Dividend appropriation from reserves reduces capital for surtax computation under the relevant accounting-date principle.

Dividends declared out of reserves were required to be deducted from capital for surtax computation under the Explanation to Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. Applying the Supreme Court principle that the appropriation of profits for dividend relates back to the relevant accounting date, the amount earmarked for dividend could not continue to form part of the reserve for capital purposes. The reserve therefore had to be reduced by the dividend amount while computing surtax, and the issue was decided against the assessee and in favour of the Revenue.

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Issues: Whether dividends declared out of reserves were required to be deducted from capital while computing surtax under the Explanation to Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The question turned on whether the amount appropriated towards dividend, though resolved at a later general body meeting, related back to the period to which the profits belonged. Applying the principle accepted by the Supreme Court, the appropriation was treated as effective from the relevant accounting date, with the consequence that the amount earmarked for dividend could not remain part of the reserve for capital computation. The reserve had to be reduced by the dividend amount for surtax purposes.

Conclusion: The dividend amounts were deductible from capital in computing surtax, and the question was answered against the assessee and in favour of the Revenue.

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