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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 :

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.