Dividend liability reduces general reserves for surtax capital when declaration crystallises the obligation.

Dividends declared out of general reserves were treated as a crystallised liability rather than part of the reserves for surtax capital computation. The Court applied the principle that an amount earmarked for an ascertained liability is a provision, not a reserve, and held that once dividend declarations were made, the corresponding liability reduced the general reserves on the valuation dates. Even where payment to non-resident shareholders depended on Reserve Bank approval under exchange control law, the dividend related back to the earlier accounting years and could not remain in the reserve base. The questions were answered in favour of the Revenue.

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Issues: Whether dividends declared out of general reserves, but payable to non-resident shareholders only after Reserve Bank approval under the Foreign Exchange Regulation Act, 1973, were to be excluded from the company's general reserves for computing capital under the Companies (Profits) Surtax Act, 1964.

Analysis: The relevant question was whether the declared dividends continued to form part of the general reserves on the valuation dates, or whether they stood reduced by reason of the liability created by the shareholders' resolutions and the subsequent Reserve Bank approvals. The Court applied the principle that an amount set aside to meet an ascertained liability is not a reserve but a provision, and followed the Supreme Court's reasoning that a dividend declaration out of profits crystallises the liability and relates back to the accounting period to which the dividend pertains. Even assuming that liability to non-resident shareholders arose only on Reserve Bank approval, the reserve stood diminished once that liability crystallised, because the dividend related to the profits of the earlier accounting years.

Conclusion: The dividends declared for the relevant years could not be included in the general reserves as on the material dates, and the questions were answered against the assessee and in favour of the Revenue.

Ratio Decidendi: A dividend declared out of profits becomes a liability, and once that liability crystallises it must be deducted from general reserves for the purpose of computing capital under the surtax law.

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