full Bench referred this case to a Fuller Bench by an order dated 1st December, 1980. That is how the case has come up for disposal before this Bench.
8. The Income-tax Appellate Tribunal, Madras Bench "B", under s. 18 of the C.(P.)S.T. Act, 1964, read with s. 256(1) of the I.T. Act, 1961, referred the following question for the opinion of this court :
"Whether, on the facts and in the circumstances of the case, Rs. 18,64,065, which was distributed as dividend to the shareholders of the assessee-company should be excluded in the computation of the capital for ascertaining the 'statutory deduction' for the purpose of assessment under the Companies (Profits) Surtax Act, 1964, for the assessment year 1970-71 ?"
9. The assessee is a private limited company carrying on the business of passenger and goods transport. It filed its return showing a deficit of chargeable profits under the C.(P.)S.T. Act, 1964, hereinafter referred to as "the Act", for the assessment year 1970-71. The Surtax Officer, by his order dated 24th February, 1971, determined the taxable profits as Rs. 3,33,973 and levied a surtax of Rs. 83,493. In doing so, he computed the "chargeable profits" as Rs. 17,80,500 and the "statutory deduction" as Rs. 14,46,527. In computing the statutory deduction, the Surtax Officer noticed that the assessee-company had shown its capital as Rs. 1,93,61,011 which included Rs. 25,45,923 transferred to the general reserve account. He also noticed that such transfer had been made by the board of directors of the assessee-company on August 30, 1969, that is, long after the first day of the chargeable accounting period, which was April 1, 1969. He held that such transfer made on August 30, 1969, could not have retrospective effect, in view of the decision of this High Court in CIT v. Vasantha Mills Ltd. [1957] 32 ITR 237. Consequently, he computed the capital under the Second Schedule of the Act as Rs. 1,44,65,274 after deducting the aforesaid sum of Rs. 25,45,923 and a further sum of Rs. 23,49,841, the latter being the deduction made under r. 4 of the Second Schedule of the Act, with which we are not concerned in this case.
10. Aggrieved by such assessment, the assessee-company preferred Surtax Appeal No. 1/1971-72 to the AAC to Surtax, Madurai, contending among others, that the entire sum of Rs. 34,07,483 shown as general reserve in the balance-sheet as on March 31, 1969, should be taken as part of the capital. The AAC noticed that the Supreme Court had since then decided in CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566 that the appropriation made by the board of directors of a company of the surplus profit should be considered as having been made on the first day of the relevant previous year and that the Supreme Court had not approved the decision of the Madras High Court in CIT v. Vasantha Mills Ltd. [1957] 32 ITR 237, referred to already. He, therefore, held that the entire sum of Rs. 34,07,483 shown as general reserve in the balance-sheet of the assessee-company as on March 31, 1969, should be taken as capital for the purpose of computation of the "statutory deduction". But before the AAC, the Surtax Officer contended that since the board of directors had recommended in their report to the shareholders dated September 1, 1969, that dividend at the rate of 15% of the share capital, absorbing a sum of Rs. 18,64,065 might be distributed from out of the aforesaid sum of Rs. 25,45,923 transferred to the "general reserve" and since the general body of the assessee-company approved of this at the meeting held on September 30, 1969, the said amount could not be considered as capital for the purpose of computation of the "statutory deduction". The AAC did not accept this contention. He rejected the contention of the Surtax Officer that when the general body of the assessee-company sanctioned the distribution of Rs. 18,64,065 as dividend at the meeting held on September 30, 1969, the said sanction related back to the first day of the accounting year. It is against this reasoning and conclusion of the AAC that the department preferred an appeal to the Tribunal.
11. The only contention raised by the department in the appeal before the Tribunal was that the sum of Rs. 18,64,065 being the amount distributed as dividend could not be taken as reserve and, hence, it should not be included for the computation of capital for the ascertainment of the "statutory deduction". The basis of the contention was that when the general body approved the recommendations made by the board of directors for the distribution of the dividend at the meeting held on September 30, 1969, the approval related back to the first day of the accounting year in view of the decision of the Supreme Court in CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566, referred to already. Accepting this contention, the Tribunal rejected the claim of the assessee-company.
12. It is the correctness of this conclusion that is raised in the present reference in the form of the question which we have extracted in the beginning of this judgment.
13. We shall first consider the question referred to this court with reference to the admitted facts and the relevant statutory provisions. The admitted facts are as follows : For the assessment year 1970-71, the assessee-company showed in its balance-sheet that it had created a general reserve of Rs. 25,45,923. In the balance-sheet itself it was stated :
"No appropriation has been made for dividend on shares. Dividend when declared will be paid out of the general reserve."
14. This balance-sheet was signed by the directors on August 30, 1969. However, the report of the board of directors accompanying the balance-sheet for the purpose of being placed before the general body meeting of the company was dated September 1, 1969. In that report, among others, the directors stated as follows :
"Subsequent to the signing of the balance-sheet, your directors thought it desirable to recommend a dividend at 15% for the year ended 31-3-1969 from out of the profits of that year, absorbing a sum of Rs. 18,64,065 subject to deduction of tax, on the paid-up capital of the company, viz., Rs. 1,24,27,100. Sanction may please be accorded for payment of dividend out of general reserve, if the recommendation is approved, and the dividend declared at the ensuing annual general meeting."
15. The general body meeting took place on September 30, 1969, and the general body approved the aforesaid recommendation of the board of directors and, consequently, Rs. 18,64,065 was distributed as dividend.
16. The Act was enacted to impose a special tax on the profits of certain companies. Section 2(5) of the Act defines the expression "chargeable profits" as meaning :
"the total income of an assessee computed under the Income-tax Act, 1961 (43 of 1961), for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule."
17. Section 2(8) defines the expression "statutory deduction", which as it stood at the relevant time, is as follows :
"'statutory deduction' means an amount equal to ten per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of two hundred thousand rupees, whichever is greater :"
18. There are two provisos to this definition, which it is unnecessary to refer to for the purpose of this case.
19. Section 4 of the Act is the charging section and the same reads as follows :
"Subject to the provisions contained in this Act, there shall be charged on every company for every assessment year commencing on and from the first day of April, 1964, a tax (in this Act referred to as the surtax) in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction, at the rate or rates specified in the Third Schedule."
20. Rule 1 of the Second Schedule, referred to in s. 2(8) of the Act, so far as the same is relevant, as it stood at the relevant time, reads as follows :
"1. Subject to the other provisions contained in this Schedule, the capital of a company shall be the aggregate of the amounts, as on the first day of the previous year relevant to the assessment year, of -
(i) its paid-up share capital;
(ii) its reserves, if any, created under the proviso (b) to clause (vib) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922 (11 of 1922), or under sub-section (3) of section 34 of the Income-tax Act, 1961 (43 of 1961);
(iii) its other reserves as reduced by the amounts credited to such reserves as have been allowed as a deduction in computing the income of the company for the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or the Income-tax Act, 1961 (43 of 1961) : .....
Explanation. - For the removal of doubts it is hereby declared that any amount standing to the credit of any account in the books of a company as on the first day of the previous year relevant to the assessment year which is of the nature of item (5) or item (6) or item (7) under the heading 'RESERVES AND SURPLUS' or of any item under the heading 'CURRENT LIABILITIES AND PROVISIONS' in the column relating to 'LIABILITIES' in the 'FORM OF BALANCE-SHEET' given in Part I of Schedule VI to the Companies Act, 1956 (1 of 1956), shall not be regarded as a reserve for the purposes of computation of the capital of a company under the provisions of this Schedule."
21. Section 209 and the following sections of the Companies Act, 1956, that is, Act 1 of 1956, deal with the accounts of a company and the profits, and, among others, provide for the preparation of the balance-sheet and profit and loss account. Section 210(1) of the said Act states :
"At every annual general meeting of a company held in pursuance of section 166, the board of directors of the company shall lay before the company -
(b) a balance-sheet as at the end of the period specified in sub-section (3); and
(c) a profit and loss account for that period."
22. Section 217(1) of the said Act reads as follows :
"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 -
(a) the state of the company's affairs;
(b) the amounts, if any, which it proposes to carry to any reserves in such balance-sheet;
(c) the amount, if any, which it recommends should be paid by way of dividend;
(d) material changes and commitments, if any, affecting the financial position of the company which have occurred between the end of the financial year of the company to which the balance-sheet relates and the date of the report."
23. Section 220 of the said Act deals with the obligation of the directors to file the copies of balance-sheet and profit and loss account before the Registrar of Companies, after the same have been laid before the annual general meeting of the company. Sub-section (2) of s. 220 states that if the annual general meeting of a company before which a balance-sheet is laid as aforesaid does not adopt the balance-sheet, a statement to that effect and of the reasons therefor shall be annexed to the balance-sheet and to the copies thereof required to be filed with the Registrar.
24. Against the above facts and the background of the statutory provisions, we shall now consider the question referred to this court, without reference to any decided cases.
25. Section 217(1) of the Companies Act makes it clear that when the balance-sheet accompanied by a report of the board of directors, containing the allocation of certain amount towards reserves out of the surplus profits, is placed before the company in a general meeting, the board of directors is merely proposing that figure as the amount to be kept as reserve. Similarly when, in its report, the board of directors recommends a particular amount to be paid by way of dividend, as the language of the section itself shows, it is only a recommendation which the company in the general meeting may or may not accept. Notwithstanding the fact that s. 217(1) of the Companies Act, 1956, uses the word "proposes" in clause (b) thereof and uses the word "recommends" in clause (c) thereof, in our opinion, there is no difference between the two, because the idea of a proposal contemplates somebody else accepting or not accepting it, just as the very idea of recommendation contemplates somebody else accepting and acting upon it or not accepting it. Therefore, when in this case the balance-sheet showed a sum of Rs. 25,45,923 as a general reserve, it was no more than a proposal by the board of directors made to the general body of the company for setting apart that amount as a general reserve. From this point of view, it is in no way different from the recommendation of the board of directors contained in the report dated September 1, 1969, to the general body for declaring dividend at 15% accounting for a sum of Rs. 18,64,065.
26. Mr. S. Swaminathan, learned counsel for the assessee-company, conceded before us that the fact that the balance-sheet was signed by the directors on August 30, 1969, and the report of the directors was dated September 1, 1969, that is, the next working day (August 31, 1969), being a holiday, will not have any consequence, since the balance-sheet as well as the report accompanying the balance-sheet was placed before the general body only on September 30, 1969. In view of this, on the application of the provisions contained in s. 217(1)(b) and (c) of the Companies Act, 1956, the position is this, namely, that it is only when the general body aodpts the balance-sheet and the report of the board of directors, that a reserve is created and dividend is declared. Applying this to the facts of this case, it is clear that on September 30, 1969, the company at its general body meeting approved the proposal of the board of directors to create a reserve of Rs. 25,45,923 and out of the same to declare a dividend of Rs. 18,64,065 leaving a net reserve of Rs. 6,81,858 only. Since the approval of the proposal to create a reserve and the approval of the recommendation to declare a dividend took place at the same meeting of the general body, it would be an empty formality to hold that the company at its general body meeting first approved the proposal of the board of directors to create a reserve of Rs. 25,45,923 and thereafter approved the recommendation of the board of directors to declare a dividend of Rs. 18,64,065. On the other hand, it will be in accordance with not only the letter but also the spirit of the law that the action of the company in its general meeting in approving the creation of a reserve as well as the recommendation for declaring dividend is one only and consequently the creation of a reserve and the declaration of dividend takes place simultaneously with the result that as far as the creation of a reserve is concerned, what springs from the action of the company at its general body meeting is the creation of a reserve of Rs. 6,81,858 only.
27. The further contention of Mr. Swaminathan, learned counsel for the assessee-company, is that under art. 107 of the articles of association of the assessee-company, the board of directors had the authority to set aside and transfer to the reserve fund such sum as it thought proper out of the profits of the company, that for the accounting year in question the assessee-company had made a surplus profit of Rs. 78,95,923, that the board of directors in exercise of the authority available to it under art. 107 transferred to the general reserve of Rs. 25,45,923 out of the aforesaid surplus by signing the balance-sheet on August 30, 1969, that the moment the board of directors signed the balance-sheet on August 30, 1969, the general reserve of Rs. 25,45,923 had been created and by virtue of this position, automatically the said reserve became reserves under clause (iii) of r. 1 of the Second Schedule to the Act and that the fact that on September 30, 1969, the general body declared a dividend of Rs. 18,64,065 out of Rs. 25,45,923 would not in any way affect the position that a general reserve had already been created in a sum of Rs. 25,45,923. In other words, the argument of Mr. Swaminathan is that the board of directors had complete and decisive authority to create a general reserve under art. 107 of the articles of association of the assessee-company and that the moment it had shown the said sum of Rs. 25,45,923 as a general reserve in the balance-sheet signed by the directors on August 30, 1969, the creation of the reserve had become final and irrevocable and the fact that the general body meeting held on September 30, 1969, declared a dividend of Rs. 18,64,065 out of the said reserve would not affect the position for the purpose of the Act.
28. We are unable to accept this contention, having regard to the specific language contained in s. 217(1)(b) and (c) of the Companies Act, 1956. We are of the opinion that, having regard to the language contained in s. 217(1)(b) of the Companies Act, 1956, the authority competent to create a general reserve under the Companies Act, 1956, is only the general body, though the general body acts on the proposals made by the board of directors. Article 107 of the articles of association of the assessee-company does not in any way affect the position. As a matter of fact, Table A found in Sch. I annexed to the Companies Act, 1956, contains a model clause 87 on which art. 107 of the articles of association of the assessee-company is stated to have been based. Clause 87 of Table A reads as follows :
"87. (1) The board may, before recommending any dividend, set aside out of the profits of the company such sums as it thinks proper as a reserve or reserves which shall, at the discretion of the board, be applicable for any purpose to which the profits of the company may be properly applied, including provision for meeting contingencies or for equalising dividends; and pending such application, may, at the like discretion, either be employed in the business of the company or be invested in such investments (other than shares of the company) as the board may, from time to time, think fit.
(2) The board may also carry forward any profits which it may think prudent not to divide, without setting them aside as a reserve."
29. Section 9 of the Companies Act, 1956, reads as follows :
"9. Save as otherwise expressly provided in the Act -
(a) the provisions of this Act shall have effect notwithstanding anything to the contrary contained in the memorandum or articles of a company, or in any agreement executed by it, or in any resolution passed by the company in general meeting or by its board of directors, whether the same be registered, executed or passed, as the case may be, before or after the commencement of this Act; and
(b) any provision contained in the memorandum, articles, agreement or resolution aforesaid, shall, to the extent to which it is repugnant to the provisions of this Act, become or be void, as the case may be."
30. Consequently, it is clear that no clause contained in Table A of Sch. I to the Companies Act, 1956, or no article contained in the articles of association of any company can override the provisions contained in s. 217 of the Companies Act, 1956. Even if clause 87 of Table A of Sch. I to the Companies Act, 1956, or any article in the articles of association of any company is couched in a wide language in this behalf, it is the duty of the court to read the said clause or article consistent with the statutory provisions. If such a harmonious reading is not possible, the clause in Table A or the relevant article contained in the articles of association of a company will have to yield to the provisions contained in the statute. Hence, simply as a matter of construction of the relevant statutory provisions, we are of the opinion that there is no complete and irrevocable creation of a reserve, the moment the board of directors signs the balance-sheet showing a particular amount as having been carried towards reserve, and the reserve is created finally only when the company's general body adopts the balance-sheet and the report of the board of directors.
31. Mr. Swaminathan stresses the fact that in this case the board of directors has not set apart any amount towards proposed dividend in the balance-sheet itself and that it has only referred to the figure recommended to be declared as dividend in its report. In our opinion, this does not make any difference, since, as we have pointed out already, both of them will have to be placed together before the general body and the general body has to adopt the same. The moment it is adopted, the contents of the balance-sheet as well as the proposal or recommendation contained in the report of the board of directors will constitute appropriation of the surplus profits. Thus, it is clear that when the company, in its general body meeting held on September 30, 1969, adopted the balance-sheet and the report of the directors, it declared a dividend of Rs. 18,64,065 out of the surplus profits of Rs. 25,45,923, leaving only a sum of Rs. 6,81,858 to be taken to the general reserve. It is not the case of the assessee-company that simply because the general reserve was "created" by the board of directors on August 30, 1969, by showing the figure of Rs. 25,45,923 in the balance-sheet as on March 31, 1969, and signing the same, it will not be referable to or relate back to 1st April, 1969, the first day of the previous year relevant to the assessment year 1970-71. On the other hand, it is the case of the assessee-company that by reason of the judgment of the Supreme Court in CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566 (to which we shall ourselves refer later in the course of the judgment), the "creation" of the reserve on August 30, 1969, will relate back to 1st April, 1969. If so, the question being not one of form, but of substance, the general reserve that was created as a result of the action of the company in its general meeting held on September 30, 1969, was the general reserve of Rs. 6,81,858 only and naturally that will relate back to 1st April, 1969. It is not the particular form that is adopted or the particular procedure that is followed which will determine the real nature of a transaction. In fact, no amount of ingenuity or jugglery in the procedure followed can conceal the real nature of a transaction. Logically speaking, out of the surplus profits, the amount recommended to be paid to the shareholders by way of dividend must be first set apart before a reserve can be created, because the amount payable by way of dividend is a sum of money that will go out of the coffers of the company, while the amount set apart by way of reserve will remain with the company itself. Reversing this logic, if any company first attempts to set apart the surplus profits as a general reserve and thereafter out of that general reserve declares a certain amount by way of dividend payable to the shareholders, that sequence itself cannot affect or alter the real nature of the transaction. In this particular case, as we have already pointed out, the balance-sheet was signed by the board of directors on August 30, 1969, and their report was dated September 1, 1969. In this report, they stated :
"Subsequent to the signing of the balance-sheet, your directors thought it desirable to recommend a dividend at 15% for the year ended March 31, 1969, from out of the profits of that year, absorbing a sum of Rs. 18,64,065, subject to deduction of tax, on the paid up capital of the company, viz., Rs. 1,24,27,100."
32. This will give an impression that there was a sequence of two events, namely, first, signing of the balance-sheet and thereafter the board of directors thinking it desirable to recommend a dividend. The attempt that was made by this procedure was to create an impression as if the general reserve was first created and only thereafter the recommendation for payment of dividend out of the general reserve was made. But that attempt cannot succeed in this case, because the very statement contained in the balance-sheet, which we have extracted already, namely, "No appropriation has been made for dividend on shares. Dividend when declared will be paid out of the general reserve", clearly establishes that even when the board of directors signed the balance-sheet on August 30, 1969, they did think of recommending to the general body, declaration of dividend. It is in view of this only that Mr. S. Swaminathan, learned counsel for the assessee-company, represented to us that he was not advancing any argument based upon the general reserve being created on August 30, 1969, and the recommendation for declaration of dividend being made on the next working day, namely, September 1, 1969.
33. So far we have approached this question without any reference whatever to any decided case, but solely on the basis of the statutory provisions contained in the Act and the Companies Act, 1956. Even for the conclusion which we have reached, namely, that having regard to the language of s. 217(1)(b) of the Companies Act, 1956, a reserve is created only by the general body at its meeting, we find support in the decision of the Bombay High Court in CIT v. Aryodaya Ginning and Manufacturing Co. Ltd. [1957] 31 ITR 145 (Bom), which was referred to with approval by the Supreme Court in CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566. In CIT v. Aryodaya Ginning and Manufacturing Co. Ltd. [1957] 31 ITR 145 (Bom), the assessee was a limited liability company. The company made up its accounts at the end of December every year. For the year ending 31st December, 1948, the directors made certain appropriation of the profits of that year and the profits brought forward from the previous year and allocated certain amounts to the reserve fund and dividend reserve fund. At a general meeting held on June 27, 1949, the company accepted the recommendation of the directors and adopted the balance-sheet. In the assessment of the company to the business profits tax for the chargeable accounting period January 1, 1949, to March 31, 1949, under the Business Profits Tax Act, 1947, the company claimed that the amounts allocated to the reserve fund and the dividend reserve fund should be taken into account in computing its capital for the purpose of abatement, inasmuch as those reserves appeared in the balance-sheet as on December 31, 1948. The contention of the department was that as the reserves were not sanctioned by the shareholders till 27th June, 1949, they could not be treated as reserves for the chargeable accounting period of January 1, 1949, to March 31, 1949. The Bombay High Court observed (p. 150) :
"Now, there is no doubt in this case that these amounts - and we will deal for the time being only with the reserve with regard to the amounts appropriated to the reserve fund and the dividend reserve fund - did constitute reserves. The only question is as to the date when they constituted reserves. It is undoubtedly true that the function of the directors under the Companies Act is to make a recommendation as to how the profits should be distributed or allocated and it is the right of the shareholders ultimately to decide at a general meeting. There were profits made by this company at the end of 31st December, 1948, and those profits were in the sum of Rs. 28,94,946-11-0 and these profits had to be dealt with by the directors and in respect of them recommendation had to be made by the directors, and the company law provides that dividend must be declared out of these profits after all the necessary appropriations have been made, and, therefore, the directors proceeded to make the appropriations and the appropriations included the taking of a sum of Rs. 11,08,000 to the reserve fund and a sum of Rs. 1,50,000 to the dividend reserve fund. Now, when this recommendation came before the shareholders at the general meeting, what the shareholders accepted and adopted in the form of a resolution was that these amounts should constitute reserves as of the 31st December, 1948. The fallacy underlying the Commissioner's contention is that these amounts constituted reserve as of the 27th June, 1949, when the resolution was passed. Although the resolution was passed on the 27th June, 1949, the resolution obviously had a retrospective effect and it referred to the profits of the year ending on 31st December, 1948, to the appropriations to be made in the balance-sheet as of the 31st December, 1948, and the reserves that should be constituted and shown in the balance-sheet as of the 31st December, 1948. When we look at the balance-sheet of the year ended on 31st December, 1948, these amounts are shown respectively in the reserve fund and the dividend reserve fund. Therefore, the shareholders by passing a resolution on the 27th June, 1949, did not decide that these amounts should constitute reserves as from that date, but they accepted the recommendation of the directors that these amounts should constitute reserves of the company as of the 31st December, 1948."
34. After the above observation, there follows the following paragraph, which is of immediate relevance to the point which we have just dealt with (p. 151) :
"The Advocate-General says that there must be someone with the requisite authority who can decide that a certain amount should constitute reserve. The directors under the Companies Act do not have the requisite authority, only the shareholders have it, and till somebody has decided to this effect no part of the profits can become reserves. Now, that proposition is perfectly sound, but in advancing that argument what is overlooked is that the body of shareholders who are the persons with the requisite authority do not merely determine that a certain amount should constitute reserve, but they also determine and have the necessary authority for determining that that amount should constitute reserve as from a particular date, and in this case there is no doubt that the general meeting of the shareholders was considering the accounts for the year ended 31st December, 1948, and passing resolution with regard to those accounts."
35. This passage is decisive on the question as to who is the authority competent to create "reserves" and shows that it is the general body of a company that has competency to create "reserves".
36. The above judgment of the Bombay High Court was rendered in that case on August 23, 1956, and the Companies Act, 1956, came into force on April 1, 1956. For deciding the question which was before it, naturally the Bombay High Court could not have relied on the provisions contained in the Companies Act, 1956. However, that does not in any way alter the position because the provisions of s. 217 of the Companies Act, 1956, on which we have relied, correspond to those of s. 131A of the Indian Companies Act, 1913, and s. 157 of the English Companies Act, 1948.
37. This decision of the Bombay High Court, namely, CIT v. Aryodaya Ginning and Manufacturing Co. Ltd. [1957] 31 ITR 145 (Bom) was referred to with approval by the Supreme Court in CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566, as stated already. As a matter of fact, when summarising the facts of that case, the Supreme Court specifically referred to the directors making only a recommendation for the purpose of creating a "reserve".
38. No decided case was brought to our notice approaching this question regarding the construction of the relevant provisions of the Act from the angle from which we have approached, namely, the authority or the body under the Companies Act, 1956, competent to create a "reserve" and when the company in its general meeting adopts the balance-sheet signed by the board of directors and the report of the directors appended thereto, the declaration of the dividend and the creation of the reserve are effeted simultaneously by the general body, which is competent to act with reference to both.
39. We shall now consider the question from another point of view. Even assuming that the entire sum of Rs. 25,45,923 is "reserve" within the scope of r. 1(iii) of the Second Schedule to the Act, yet by the operation of the Explanation to that rule, the sum of Rs. 18,64,065 recommended for declaration of dividend will cease to be part of that reserve. It was not disputed before us that the sum of Rs. 18,64,065 came out of the sum of Rs. 25,45,923 shown as "reserve" in the balance-sheet signed by the directors on August 30, 1969. We have already extracted the Explanation to r. 1 of the Second Schedule to the Act. That Explanation makes it clear that for the purpose of computation of the capital of a company under the provisions of the Second Schedule, certain amounts standing to the credit of any account in the books of a company as on the first day of the previous year relevant to the assessment year which are of the nature mentioned in the Explanation shall not be regarded as a reserve. The Explanation refers to item (5) or item (6) or item (7) under the heading "Reserves and Surplus" or of any item under the heading "Current Liabilities and Provisions" in the column relating to "Liabilities" in the "Form of Balance-sheet" given in Pt. I of Sch. VI to the Companies Act, 1956 (1 of 1956). Section 211(1) of the Companies Act, 1956, states :
"Every balance-sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of this section, be in the form set out in Part I of Sch. VI, or as near thereto as circumstances admit or in such other form as may be approved by the Central Government either generally or in any particular case; and in preparing the balance-sheet due regard shall be had, as far as may be, to the general instructions for preparation of balance-sheet under the heading 'Notes' at the end of that part."
40. In the form of balance-sheet as Pt. I in Sch. VI to the Companies Act, 1956, under the heading "Current Liabilities and Provisions", there are 13 items, the first 7 items being under the sub-heading "A. Current Liabilities" and the remaining 6 items being under the sub-heading "B. Provisions". The 9th item is "Proposed dividends". "Notes" at the end of Pt. I of Sch. VI to the Companies Act, 1956, contains the following, among others :
"General instructions for preparation of balance-sheet. - (a) The information required to be given under any of the items or sub-items in this form, if it cannot be conveniently included in the balance-sheet itself, shall be furnished in a separate Schedule or Schedules to be annexed to and to form part of the balance-sheet. This is recommended when items are numerous."
41. Thus, it will be seen that under s. 211(1) of the Companies Act, 1956, read with the form of balance-sheet in Pt. I of Sch. VI to the said Act, a balance-sheet should contain "Proposed dividends" as an item under the heading "Current Liabilities and Provisions". Whether the failure to include such item will impose any liability on the board of directors is a different matter. What is relevant for the purpose of the point under consideration is, that the statute contemplates showing the amount representing the proposed dividend as an item under the heading "Current Liabilities and Provisions", particularly under the sub-heading "B. Provisions". The Explanation states that such item shall not be regarded as a reserve for the purpose of computation of the capital of a company under the provisions of the Second Schedule to the Act.
42. In a case like the present one, where the board of directors have not shown the amount of proposed dividend in the balance-sheet itself, the question for consideration is, what is the legal consequence. In order to meet such contingency, the Explanation to r. 1 of the Second Schedule to the Act takes care to say "any amount standing to the credit of any account in the books of a company as on the first day of the previous year relevant to the assessment year which is of the nature of item (5) ..... or of any item under the heading 'Current Liabilities and Provisions'." The Explanation deliberately does not say, "any amount standing to the credit of any account in the books of a company as on the first day of the previous year relevant to the assessment year, which is an item under the heading 'Current Liabilities and Provisions'." The use of the expression, "of the nature" occurring in the Explanation is significant. In this particular case, if the balance-sheet was prepared by the assessee-company in the form of balance-sheet given in Pt. I of Sch. VI to the Companies Act, 1956, the board of directors should have shown the sum of Rs. 18,64,065 as item 9 under the heading "Current Liabilities and Provisions". Their deliberate omission to show the said amount in that manner cannot affect the legal consequences flowing from the Explanation. As a matter of fact, the Explanation is in the nature of a proviso or exception to r. 1 providing that certain amounts shall not be regarded as reserve for the purpose of computation of the capital of a company under the provisions of the Second Schedule to the Act. The Explanation from its very nature can come into operation only if the amount in question falls under r. 1(iii) of the Second Schedule to the Act as a reserve. Inasmuch as the Explanation has the effect of cutting down the scope of reserves under r. 1(iii) the same will not come into operation if the particular amount does not fall within the scope of r. 1(iii) at all. Hence, even assuming that the sum of Rs. 18,64,065 forming part of the sum of Rs. 25,45,923 constitutes a "general reserve" under r. 1(iii) of the Second Schedule to the Act, still by operation of the Explanation, the said amount, namely, Rs. 18,64,065 shall not be regarded as a reserve for the purpose of computation of the capital of the assessee-company in the present case. Hence, looked at from any point of view, it necessarily follows that the assessee-company is not entitled to include the sum of Rs. 18,64,065 in the computation of its capital for ascertaining the statutory deduction.
43. So far, we have considered the question as purely one of interpretation of the statutory provisions. In view of this and in view of the fact that no decided case cited before us has approached this question from this angle, strictly it may not be necessary to refer to any decided case. However, having regard to the fact that the matter has come before this Bench of five judges only because of certain observations contained in the Full Bench judgment of this court in Madras Motor and General Insurance Co. Ltd. v. CIT [1979] 117 ITR 534, already referred to, we shall briefly note the decisions which have a bearing on this question and which have been cited at the Bar.
44. We shall first note two decisions of the Supreme Court, one arising under the W.T. Act and the other arising under the Act. The decision arising under the W.T. Act is Kesoram Industries and Cotton Mills Ltd. v. CWT . In that case, the Supreme Court was considering the provisions of the W.T. Act, 1957, and as to what constituted a debt for the purpose of ascertaining the net wealth. The Supreme Court observed (p. 772) :
"The second question does not call for a detailed scrutiny. Under section 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. Under section 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."
45. We are of the opinion that the said decision of the Supreme Court does not have any direct bearing on the question we are considering. In the present case, we are not considering the question as to what constitutes a debt and we are considering only as to what constitutes a reserve. Since under the W.T. Act, the value of all the debts owed by the assessee on the valuation date has to be deducted from the value of all the assets of the assessee on that date, the question that had to be considered by the Supreme Court was whether the dividend which was declared by the assessee-company subsequent to the valuation date could be said to be a debt owed by the company on the valuation date. That is not the position in the present case.
46. The next decision of the Supreme Court is CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566, mentioned already. That decision was directly concerned with the interpretation of certain provisions of the Act. In that case, the directors of the assessee-company on 8th August, 1963, out of the profits of the year ending 31st March, 1963, appropriated several sums for different purposes. The items appropriated which came up for consideration before the Supreme Court were : (1) Rs. 2,56,000 as plant modernisation and rehabilitation reserves; (2) Rs. 1,00,000 as loan redemption reserves, and (3) Rs. 89,557 as development rebate reserve. These were three of the items of reserve which the directors of the assessee-company in their report to the general body of the shareholders proposed as appropriations out of the profits of the year ending on 31st March, 1963. The contention of the revenue was that these appropriations having been made on 8th August, 1963, could not be treated as components of capital "as on the first day of the previous year", that is, the 1st April, 1963, in terms of r. 1 of the Second Schedule to the Act and that these could only be taken into consideration in the subsequent year commencing on 1st April, 1964, on the ground that on 1st April, 1963, they only formed a part of the mass of undistributed profits, no portion of which had been earmarked or set apart for any particular purpose. The Supreme Court, after extracting r. 1 of the Second Schedule to the Act, rejected this contention. The Supreme Court observed (p. 569) :
"It is well known that the accounts of the company have to be made up for a year up to a particular day. In this case that day was the 31st March, 1963. If it was reasonably practicable to make up the accounts up to the 31st March, 1963, and present the same to the directors of the respondent on April 1, 1963, they could have made up their minds on that day and declared their intention of appropriating the said and other sums to reserves of different kinds. But the fact that they could not do so for the simple reason that the calculation and collection of figures of all the items of income and expenditure of the company for the year ending March 31, 1963, was bound to take some time cannot make any difference to the nature or quality of the appropriation of the profits to reserves as determined by the directors after the first of April, 1963. Their determination to appropriate the sums mentioned to the three separate classes of reserves on the 8th August, 1963, must be related to the 1st of April, 1963, i.e., the beginning of the accounts for the new year and must be treated as effective from that day."
47. It is in that context only the Supreme Court referred to with approval the decision of the Bombay High Court in CIT v. Aryodaya Ginning and Manufacturing Co. Ltd. [1957] 31 ITR 145, already drawn attention to. Even the learned counsel for the assessee-company relied on this decision for the purpose of contending that the general reserve of Rs. 25,45,923 shown in the balance-sheet signed by the board of directors on August 30, 1969, should be related to 1st April, 1969. However, when we asked the learned counsel as to why the dividend declared by the general body of the company on September 30, 1969, cannot similarly relate back to 1st April, 1969, the only answer of the learned counsel was that the decision of the Supreme Court in CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566 was concerned with "reserve" and the principle of that decision cannot be applied to a "liability" like declaration of dividend. We are unable to accept this contention. As a matter of fact, on the reasoning of the Supreme Court in CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566, even the fact whether a company had made a profit or suffered a loss can be ascertained only subsequent to 31st March or 1st April of the year, because the calculation and the collection of figures of all the items of income and expenditure of the company will certainly take time. If a company has branches at different places, all the dealings of these branches will have to be pooled for the purpose of finding out whether the company has made a profit or suffered a loss. Therefore, even the fact whether a company has made a profit or suffered a loss can be ascertained only very much later than the 1st April of a year. If so, we are unable to make a distinction between the creation of a reserve and a declaration of a dividend with reference to relation back to the first April of the year in question. In our opinion, the fact that the declaration of dividend creates a liability on the part of the company towards its shareholders does not in any way affect the question. By holding that the declaration of dividend will relate back to the 1st day of April, the court is not affecting the rights and liabilities between the company and its shareholders with reference to the dividend. It is merely adopting a practical and commonsense approach for the purpose of computation of the capital under the Second Schedule to the Act, and any such relation back will not affect the inter se rights and obligations between the company and its shareholders. This conclusion of ours is independent of the conclusion we have already reached, namely, that the creation of a reserve and declaration of dividend take place simultaneously and, therefore, the real reserve is the surplus profits proposed to be taken to the reserve by the board of directors minus the amounts recommended by the board of directors for declaration of dividend.
48. As far as this court is concerned, there are two direct decisions dealing with the question. One is Nagammal Mills Ltd. v. CIT [1974] 94 ITR 387 (Mad). In that case, the assessee-company made a profit of Rs. 9,91,092 for the year ending on 30th April, 1961. The balance of profit brought forward from the earlier year was Rs. 2,12,352. The board of directors in their report dated November 12, 1961, to the shareholders recommended a dividend of Rs. 31,465 on preference shares and a dividend of Rs. 3,12,020 on ordinary shares, totalling Rs. 3,43,485. In computing the capital as on May 1, 1961, under r. 1 of the Second Schedule to the Act, the assessee claimed among others that the said sum of Rs. 3,43,485 should be treated as reserve. The Tribunal, relying on the decision of the Supreme Court in CIT v. Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499, held that on May 1, 1961, the whole of the profits of the company remained unappropriated to any specific account or specific purpose and no reserve has been created out of the profits by the board of directors or by the general body of shareholders, and, therefore, they cannot be treated as reserves contemplated by r. 1 of the Second Schedule. Dealing with this conclusion of the Tribunal, this court observed (p. 390) :
"Before considering each of the four items, provision for bonus, dividend, taxation and development rebate reserve, it is necessary to consider in the first instance the correctness of the reasoning of the Tribunal holding that there is no appropriation made by the competent authority as on May 1, 1961; and, therefore, the sums cannot be treated as reserves. Though the appropriation is made by the company subsequent to the close of the earlier year, it relates back to the first day of the accounting year, that is, May 1, 1961, in this case, as the words 'as on' occurring in rule 1 of Schedule 2 indicate that though the appropriation has been made actually on a later date, it is as on the first day of the previous year [vide Commissioner of Income-tax v. Mysore Electrical Industries Ltd. ]. The position is different in the case reported in Century Spinning and Manufacturing Co.'s case , which dealt with the provision of rule 2(1) of Schedule II of the Business Profits Tax Act of 1947, which used the words 'on the first day of the accounting period' as distinguished from the words 'as on' used in rule 1 of Schedule II of the Super Profits Tax Act with which we are concerned. Therefore, the view taken by the Tribunal that the appropriation came to be made subsequent to the first day of the previous year and, therefore, it should be taken that on the relevant date the profits have not been appropriated for any particular purpose cannot, therefore, be accepted. Though the appropriation came to be actually made by the company on November 12, 1961, it should be deemed to relate back to the first day of the previous year."
49. With regard to the sum of Rs. 3,43,485 set apart for payment of dividend, this court observed (p. 391 of 94 ITR) :
"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."
50. The second decision is Madras Auto Service v. CIT [1978] 112 ITR 540 (Mad). In the said decision, which was rendered by two of us (Ismail J., as he then was, and Sethuraman J.), the question that came to be considered was whether the sum of Rs. 7,44,000, representing proposed dividends, 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 Bench referred to the earlier decision of this court in Nagammal Mills Ltd. v. CIT [1974] 94 ITR 387, and held that the amount of Rs. 7,44,000 representing the proposed dividends could not be taken into account for computation of the capital. The learned counsel who appeared for the assessee in that case and who is also appearing for the assessee-company in the present case argued that the decision of this court in Nagammal Mills Ltd. v. CIT [1974] 94 ITR 387 required reconsideration in the light of the decision of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. CWT [1966] 59 ITR 767, already referred to. After referring to the decision of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. CWT, the Bench observed (p. 543) :
"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. Provision'. 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."
51. The next decision is that of the Bombay High Court in CIT v. Bharat Bijlee Ltd. [1977] 107 ITR 30. The two questions which the Bombay High Court had to consider in the said decision were :
"1. Whether, on the facts and in the circumstances of the case, the dividend reserve was a reserve includible in the computation of capital of the assessee-company as contemplated under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ?
2. If the answer to question No. 1 is in the affirmative, whether the dividend reserve includible in the computation of capital of the assessee-company as on July 1, 1964, was in the amount of Rs. 5,90,000 or in the amount of Rs. 3,60,000 ?"
52. In that case, the balance-sheet of the company for the year ending June 30, 1964, showed an item of dividend reserve under the head "Reserves and surplus". The relevant part of the balance-sheet was as under :
"Reserves and surplus Rs. Rs.
Dividend reserve : as per last
account 3,45,000
Less : Transferred to profit and
loss account for dividend for
1962-63 1,90,000
----------
1,55,000
Set aside this year 4,35,000
----------
5,90,000".
53. The directors in their report dated October 22, 1964, stated that after transferring an amount of Rs. 4,35,000 to the dividend reserve the balance to be carried forward was Rs. 1,941. The directors recommended that a dividend of Rs. 8 per share on the 20,000 old equity shares (subject to deduction of tax) and a dividend of Rs. 7 per share on the 10,000 new equity shares (subject to deduction of tax) aggregating to Rs. 2,30,000 be paid out of the dividend reserve. The dividend as recommended by the board of directors ..... was approved of by the shareholders at the annual general meeting and ultimately was paid to them. The question arose before the taxing authorities as to what was the capital employed in the business on the relevant date, namely, July 1, 1964. It was contended on behalf of the assessee-company that the entire dividend reserve amount of Rs. 5,90,000 as on July 1, 1964, was a reserve includible in the computation of capital for the surtax assessment year 1966-67. In the alternative, it was contended that in any case the balance of Rs. 3,60,000 in the dividend reserve account, after excluding the sum of Rs. 2,30,000 recommended by the directors for the payment of dividends for the year ended June 30, 1964, was dividend reserve and that such amount of Rs. 3,60,000 formed part of the capital of the assessee-company as on July 1, 1964, for the purposes of surtax assessment for the assessment year 1966-67. The Tribunal took the view that on the first day of the previous year, that is, as on July 1, 1964, the balance-sheet clearly showed the said sum of Rs. 3,60,000 as constituting part of the dividend reserve, the amounts in question having been duly transferred from profits to reserve in the earlier years by the authorities of the company competent to do so and that the sum of Rs. 2,30,000 earmarked for payment of dividends was not a reserve as on July 1, 1964, but the balance amount of Rs. 3,60,000 in the dividend reserve account was a reserve includible in the computation of capital as on July 1, 1964, for surtax purposes for the assessment year 1966-67. It was contended on behalf of the assessee before the High Court that as a sum of Rs. 1,55,000 was already standing to the credit of the dividend reserve account, only a sum of Rs. 75,000 should be treated as being available from the current profits for payment of the sum of Rs. 2,30,000 as proposed dividend and, therefore, a sum of Rs. 5,15,000 should be regarded as includible in the computation of capital for the purpose of surtax. The High Court rejected this contention. The High Court pointed out thus (pp. 34, 35) :
"For the year ending June 30, 1964, the directors had recommended an aggregate amount of Rs. 2,30,000. No independent provision was made for payment of this amount but it was stated in the report that the said amount will be paid out of the dividend reserve. Out of the profits or income for the year ending June, 30, 1964, a sum of Rs. 4,35,000 was directed to be appropriated towards the dividend reserve account. Thus, the whole of the sum of Rs. 2,30,000 could come out of the said amount and the balance will be credited to the dividend reserve account so as to be added to the amount of Rs. 1,55,000 already standing to the credit of the dividend reserve account. From the commercial point of view if any amount is required for incurring any expenditure or making any disbursements in a current year, then ordinarily the same will come out of the income of the company if it is available and only if it is insufficient then the past savings will be resorted to for the purpose of incurring the expenditure or making disbursements. In the present case, there is no doubt that, ordinarily, if the current profits are sufficiently available, then the same will be utilised for the purpose of payment of the dividend and, looked at from that point of view, the sum of Rs. 2,30,000 should be regarded as having been paid out of the sum of Rs. 4,35,000. The aggregate amount thus standing to the credit of the dividend reserve account would be Rs. 3,60,000 after payment of the dividend amount of Rs. 2,30,000. Thus, our answers to the questions referred are as under :
Question No. 1 is answered in the affirmative, but the quantum of the amount which should be treated as reserve includible in the computation of capital of the assessee-company will depend upon the facts of the case.
Question No. 2. The dividend reserve includible in the computation of the capital of the assessee-company as on July 1, 1964, was the amount of Rs. 3,60,000."
54. Thus, it will be seen, that in this case, it was assumed on both sides that the dividend paid during the year of account will not form part of the reserve and the only question was whether that dividend should be adjusted exclusively against the amount set apart during the year of account or should be first adjusted against the amount already standing to the credit of the dividend reserve and the excess only being adjusted against the dividend reserve created for the year of account.
55. Similar is yet another decision of the Bombay High Court in CIT v. Marrior (India) Ltd. [1977] 107 ITR 35 decided by the same Bench on the same day. In that case also, the question that came to be decided by the Bombay High Court was whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the dividends paid out of the general reserve had to be ignored for the purpose of capital computation as the entire general reserve was in the nature of a reserve. The matter related to two assessment years 1970-71 and 1971-72 for assessment of surtax. So far as the assessment year 1970-71 was concerned, the computation of capital had to be made as on June 1, 1968. The balance-sheet of the company as on May 31, 1968, showed that in the item, general reserve, under the heading "Reserves and Surplus" initially at the beginning of that year there was a balance of Rs. 4,81,501. Out of the profits during the year ending May 31, 1968, the sum of Rs. 2,44,000 was directed to be appropriated by transfer to general reserve. In the same year, that is, May 31, 1968, the directors recommended that the sum of Rs. 2,10,000 should be paid as final dividend, if approved by the shareholders at the annual general meeting to be held on September 30, 1968, and the same should be paid out of the general reserve. The question that arose was, whether the said sum of Rs. 2,10,000 forming part of the general reserve was includible in the capital of the company for the purpose of surtax. For the assessment year 1971-72, the relevant date for computation of the capital was December 1, 1969. The position shown by the balance-sheet as on November 30, 1969, was that at the beginning of that year a sum of Rs. 5,15,501 was standing to the credit of the general reserve. Out of the profits of 18 months ending on November 30, 1969, a sum of Rs. 5,78,000 was directed by the directors to be appropriated by transfer to the general reserve. For the period ending November 30, 1969, the directors recommended that a total dividend of Rs. 2,25,000 be paid and such dividend, if approved by the shareholders at the annual general meeting to be held on March 25, 1970, was to be paid out of general reserve. The question that came to be decided was, whether the sum of Rs. 2,25,000 directed to be paid as final dividend in respect of the period ending on November 30, 1969, was includible for computation of the capital for the purpose of surtax. The Bombay High Court pointed out (p. 37) :
"Such a contention could be accepted only if the directors in the report had specifically stated that for the purpose of payment of dividend recommended by them the past balance standing to the credit of general reserve was only to be utilised for the payment of such dividend. However, the directors have merely stated that the dividend recommended by them if approved by the shareholders at the annual general meeting to be held on March 25, 1970, will be paid out of general reserve. Ordinarily, from the common sense point of view and looking at the matters commercially, if the current income is sufficient to meet the expenses to be incurred and for disbursement to be made in respect of that year, the said current income should be utilised for the discharge of such expenses and disbursement and the past savings would not be touched unless it is expressly otherwise stated while doing so."
56. For this conclusion, the court relied on its decision in CIT v. Bharat Bijlee Ltd. [1977] 107 ITR 30 (Bom) referred to already. Consequently, this decision does not take the matter any further.
57. Yet another Bench decision of the same High Court consisting of the same two judges rendered on July 29, 1976, is CIT v. Hindustan Sugar Mills Ltd. [1977] 107 ITR 659, 660 (Bom). In that case also, the question referred to the court were :
"Assessment year 1965-66 : Whether, on the facts and in the circumstances of the case, the dividend reserve of Rs. 17,25,000 as on July 1, 1963, was includible in the computation of capital of the assessee under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, for the assessment year 1965-66 ?
Assessment year 1966-67 : Whether, on the facts and in the circumstances of the case, the general reserve to the extent of Rs. 18,35,715 as on July 1, 1964, was includible in the computation of capital of the assessee-company under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, for the assessment year 1966-67 ?"
58. The court pointed out that so far as the reference was concerned, the facts need not be stated because the principles on the basis of which the questions were to be answered had been fully laid down in more than one decision of that court decided that day and a few days earlier. The court stated :
"For the assessment year 1965-66, the crucial date is July 1, 1963. It is clear from the balance-sheet and profit and loss account for the year ending June 30, 1963, that the sum of Rs. 17,25,000 is appropriated from the current profits to the dividend reserve account and out of that the sum of Rs. 17,15,715 is directed to be paid as dividend in the same year. Thus, the sum of Rs. 17,15,715 which is the proposed dividend will not be includible in the computation of capital and only the balance of Rs. 9,285 will be treated as capital for the purpose of the Surtax Act. Therefore, our answer to question No. 1 is that out of an amount of Rs. 17,25,000, the sum of Rs. 9,285 as on July 1, 1963, was includible in the computation of capital for the assessment year 1965-66, under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.
So far as the assessment year 1966-67 is concerned, instead of transferring the amount to the dividend reserve, the amount of Rs. 25,00,000 was transferred to the general reserve and the sum of Rs. 18,35,715 was directed to be paid as dividend for the same year from the amount standing to the credit of the general reserve. It is clear that the nomenclature given to an account is not conclusive. The sum of Rs. 18,35,715 was the proposed dividend in relation to the year ending June 30, 1964, and it is not includible in the computation of capital of the assessee-company. Thus, our answer to question No. 2 is that the general reserve to the extent of Rs. 18,35,715 as on July 1, 1964, was not includible in the computation of capital of the assessee-company but the sum of Rs. 6,64,285 as on July 1, 1964, was includible in the computation of capital of the assessee-company under rule 1 of the Second Schedule of the Companies (Profits) Surtax Act, 1964, for the assessment year 1966-67."
59. Thus, it will be clear that the basis of the conclusion as set out in this particular decision directly supports the conclusion we have reached.
60. Mr. S. Swaminathan, learned counsel for the assessee-company, placed strong reliance on three decisions, one of the Bombay High Court in CIT v. Indian Smelting & Refining Co. Ltd. [1977] 107 ITR 793, the second of the Gujarat High Court in CIT v. Mafatlal Chandulal & Co. Ltd. [1977] 107 ITR 489 and the third of the Andhra Pradesh High Court in Super Spinning Mills Ltd. v. CIT [1979] 120 ITR 512. In our opinion, none of these decisions supports the contention of the learned counsel for the assessee-company. In the decision in CIT v. Indian Smelting & Refining Co. Ltd. [1977] 107 ITR 793 (Bom), the facts have not been fully set out. The judgment opens up by stating :
"The Tribunal in this case has taken the view that 'general reserve' should not be reduced by the amount of dividend declared while computing the capital under the Surtax Act, 1964, as it cannot be said to relate back to the first day of the accounting year. The question is raised with a view to challenge the correctness of this finding."
61. The court referred to the decisions of the Supreme Court in Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53; 39 Comp Cas 410, Purshottamdas Thakurdas v. CIT [1963] 48 ITR (SC) 206 and CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566, and considered the distinction between the conceptions of "provision" and "reserve". The court pointed out that when there was no liability on the last day of the year, the question of making a provision would not arise. The court also referred to its earlier decision in CIT v. Aryodaya Ginning and Manufacturing Co. Ltd. [1957] 31 ITR 145, already referred to, and pointed out (pp. 795, 796 of 107 ITR) :
"This decision of this High Court cannot be attracted for application to the facts of the present case, because in the present case no amount whatsoever has been set apart even for dividend reserve. Actually, except for a bare recommendation in the directors' report for declaration of dividend, no amount is set apart for payment of the said amount. In such a case, if and when the shareholders decide at an annual general meeting to declare dividend, the dividend shall have to be paid out of the general reserves. The liability to pay the dividend will arise only from and after the date of the resolution of the shareholders at the general meeting and it will be payable only from such date as may be specified in the resolution. When dividend is payable out of general reserves if declared by the shareholders at a general meeting, there is no question of making any provision for a known or anticipated liability and it is not possible for us to take the view that the amount to be paid pursuant to the resolution of the directors to declare a dividend should be treated as a provision or should be deducted from the amount of general reserve for the purpose of determining the capital under the Surtax Act, 1964. As the liability will arise prospectively, it can never relate back to the first day of the accounting year. Thus, in our opinion, the Tribunal was right in taking the view that the amount of dividend declared at a future date when the general meeting was held ought not to be deducted from the general reserves for the purposes of computing the capital under the Surtax Act, 1964."
62. We are of the opinion that this decision cannot be of any assistance whatever to the assessee-company in the present case. In the first place, that decision was rendered obviously on an application for a direction to the Tribunal to refer the case to the High Court and, therefore, the decision itself does not refer to the facts of the case. Secondly, the court distinguished its earlier decision in CIT v. Aryodaya Ginning and Manufacturing Co. Ltd. [1957] 31 ITR 145 (Bom) only on the ground that no amount whatsoever had been set apart even for dividend reserve and that actually except for a bare recommendation in the directors' report for declaration of dividend, no amount was set apart for payment of the said amount. However, the facts of the present case are different. As we have pointed out already, in their report dated September 1, 1969, the directors actually recommended the distribution of dividend in a sum of Rs. 18,64,065 and the fact that this amount was mentioned only in the directors' report and not in the balance-sheet will not affect the position. Further, this decision of the Bombay High Court, namely, CIT v. Indian Smelting & Refining Co. Ltd. [1977] 107 ITR 793, was rendered on June 18, 1976, by the same two learned judges of that High Court, namely, Kantawala C.J. and Tulzapurkar J., as he then was, who rendered the decision in CIT v. Bharat Bijlee Ltd. [1977] 107 ITR 30 (Bom) on July 28 and 29, 1976 and the decision in CIT v. Marrior (India) Ltd. [1977] 107 ITR 35 (Bom) on July 29, 1976, and the decision in CIT v. Hindustan Sugar Mills Ltd. [1977] 107 ITR 659 on July 29, 1976, and, therefore, it cannot be assumed that the learned judges were contradicting themselves and in the later three decisions they took a view different from the one which they had taken in this decision rendered on June 18, 1976, without even referring to the same in their later decisions.
63. The decision of the Gujarat High Court relied on by the learned counsel for the assessee-company, as already stated, is CIT v. Mafatlal Chandu Lal & Co. Ltd. [1977] 107 ITR 489. In that case, the following two questions were referred to the court :
"1. Whether, on the facts and in the circumstances of the case, the sum of Rs. 3,31,069 standing in the provision for taxation account on December 31, 1961, was includible in computing the capital of the company for the purposes of the Super Profits Tax Act, 1963 ?
2. Whether, on the facts and in the circumstances of the case, the sum of Rs. 2,13,600 standing in the proposed dividend account on December 31, 1961, was includible in computing the capital of the company for the purposes of the Super Profits Tax Act, 1963 ?"
64. In that decision the court elaborately discussed the difference between the conceptions of "provision" and "reserve" and referred to certain text books on Accountancy and Modern Company Law and various decisions of the Supreme Court as well as other High Courts in the country, including the decision of the Supreme Court in CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566. The court pointed out (p. 517) :
"It is clear that, so far as provision for taxation reserve, namely, Rs. 3,31,069 is concerned, the amount was set apart for meeting liabilities known to exist and it was a provision as distinguished from a reserve. Different considerations will, however, apply so far as the amount of Rs. 2,13,600 is concerned. This amount was standing to the 'proposed dividend' account of December 31, 1961. In view of the decision of the Supreme Court in Mysore Electrical Industries Ltd.'s case [1971] 80 ITR 566, it is obvious that though the resolutions of the board of directors of the company in general meeting were passed subsequently, those resolutions relate back to December 31, 1961. The decision of the Bombay High Court in Aryodaya Ginning and Manufacturing Company Ltd.'s case [1957] 31 ITR 145, clearly shows that when directors make certain appropriations of the profits for the year under consideration and the profits brought forward from the previous year and allocate certain amounts to the dividend reserve fund the amount in the dividend reserve fund must be taken into account in computing the capital for the purpose of rule 1 of Schedule II to the Act of 1947. It is clear that the question that we have to ask ourselves if whether at the end of the calendar year, that is, as on December 31, 1961, the amount of Rs. 2,13,600 was set apart for a specific purpose to be put to use in future. That is the ratio of the Supreme Court decision in Century Spinning and Manufacturing Company Ltd.'s case [1953] 24 ITR 499, which has been applied in subsequent cases. As Shah J. pointed out in Standard Vacuum Oil Company's case , in its ordinary meaning, the expression 'reserve' meant something specifically kept apart for future use or for a specific occasion. The accounting practice followed by the company has to be taken into account and the requirement of statute which the assessee-company is required to follow have also to be borne in mind. It is because of this account-keeping practice that the statute imposes upon the assessee-company under the Indian Companies Act, 1956, particularly the form of the balance-sheet, that this distinction between 'provision' and 'reserve' also becomes material for the purpose of finding out what exactly constitutes 'reserve' under rule 1 of Schedule II to the Act of 1963. It is true that though the Indian Companies Act was in force when the Act of 1963 was enacted, there is no reference in the definition section to the Companies Act, 1956, but in view of the decision of the Supreme Court in Standard Vacuum Oil Company's case , it is really not necessary that there should have been any such reference in the definition section because the requirement of the statute which the company is required to follow in its account-keeping practice have to be taken into consideration while considering this question of reserve."
65. After referring to the Guide to Company Audit, 3rd Edn., 1972, published by the Research Committee of the Institute of Chartered Accountants of India, the court proceeded to observe :
"It is true, as Mr. Kaji has contended, in the light of the decisions of the Supreme Court discussed above, that it is the substance and not the form that matters and if there is no existing liability as at the date of the balance-sheet, that is, December 31, 1961, in the instant case, the amount set apart for the dividend cannot be said to be an amount set apart for meeting a present liability. Though, therefore, under the Companies Act, the proposed dividend has to be shown under the heading 'Provisions', in substance, it amounts to a 'reserve' as known to accountancy practice which has been approved by the Supreme Court in Metal Box Company of India Ltd.'s case . Under these circumstances we must hold that the amount of Rs. 2,13,600 standing in the proposed dividend accounts as on December 31, 1961, was includible in computing the capital of the company but the amount of Rs. 3,31,069 standing in the 'provision for taxation account' as on December 31, 1961, was not includible in computing the capital of the company."
66. With great respect to the learned judges who decided this case, we are not able to agree with their reasoning or conclusion. The sentence underlined by us in the portion of the judgment extracted above will clearly show that the court was confusing between "allocation to a dividend reserve fund" and "amount set apart for payment of the proposed dividend". The second question referred to the court, as we have extracted already, deals with the amount standing in the proposed dividend account, while the Bombay High Court in CIT v. Aryodaya Ginning and Manufacturing Co. Ltd. [1957] 31 ITR 145 was dealing with allocation to a dividend reserve fund. As a matter of fact, in CIT v. Aryodaya Ginning and Manufacturing Co. Ltd. [1957] 31 ITR 145, the company had made a profit of Rs. 28,56,997-14-2 for the year 1948, and there was a carry forward in the profit and loss account from the preceding year amounting to Rs. 37,948-11-9. The total profit available with the company as at 31st December, 1948, was appropriated by the assessee-company in the following manner :
Rs. A. P. "To Depreciation fund 2,25,000 0 0 Towards provision for income-tax, corporation tax and business profits tax 12,50,000 0 0 To Reserve fund 11,08,000 0 0 To Dividend reserve fund 1,50,000 0 0 To Dividend payments 67,812 8 0 To Charity account 5,000 0 0 To carry forward to next year's account 89,134 1 11."
67. From the above, it will be clear that there were two appropriations, one to "dividend reserve fund" and the other to "dividend payments". The items that were the subject-matter of controversy were only three, namely : (1) the sum of Rs. 12,50,000 set apart towards provision for income-tax, corporation tax and business profits tax; (2) the sum of Rs. 11,08,000 set apart towards "reserve fund"; and (3) the sum of Rs. 1,50,000 set apart towards "dividend reserve fund". There was no controversy with regard to the sum of Rs. 67,812-8-0 set apart towards "dividend payments". The judgment points out (p. 149) :
"The company's contention was that the paid-up capital should be increased by the amount of reserves which had been constituted by the recommendation made by the directors and accepted by the shareholders and the company made this claim in respect of the three amounts of Rs. 12,50,000, Rs. 11,08,000 and Rs. 1,50,000. The Tribunal accepted the contention of the assessee-company with regard to the reserve fund of Rs. 11,08,000 and dividend reserve fund of Rs. 1,50,000. With regard to the provision for payment of tax the view taken by the Tribunal was that that was a provision made for a liability and did not constitute a reserve, but it made a recommendation to the ITO that if the amount set apart to meet this liability exceeded the actual liability, then to the extent of the excess the amount should be treated as reserve. The Commissioner has now come on this reference and the question that has been submitted to us for our consideration is whether the two sums of Rs. 11,08,000 and Rs. 1,50,000 constitute a reserve as of the 1st January, 1949. The rival contentions are that as this was a reserve that appeared in the balance-sheet as of the 31st December, 1948, it was a reserve on the 1st January, 1949, and must be taken into account in computing the capital according to the provisions of the Business Profits Tax Act. The contention of the Commissioner on the other hand is that this reserve was not sanctioned till the 27th June, 1949, and, therefore, prior to that date it could not be looked upon as reserve."
68. Thus, it will be seen that in Aryodaya Ginning and Manufacturing Co. Ltd.'s case [1957] 31 ITR 145 (Bom), the present question regarding the character of the amount set apart for payment towards the proposed dividend did not come up for consideration. On the other hand, the subject-matter of consideration was something different, namely, amount set apart towards the dividend reserve fund. The second question that came to be considered on the basis of the rival contention was whether the creation of the reserve related back to 1st January, 1949, or not, when the general body meeting of the company at which the balance-sheet and the directors' report were adopted took place only on June 27, 1949. Hence, the above decision cannot be said to have decided the present question in favour of the assessee-company.
69. As a matter of fact, a Bench of this court consisting of two of us (Ismail J., as he then was, and Sethuraman J.) in Addl. CIT v. Thirumagal Mills Ltd. [1977] 108 ITR 236 considered the distinction between "provision" and "reserve" according to the principles of accountancy and statutory provisions and held that an appropriation towards "dividend equalisation reserve" is a "reserve" and not a "provision". We are merely referring to this only for the purpose of emphasising the difference between the amount set apart towards "dividend reserve fund" and the amount set apart towards "payment of the proposed dividend".
70. Further, the Gujarat High Court in the decision in question, namely, CIT v. Mafatlal Chandulal & Co. [1977] 107 ITR 489 had not given full effect to the decision of the Supreme Court in Mysore Electrical Industries Ltd.'s case [1971] 80 ITR 566. The Supreme Court had held that when the resolution of the general body meeting creating a reserve out of the profits of a company for the concerned year will relate back to the first day of the succeeding year, there is no justification on principle for holding that the resolution of the same general body meeting of the company regarding declaration of dividend will not have such an effect. As we have pointed out already, the fact that the reserve will remain in the coffers of the company and the dividend will go out of the coffers of the company to the shareholders and, consequently, when the company decides to declare a dividend, it undertakes an obligation towards the shareholders, will not in any way affect the position, because the relation back in question either with regard to "reserve" or with regard to declaration of dividend is solely for the purpose of computation of the capital under the Second Schedule to the Act and not for any other purpose.
71. The next decision relied on by Mr. S. Swaminathan, learned counsel for the assessee-company, is that of the High Court of Andhra Pradesh in Super Spinning Mills Ltd. v. CIT [1979] 120 ITR 512. In that case also, the question referred to the High Court was :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that (for the purposes of computing capital under the Companies (Profits) Surtax Act, 1964, for the assessment year 1971-72) the general reserve of the assessee-company of Rs. 28,43,948 as on April 1, 1970, should stand reduced by Rs. 4 lakhs, being the dividend declared for year ended March 31, 1970, at the annual general meeting held on 26th August, 1970 ?"
72. In this case also, the Bench of the Andhra Pradesh High Court elaborately referred to the various decisions of the Supreme Court and other High Courts and the distinction between "provision" and "reserve". After extracting a passage from the judgment of the Supreme Court in Mysore Electrical Industries Ltd.'s case [1971] 80 ITR 566, the Bench proceeded to state (p. 524 of 120 ITR) :
"Patently this principle of relating back cannot be applied to the sum of Rs. 4,00,000 in this case. It formed part of the general reserve and there was no indication in the balance-sheet or any designation of the nature of the amount. There was no setting apart of that amount to any particular head.
There was no known liability on the date of the commencement of the accounting year for distribution of dividends. In so far as the general reserves are concerned it was not reasonably practicable for the directors to make up the accounts to declare their intention of appropriating the said and other sums of reserves of same kinds. There was no known or ascertainable liability in respect of dividends on the date of the preparation of the balance-sheet. Therefore, the subsequent recommendation of the board of directors to pay dividends to the shareholders to the tune of Rs. 4,00,000 and the subsequent endorsement by the general body of shareholders would not have any effect of dating back the dividends to the date of the preparation of the balance-sheet. Indeed there was no indication of any appropriation in the balance-sheet. In such a case how could there be relating back to something which was not even in any embryonic form ? I, therefore, hold that the subsequent declaration of dividends from out of the general reserve cannot be related back to the date of the balance-sheet. The true nature and character of the entry in the balance-sheet is patently one of 'reserve' and not of 'provision'. The amount of general reserve, not to speak of the later declaration of a sum of Rs. 4,00,000 towards dividends from out of the general reserve, was not set apart to meet any liability, contingency, commitment or diminution in value of assets known to exist at the time of the balance-sheet. The board of directors and the general body of the shareholders may or may not declare any dividends. As on the date of the balance-sheet there was no known liability of which the amount cannot be determined with substantial accuracy so that it could be accepted as a 'provision'. For these reasons, I hold that for the purpose of computing capital under the Companies (Profits) Surtax Act, 1964, for the assessment year 1971-72, the general reserve of the assessee-company of Rs. 28,43,984 as on April 1, 1970, shall not stand reduced by Rs. 4,00,000 and that the Tribunal was not justified in holding otherwise."
73. With great respect to the learned judges, we are not able to share their view. In the first place, it was not clear as to why the principle of "dating back" cannot be applied to the sum of Rs. 4,00,000, namely, the amount declared by way of dividend. Secondly, the learned judges repeatedly refer to dating back to "the date of preparation of balance-sheet". As a matter of fact, whatever is found in the balance-sheet has necessarily to relate back to an earlier date and every balance-sheet deals with the position of the company as on the last day of the year for which the balance-sheet is prepared and the date of the preparation of the balance-sheet as such has no significance. Even the reserves shown in the balance-sheet will date back to the first day of the year. Thirdly, even assuming that the date of the preparation of the balance-sheet has any significant part to play, we are unable to hold that the question of paying dividend was not even in embryonic form on the date of the preparation of the balance-sheet. We have already shown that the requirement of the company law is that the balance-sheet should be accompanied by a report of the board of directors and also as to what that report should contain. As a matter of fact, the report of the board of directors is generally dated on the same date, when the balance-sheet is signed. At any rate, as far as the present case is concerned, we have already extracted as to what were contained in the balance-sheet regarding the dividend and what the board of directors recommended to the general body regarding the declaration of dividend in their report dated September 1, 1969. Consequently, the question of payment of dividend was very much in evidence on the date of preparation of the balance-sheet.
74. There is yet another feature with reference to this decision of the Andhra Pradesh High Court, namely, Super Spinning Mills Ltd. v. CIT [1979] 120 ITR 512. In that case, the Tribunal, whose decision was reversed by the High Court, followed an earlier decision of the Andhra Pradesh High Court in Vazir Sultan Tobacco Co. Ltd. v. CIT [1974] 96 ITR 248. The Andhra Pradesh High Court in Super Spinning Mills Ltd. v. CIT [1979] 120 ITR 512 referred to the said decision in Vazir Sultan Tobacco Co. Ltd.'s case and tried to distinguish the same. The relevant portion of the judgment dealing with Vazir Sultan Tobacco Co. Ltd.'s case is as follows (p. 520 of 120 ITR) :
"This court considered the question at some length in Vazir Sultan Tobacco Co. Ltd. v. CIT . It was a case which arose under the Super Profits Tax Act of 1963, and the question was that the provisions of certain amounts, (1) for taxation, (2) for retirement gratuity, and (3) for dividends, should be considered as 'reserves' within the meaning of Sch. II to the S.P.T. Act, so that they could be considered for determination of the company's capital. The learned judges held that the amount set apart for tax liability was a 'provision' and not a 'reserve' because it was set apart to meet a known liability, the quantum of which, on that date, could not be determined with substantial accuracy and that the amounts retained for gratuity were set apart in respect of liabilities known on the date of the balance-sheet. The learned judges further pointed out that the liability to pay the dividends was existing on the date of the balance-sheet and that the amount which was set apart specifically for the payment of dividends is a 'provision' and not a 'reserve'. It was made clear that the terminology given by the assessee-company to the items is not a decisive factor for deciding the question whether the items constitute 'reserve' or 'provisions'. Since what we are considering in this case is one of dividends, that part of the decision in Vazir Sultan Tobacco's case , which relates to the amount set apart for dividends is material. There, the directors of the assessee-company had recommended the payment of the amount as dividends. The learned judges proceeded to point out that it had not been shown that the directors had rescinded the recommendation to pay it as dividends. Subsequent events proved that the recommendation of the director was ratified by the shareholders in which eventuality the shareholders would be entitled to enforce the payment of the dividends against the company. Since the amount had been set apart specifically for the payment of dividends, the learned judges opined that the amount thus set apart was a 'provision' and not a 'reserve'."
75. However, we are of the view that it is not possible to distinguish Vazir Sultan Tobacco's case , in the manner in which the subsequent Bench attempted to do. The question referred to the court in that case, namely, Vazir Sultan Tobacco's case was :
"Whether, on the facts and in the circumstances of the case, the provision, (a) for taxation of Rs. 33,68,360, (b) retirement gratuity, Rs. 9,08,106; and (c) dividends, Rs. 18,41,820, could be treated as reserves for computing the capital for the purpose of super profits tax under the Second Schedule to the Super Profits Tax Act, 1963, for the assessment year 1963-64 ?"
76. The Bench, after elaborately considering the provisions of the Act, the Companies Act, the conceptions of "provision" and "reserve" and various decisions of the Supreme Court and other High Courts, held as follows, with regard to the dividend of Rs. 18,41,820 mentioned in the question (p. 260) :
"Then we come to the amount set apart for dividends. The directors of the assessee-company had recommended the payment of that amount as dividends. It has not been shown that the directors have rescinded their recommendation to pay it as dividends. Subsequent events may prove that the recommendation of the directors may be retified by the shareholders. In such an event, the shareholders would be entitled to enforce the payment of the dividends against the company. Since, however, the liability to pay the dividends was existing on the date of the balance-sheet, and the amount has been set apart specifically for the payment of dividends, it is, in our opinion, a 'provision' and not a 'reserve'."
77. However, the High Court of Andhra Pradesh in Super Spinning Mills' case [1979] 120 ITR 512 itself stated that the correctness of the decision in Vazir Sultan Tobacco's case was doubted and consequently another Division Bench referred the problem to a Full Bench and the Full Bench of the Andhra Pradesh High Court in Hyderabad Asbestos Cement Products Ltd. v. CIT [1976] 105 ITR 822 resolved the problem. In that case, the Andhra Pradesh High Court had to consider a provision made for "breakages and damages on sales" and "provision for contingencies and bonus". The Full Bench also elaborately went into the difference between the conceptions of "provision" and "reserve" and referred to the decisions of various courts. With regard to the Division Bench decision in Vazir Sultan Tobacco's case [1974] 96 ITR 248, the Full Bench observed (p. 833 of 105 ITR) :
"Before proceeding to consider the various decisions of the High Courts in India cited by both the parties, it would be appropriate to deal with the decision of this court in Vazir Sultan Tobacco Company Ltd. v. Commissioner of Income-tax [1974] 96 ITR 248, and see whether it runs counter to the decision of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax [1966] 59 ITR 767. The said case arose under the provisions of the Super Profits Tax Act and the question was whether the provision made by the company for, (a) taxation, (b) for retirement gratuity, and (c) for dividend, could be treated as reserves in computation of capital for the purpose of the said Act. The court referred to the definition of the expressions 'provision' and 'reserves' in the Companies Act and then made a specific reference to the relevant observations of the Supreme Court reported in Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53. Thereafter, the court referred to the various decisions of the Supreme Court including Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax [1966] 59 ITR 767 and Commissioner of Income-tax v. Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499, and held , as follows :
'Apart from that, the liability to pay income-tax is a present liability though it becomes payable at a future point of time when it is quantified in accordance with the ascertainable data. That liability, on the first day of the accounting year, is known, but the amount of that liability cannot be determined on that date with substantial accuracy. (See Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax ). Therefore, the amount set apart for tax liability is a "provision" and not a "reserve", because it is set apart to meet a known liability, the quantum of which, on that date, cannot be determined with substantial accuracy.' What Mr. Srinivasamurthy contends is that the principle set out above, within quotes, is not supported by the decision of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax [1966] 59 ITR 767. However, on closer examination, we noticed that the reference to Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax was really a mistake and that the court was really referring to the case of Metal Box Company of India Ltd. v. Their Workmen . This is evident from the fact that the language and the expressions used in the said paragraph are the same which are employed in the case of Metal Box Company of India Ltd. v. Their Workmen . In fact, the words 'substantial accuracy' are taken from the decision of the Supreme Court in Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53 and that the said expression does not occur in the case of Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax . We presume that it was either a typographical or an accidental mistake that the reference was made to Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax , while really intending and referring to the case of Metal Box Company of India Ltd. v. Their Workmen . In this view, the very basis of the argument that the observations made in the decision of this court in Vazir Sultan Tobacco Co. Ltd. v. Commissioner of Income-tax [1974] 96 ITR 248 run counter to the decision of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax , disappears and we see no conflict whatsoever between both the decisions. In fact, the decision of this court is wholly consistent with the principle of the decision in Metal Box Company of India Ltd. v. Their Workmen as well as Commissioner of Income-tax v. Century Spinning and Manufacturing Co. Ltd. , and, applying the said principles, the Bench had come to the conclusion that the provisions for taxation, retirement gratuity and dividends are provisions and not 'reserves' for the purpose of the Super Profits Tax Act."
78. Thus it will be seen that the Full Bench of the Andhra Pradesh High Court really approved the decision of the Division Bench of that court in Vazir Sultan Tobacco's case , and if so, with great respect to the learned judges of the Andhra Pradesh High Court, who decided the Super Spinning Mills Ltd.'s case , there was no justification for taking a view different from the one taken in Vazir Sultan Tobacco's case [1974] 96 ITR 248.
79. The last decision cited is that of a Full Bench of this court in Madras Motor and General Insurance Co. Ltd. v. CIT [1979] 117 ITR 534, which has occasioned the constitution of this larger Bench. One difficulty in understanding that decision is that it has not given the facts of the case fully. Three questions were referred to the court for three assessment years as follows :
"Assessment year 1965-66 : Whether, on the facts and in the circumstances of the case, it has been rightly held that the sums of Rs. 91,510, Rs. 2,40,197, Rs. 19,03,252, Rs. 24,36,239 and Rs. 6,42,524 representing the premium deposits, unearned premium, provision for outstanding claims, provision for taxation and proposed dividends, respectively, did not fall under rule 2(i) of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ?
Assessment year 1966-67 : Whether, on the facts and in the circumstances of the case, it has been rightly held that the sums of Rs. 3,34,756, Rs. 1,70,463, Rs. 41,36,469, Rs. 17,21,932, Rs. 8,00,000 and Rs. 82,333 representing the premium deposits, unearned premium, provision for outstanding claims, provision for taxation, proposed dividends and balance in the profit and loss account, respectively, did not fall under rule 2(i) or rule 2(ii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ?
Assessment year 1967-68 : Whether, on the facts and in the circumstances of the case, it has been rightly held that the sums of Rs. 93,250, Rs. 2,25,067, Rs. 25,17,281, Rs. 13,97,886, Rs. 7,48,110 and Rs. 7,071 representing the premium deposits, unearned premium, provision for outstanding claims, provision for taxation, proposed dividends and balance in the profit and loss account, respectively, did not fall under rule 2(i) or rule 2(ii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ?"
80. The said judgment extracted r. 2 of the Second Schedule to the Act with the Explanations, which is as follows :
"2. Where a company owns any assets the income from which in accordance with clause (iii) or clause (vi) or clause (viii) of rule 1 of the First Schedule is required to be excluded from its total income in computing its chargeable profits, the amount of its capital as computed under rule 1 of this Schedule shall be diminished by the cost to it of the said assets as on the first day of the previous year relevant to the assessment year in so far as such cost exceeds the aggregate of -
(i) any moneys borrowed (other than the debentures referred to in clause (iv) or moneys referred to in clause (v) of rule 1) and remaining outstanding as on the first day of the said previous year; and
(ii) the amount of any fund, any surplus and any such reserve as is not to be taken into account in computing the capital under rule 1.
Explanation 1. - A paid up share capital or reserve brought into existence by creating or increasing (by revaluation or otherwise) any book asset is not capital for computing the capital of a company for the purposes of this Act.
Explanation 2. - Any premium received in cash by the company on the issue of its shares standing to the credit of the share premium account shall be regarded as forming part of its paid up share capital.
Explanation 3. - Where a company has different previous years in respect of its income, profits and gains, the computation of capital under rules 1, 2 and 3 shall be made with reference to the previous year which commenced first."
81. Thereafter the court observed :
"Turning now to the balance-sheet of the company, it is seen that the amounts that are claimed by the assessee must be taken into account to reduce the value of the assets which are referred to under the first part of r. 2 of the Second Schedule, namely, assets the income from which is required to be excluded under clauses (iii), (vi) and (viii) of r. 1 of the First Schedule. After determining the value of these assets as on the first day of the year of account, sub-rr. (i) and (ii) of r. 2 provide that the portion of such assets shall be reduced further by the borrowing and particularly under sub-r. (ii) under which the question arises, by any fund, surpluses and reserves which are not to be included for the purpose of r. 1 of the Second Schedule. On the basis of this provision in r. 2 of the Second Schedule, the assessee has contended that the following amounts shown in the balance-sheet at Page 18, namely, Rs. 24,36,239 under the heading 'Reserves or Contingency Accounts', the sums of Rs. 1,82,346, Rs. 50,709 and Rs. 16,70,197 falling under 'Estimated liability in respect of outstanding claims whether due or intimated' which amounts sum up to Rs. 19,03,352 as also the provision towards unearned premium and premium deposits of the amounts, Rs. 2,40,197 and Rs. 91,510, as seen at page 20 of the balance-sheet falling under the heading 'Liabilities' as well as the sum of Rs. 6,42,524 which is termed as 'Proposed dividend for the yea 1964' should be deducted from the value of the assets, the income from which is required to be excluded for the purpose of r. 1 of the First Schedule in order to arrive at the capital base or the value of the capital assets in relation to which 10% has to be allowed as a statutory reduction."
82. The Court thereafter dealt with those items one by one and with regard to the item under the heading 'Proposed dividend for the year 1964' it observed (p. 539 of 117 ITR) :
"The amount, which has given considerable difficulty, not entirely due to the complicated question, but in view of the number of decisions that had been cited, reference having been made to the other Acts and Schedule and forms, is the sum of Rs. 6,42,524 referred to as 'proposed dividend for the year 1964'. Before we deal with this, we would like to state a few principles, which are indisputable. Reserves, in order that they may be so called under the real sense of the term, must normally come out of the profits of the company. But if reserves are constituted out of assets which are sold or by any other means, it may be difficult to term that the amount shown as reserve is really a reserve. But here again we do not wish to state anything by way of opinion of this court, for, the question does not arise. But we can be more specific and certain that the amounts set apart specifically for the purpose of meeting a specific liability will not be a reserve but will only be a provision made for meeting the specific liability. Therefore, on the first day of the year in question if there has been an accrued liability for the purpose of payment of the dividend notwithstanding the provision made for the payment of that dividend, the sum that has been provided for payment of that dividend will not be treated as reserve. One other principle that we wish to state is that the proposal for payment of the dividend having been made by the board of directors, it is not in fact a present liability by the mere fact that there is such a proposal. The Supreme Court has ruled for the purpose of the W.T. Act that the proposal will become an accrued liability only when the shareholders of the company approve of the proposal in the general body meeting of the company. The decision is in Kesoram Industries and Cotton Mills v. CWT . We consider that this principle laid down to Supreme Court is certainly applicable for the purpose of deciding whether on the first day of the year of accounting in question there was an accrued liability for payment of dividend by the company. It was not contended on behalf of the revenue that there was any such accured liability on the first day of the year of accounting. Reference was then made to the decision of the Supreme Court in CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566 and it was submitted that if appropriation to reserves has been made by the general body it will date back to the first day of the year in question, because it must be taken to be a reserve made on the first day of the year in question. This decision only dealt with the reserves which were for purposes other than the reserves for the purpose of payment of dividends. Therefore, this decision cannot be taken as an authority for the proposition that an appropriation made towards the reserve for the purpose of payment of dividend, apart from making the appropriation later effective from the first day of the year of account, will also create a liability for dividend from the first day of the year of account."
83. With great respect to the learned judges, we are unable to share their view. In the context in which we are considering the question, there cannot be an accrued liability for payment of dividend on the first day of the year. As a matter of fact, as we have pointed out already, on the first day of the year following the year of account, there may not be any scope even for finding out whether the company has made a profit or suffered a loss and, consequently, there can be no question of there being an accrued liability for payment of the dividend as on the first day of the year. The two decisions of the Supreme Court, namely, Kesoram Industries and Cotton Mills Ltd. v. CWT [1966] 59 ITR 767 and CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566, dealt with two different situations in the context of two different statutory provisions. In Kesoram Industries and Cotton Mills Ltd.'s case [1966] 59 ITR 767, as we have pointed out already, the Supreme Court was considering whether there was a debt in existence on the valuation date in order to deduct the same from the total value of all the assets for the purpose of arriving at the net assessable wealth. On the other hand, in Mysore Electrical Industries Ltd.'s case [1971] 80 ITR 566, the Supreme Court was considering the question whether a reserve which was created subsequent to the first day of the year, which from the very nature of the case, could not have been created on the first day of the year, will relate back to the first day of the year or not. Further, in Mysore Electrical Industries Ltd.'s [1971] 80 ITR 566, the Supreme Court was not concerned with a "liability" or "debt" or with the question as to when that liability or debt arose. Simply by holding that for the purpose of r. 1 of the Second Schedule to the Act, a declaration of dividend made by the general body of the company during the course of a year will relate back to the first day of that year, the court is not deciding any rights inter se between the company and its shareholders to whom the dividend has to be paid; nor is it deciding the question as to when the liability of the company to pay the dividend and the right of the shareholders to get the dividend arose. All that the court is deciding in such a situation is, from a practical and commonsense point of view, when a dividend is declared during the course of a year, which is inevitable whether it will relate back to the first day of the year or not. In such a context, we are unable to hold that any question of creation of a liability on the part of the company arises.
84. The learned judges of this court, in the Full Bench decision, proceeded to state (p. 540 of 117 ITR) :
"The decision in CIT v. Mysore Electrical Industries Ltd. , which dealt with certain reserves other than reserves for dividend, and the decision in Kesoram Industries and Cotton Mills Ltd. v. CWT , which specifically dealt with the question of reserves for dividend, which on the date of valuation, were only in the nature of proposal for payment of dividend, will have to be noticed and applied. If we have to reconcile the two decisions, which dealt with different kinds of reserves, we have to come to the conclusion that the amounts in question are reserves that have been made for payment of dividend at the time when there was only a proposal made by the directors and, though they have been shown in the balance-sheet as a separate item indicating a specific sum under the heading 'Proposal for dividend', nevertheless remains as a provision for reserve made for the purpose of meeting the contingent liability which may or may not accrue depending upon the shareholders approving of that proposal of the directors or not."
85. With respect to the learned judges, we are unable to share either their reasoning or the assumption underlying their reasoning. In our opinion, the expression, "If we have to reconcile the two decisions" is not warranted because, as we have pointed out already, there is no inconsistency, apparent or real, between the two decisions of the Supreme Court in Mysore Electrical Industries Ltd. [1971] 80 ITR 566 and Kesoram Industries and Cotton Mills Ltd.'s case [1966] 59 ITR 767 calling for any reconciliation. Further, as we have pointed out already, there is no distinction between reserve for payment of dividend and reserve for any other purpose, because both the "reserves" are finally decided upon only by the general body in its meeting which takes place subsequently.
86. For the reasons we have already indicated, the amount shown in the balance-sheet even as a separate item indicating a specified sum under the heading "Proposal for dividend" will not form part of "reserve" since a "reserve" itself is finally created only by the general body which declares the dividend.
87. The Full Bench, after noticing the decision of a Division Bench of this court in Nagammal Mills Ltd. v. CIT [1974] 94 ITR 387 proceeded to observe (p. 541 of 117 ITR) :
"The question, therefore, is whether any amount shown to represent a dividend proposed by the directors represent any liability for the company from the 1st day of the year of account. Any provision made by way of reserve of an amount for the purpose of a possible liability that may arise in the payment of dividend cannot be refused to be taken into account merely on the ground that the amount represented a provision or a reserve for an accrued liability as there was no accrued liability as on the relevant date, namely, first day of the year of account. It has been so held by the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. CWT [1966] 59 ITR 767. So, in all these cases, we think, where a proposal has been made by the directors and by virtue of this proposal, a reserve has been made for a possible liability towards dividend, that provision or reserve could not cease to be a reserve on the ground that it is a reserve for the purpose of payment of an accrued liability as on that date. On the facts of the case before us, it has not been contended that the shareholders had approved the proposal as on that date. There is, therefore, no liability to pay that amount as on that date. This aspect was not urged before this court when it decided the case in Nagammal Mills Ltd. v. CIT [1974] 94 ITR 387, and the question has not been considered at all in the judgment under consideration. We think, therefore, that the decision cannot be taken to be a precedent for the question which has to be dealt with in this judgment, but can be distinguished, as we propose to do, as a case where the emphasis had been on the payment out of the money which was at one time provided for dividend and in view of the fact that the proposal of the directors was later approved by the shareholders of the company and the money had been actually expended for the purpose. We are not called upon in this case to consider whether payment out during the year of account will deprive the right of an assessee to claim the benefit, for, that question does not arise before us, no point having been taken in that behalf. We, therefore, leave that question open to be considered in another appropriate case."
88. With respect to the learned judges, we are clearly of the opinion that the conception of accrued liability as on the first day of the year of account can have no reality or relevancy to the point under consideration under r. 1(iii) of the Second Schedule to the Act. As we have pointed out more than once, r. 1 of the Second Schedule to the Act does not refer either expressly or impliedly to any liability or accrued liability and all that it refers to is a "reserve" and, consequently, the only question that one has to consider in such a context is, whether a particular amount set apart for a particular purpose would constitute a "reserve" or not. Having regard to the basic notion of a "reserve", namely, the amount that will be available to the company for its uninhibited use in future, the amount set apart to be declared as dividend by the company in its general meeting cannot be a "reserve", once the company in its general body meeting actually declares the dividend. For this purpose, it is not even necessary to find out whether the amount has been paid out during the year of account or not, since the moment a particular amount has been declared to be dividend, it is no longer available to the company to freely draw upon, to be used for its business and, consequently, will not be a "reserve". Hence, we are unable to hold that there was any valid ground for distinguishing the point which the Full Bench was considering from the point considered in Nagammal Mills Ltd. v. CIT [1974] 94 ITR 387 (Mad).
89. We may point out in this context that though the Full Bench noticed the decision of the Division Bench in Nagammal Mills Ltd. v. CIT , it did not refer to the subsequent decision of a Division Bench of this court in Madras Auto Service v. CIT [1978] 112 ITR 540, where the Bench held that there was no ground for reconsidering the decision of this court in Nagammal Mills Ltd. v. CIT [1974] 94 ITR 387, in the light of the decision of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. CWT [1966] 59 ITR 767.
90. Curiously there is one statement contained in the judgment of the Full Bench which will make the entire discussion and observation of the court as merely obiter. In the penultimate paragraph of its judgment, the Full Bench observed ([1979] 117 ITR 534, 541) :
"In the light of what we have stated above it is clear that the amount provided cannot be said to be not a reserve merely on the ground that it represented a sum set apart for the purpose of meeting a specific accrued liability. But this does not take the assessee very far, because if the amount is a reserve - and we will assume so without deciding the question that it represented merely a provision, and assume again that there is a distinction between a provision for an uncertain and unaccrued liability and a reserve made for meeting any contingent liability - we think that it will be a reserve that will fall under r. 1 of the Second Schedule. If the amount will fall under r. 1 of the Second Schedule then the amount cannot be excluded for the purpose of sub-r. (ii) of r. 2 and, therefore, the assessee has in any case to fail on this aspect as well."
91. Thus, it will be seen that the ultimate decision of the Full Bench was based upon what it considered to be the effect of sub-r. (ii) of r. 2 of the Second Schedule on the assumption that the amount was a "reserve". Consequently, there was no need for the Full Bench to really decide whether the concerned amount was a reserve or not, because even on that assumption the assessee had to fail. However, we may make it clear that if the Full Bench intended to lay down a proposition that even if the board of directors set apart a specific sum under the heading "Proposal for dividend" and, subsequently, the company in its general body meeting accepted their proposal and declared the said amount as dividend, still the same would continue to be a "reserve" because it did not represent an accrued liability on the first day of the relevant year, we express our disagreement with such a proposition for the reasons we have already indicated.
92. In fact, the questions which the Full Bench of this court considered referred only to r. 2(i) and r. 2(ii) of the Second Schedule to the Act. However, r. 2(ii) refers to "any such reserve as is not to be taken into account in computing the capital under r. 1". Therefore, the Full Bench had to consider the scope of the expression "reserve" occurring in r. 1 of the Second Schedule to the Act.
93. Subsequent to the decision of the Full Bench in Madras Motor and General Insurance Co. Ltd. v. CIT [1979] 117 ITR 534 (Mad), the question came up for consideration in another case before a Division Bench of this court in India Motor Parts & Accessories Ltd. v. CIT . In that case, assessment to super profits under the Super Profits Tax Act, 1963, for three assessment years, namely, 1963-64, 1964-65 and 1965-66, was under consideration and for those three years the amount set apart towards proposed dividends were :
Rs.
"1963-64 4,05,000 1964-65 2,65,000 1965-66 2,12,500"
94. The matter came up for consideration before a Division Bench consisting of two learned judges, one of whom was a party to the Full Bench judgment, namely, P. Govindan Nair C.J. and in the judgment of the Division Bench, after extracting a passage from the Full Bench judgment, the court observed (p. 315) :
"In the light of the above observations, we hold that the various amounts mentioned under the head 'Proposed dividends' for the assessment years 1963-64, 1964-65 and 1965-66 are 'reserve' and as such they are includible in the computation of the capital of the company for the respective assessment years."
95. For the reasons, we have already given, the above conclusion of the Division Bench cannot be said to be good law.
96. There is only one other matter to which we would like to make reference. In the referring order it was stated :
"Since the assessee in that case was an insurance company, the argument on behalf of the revenue based on Explanation II to rule 1, was not considered and no definite answer was given. In the present case, since the assessee is not an insurance company the computation of capital will have to be done with reference to the Explanation. Though the Full Bench decision related to an insurance company, as if the principle laid down in that judgment was applicable even to non-insurance companies, a Division Bench, without going into the Explanation, simply purported to apply the principle in the decision in India Motor Parts & Accessories Ltd. v. CIT [1981] 130 ITR 611."
97. We are of the opinion that the construction of the relevant provision in r. 1 of the Second Schedule to the Act is not dependent upon whether the company is an insurance company or not, because there is nothing in that particular rule which is exclusively applicable either to an insurance company or to a non-insurance company. Further, a perusal of the Act does not show that there is any Explanation as Explanation II to r. 1 of the Second Schedule to the Act and the same may be a typographical error.
98. Under these circumstances, we answer the question referred to this court in the affirmative and against the assessee. The respondent-Commissioner is entitled to his costs of this reference and the counsel's fee is fixed at Rs. 1,000 (Rs. one thousand only).