Dividend liability arises only on declaration, so a later AGM dividend cannot reduce opening general reserve for surtax capital.

For surtax capital computation, dividend liability arises only on declaration at the annual general meeting and does not relate back to an earlier date. Where no separate reserve had been created on the first day of the accounting year for future dividend payment, the general reserve standing on that date could not be reduced by a dividend recommended later and declared subsequently. Applying that principle, the amount was not deductible from the general reserve as on 1 April 1973, and the question was answered in favour of the assessee.

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Issues: Whether, for computing capital for surtax purposes, an amount recommended as dividend but declared later at the annual general meeting could be excluded from the general reserve standing on the first day of the accounting year.

Analysis: The relevant assessment year was 1974-75 and the accounting year began on 1 April 1973, when the assessee's books showed the amount in the general reserve. The dividend was declared only on 6 September 1973. The governing principle applied was that liability for dividend arises only on declaration at the annual general meeting and does not relate back to an earlier date. Where no separate reserve had been created for future dividend payment on the first day of the accounting period, the general reserve as on that date could not be reduced by a dividend declared subsequently.

Conclusion: The amount recommended and later declared as dividend was not deductible from the general reserve as on 1 April 1973, and the question was answered in the affirmative in favour of the assessee.

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