Bombay High Court
Commissioner Of Income-Tax vs Burmah Shell Refineries Ltd. on 20 December, 1988
Equivalent citations: [1990]186ITR138(BOM)
Author: S.P. Bharucha
Bench: S.P. Bharucha
JUDGMENT T.D. Sugla, J.
1. The question of law raised in this reference, at the instance of the Department, is :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount transferred from the general reserve to the profit and loss account for making payment of the final dividend should not be reduced from the general reserve in computing the capital of the assessee-company under the Second Schedule to the Companies (Profits) Surtax Act, 1964 ?"
2. Dr.Balasubramaniam, learned counsel for the Department, submitted that the question was covered by the Supreme Court decision in Vazir Sultan Tobacco Co., Ltd. v. CIT [1981] 132 ITR 559, in favour of the Revenue. This statement was not accepted by Shri Dalvi, learned counsel for the assessee. Therefore, Dr. Balasubramaniam proceeded to argue that the relevant date for the purpose of capital computation in this case was December 31, 1963. In its report for the year dated March 17, 1964, the directors had directors had recommended a final dividend of 10 paise per rupee of paid up ordinary share capital, to be paid out of the general reserve, if approved by the shareholders at the annual general meeting. In May, 1964, the annual general meeting approved the directors' recommendations and the final dividend was paid out of the general reserve. According to Dr. Balsubramaniam, the approval of the directors' recommendation in May, 1964, about the declaration of dividend related back to December 31, 1963. The amount representing dividend to be distributed was, therefore, a known liability and, to that extent, the general reserve should have been reduced. For that purpose, he took us through the Supreme Court judgment in Vazir Sultan Tobacco Co.'s case [1981] 132 ITR 559.
3. In our view, the Supreme Court decision is not applicable to the facts of this case. The Supreme Court has accepted the proposition that the liability for the payment of dividend arises only after the dividend has been declared by the shareholders at the annual general meeting and that this liability does not relate back to any earlier do not basis of the recommendations of the directors as the directors as the directors do not have the power of declaring the dividend. However as, in the case before the Supreme Court, a reserve out of the profits of the year had been credited for the purpose of distributing dividend in the annual general meeting of the shareholders, it was held that though the amount so set part was not for meeting any known or existing liability, yet the said amount so set apart cannot be considered to be a reserve within the meaning of the Act for the purpose of computation of the capital of the company. It is, thus, evident that the Supreme Court's observation are in regard to a reserve created out of the profits of the year in respect of which there is a recommendation both for creating a reserve and for declaring a dividend. The admitted position in this case being that no reserve for the purpose of distribution of dividend was created out of the profits of the year, we hold that the Supreme Court decision is not applicable in this case. On the other hand, the ratio of the decision elaborately referred to by us above supports the assessee's claim that the dividend declared in May, 1964, would not relate back and it cannot be held that the amounts so declared represented any known or existing liability as on December 31, 1963. No reserve for distribution of dividend to be declared having been created out of the profits of the year, the question of law requires to be and is answered in the affirmative and in favour of the assessee. No order as to costs.