Interim dividends and general reserve: statutory surtax computation requires deduction from opening capital base regardless of book treatment.

Interim dividends declared during the accounting year were treated as amounts to be reduced from the general reserve when computing the capital base under the Second Schedule to the Companies (Profits) Surtax Act, 1964. The computation was held to depend on the statutory scheme, not on the assessee's accounting treatment in the books. The fact that the dividend was declared by the board as an interim dividend, rather than at a general meeting, was stated to make no difference for surtax purposes. Prior decisions were followed to support deduction of dividends declared from the opening general reserve.

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Issues: Whether interim dividends declared by the board of directors had to be reduced from the general reserve while computing the capital base under the Second Schedule to the Companies (Profits) Surtax Act, 1964, irrespective of the accounting treatment in the books.

Analysis: The liability to compute capital base under the surtax regime was held to depend on the statutory scheme rather than on the manner in which the assessee recorded the dividend in its accounts. Interim dividends declared during the accounting year were treated as amounts reducible from the general reserve standing on the first day of the relevant accounting year. The circumstance that the dividend was declared by the board of directors as an interim dividend, and not in a general body meeting, was held to make no difference for the operation of the Second Schedule. Prior decisions were followed to the effect that dividends declared have to be deducted from the opening general reserve for surtax purposes.

Conclusion: Interim dividends were required to be reduced from the general reserve for computing the capital base, and the answer was against the assessee.

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