Dividend declared after the accounting period is excluded from surtax capital computation because liability arises only on declaration.

For surtax capital computation under the Second Schedule to the Companies (Profits) Surtax Act, 1964, dividend declared after the close of the accounting period is not part of reserve capital. A dividend becomes an enforceable liability only on declaration at the annual general meeting; before that point, it is neither an accrued nor contingent liability and cannot be treated as a provision existing on the first day of the accounting year. The relation-back theory was rejected for this purpose, and the amount set apart for dividend was excluded from capital computation, leaving the reference answered in favour of the Revenue.

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Issues: Whether dividend declared at the annual general meeting after the close of the accounting period was liable to be excluded from the computation of capital for surtax assessment.

Analysis: Under the Second Schedule to the Companies (Profits) Surtax Act, 1964, only reserves falling within the statutory scheme are includible in capital, while amounts of the nature of current liabilities and provisions are excluded. A dividend becomes an enforceable liability only when declared by the shareholders in the annual general meeting. Before such declaration, there is no accrued or contingent liability in respect of dividend, and the amount cannot be treated as a provision against liability arising on the first day of the accounting year. The principle that a later dividend declaration relates back was rejected in this context, and the amount set apart for dividend could not remain part of the general reserve for capital computation.

Conclusion: The exclusion of the dividend amount from the computation of capital was justified, and the answer to the referred question is in the negative and in favour of the Revenue.

Ratio Decidendi: For surtax capital computation, dividend declared after the accounting period does not form part of reserve capital once the declaration creates the liability, because dividend cannot be treated as an existing reserve or anticipated liability on the first day of the previous year.

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