Dividend appropriation and Chapter VI-A relief clarified for surtax capital computation and rule 4 treatment.

For surtax capital computation, a later dividend appropriation was treated as relating back to the relevant accounting period, so the appropriated amount could not remain in general reserve on the first day of the previous year; this reduced the reserve available for capital purposes and the point was decided against the assessee. Relief allowed under Chapter VI-A of the Income-tax Act, 1961 was treated as a deduction from total income, not as income, profits and gains not includible in total income; accordingly, it did not fall within rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, and that issue was decided in favour of the assessee.

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Issues: (i) Whether dividends declared should be deducted from the general reserve while computing capital for levy of surtax and whether the reserve on the first day of the previous year should be reduced by a later dividend declaration; (ii) Whether relief allowed under Chapter VI-A of the Income-tax Act, 1961 is to be treated as income, profits and gains not includible in total income for the purposes of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Issue (i): Whether dividends declared should be deducted from the general reserve while computing capital for levy of surtax and whether the reserve on the first day of the previous year should be reduced by a later dividend declaration.

Analysis: The governing principle applied was that an appropriation for dividend relates back to the period to which the profits pertain. Accordingly, where the general body subsequently resolves to appropriate a sum towards dividend out of reserve, the amount so appropriated cannot remain part of the reserve for the earlier relevant date for capital computation under the Surtax Act.

Conclusion: The issue was answered against the assessee and in favour of the Revenue.

Issue (ii): Whether relief allowed under Chapter VI-A of the Income-tax Act, 1961 is to be treated as income, profits and gains not includible in total income for the purposes of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The relief granted under Chapter VI-A was treated as a deduction from total income and not as income, profits and gains excluded from total income. On that basis, such relief did not fall within the class of items that would reduce the company's capital under rule 4 of the Second Schedule.

Conclusion: The issue was answered in favour of the assessee and against the Revenue.

Final Conclusion: The reference was answered by holding that dividend appropriations affected the reserve for capital computation, while Chapter VI-A relief did not attract rule 4 of the Second Schedule in the manner suggested by the Revenue.

Ratio Decidendi: For surtax computation, a dividend appropriation relates back to the relevant accounting period and is not available as reserve capital at the earlier date, but deductions allowed under Chapter VI-A of the Income-tax Act, 1961 are not to be treated as income, profits and gains not includible in total income for rule 4 purposes.

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