Court rules dividends declared from general reserves are not deductible for capital computation under Companies (Profits) Surtax Act.

The court ruled in favor of the Revenue, affirming that dividends declared and paid out of general reserves should be deducted from the relevant reserves for the computation of capital under the Companies (Profits) Surtax Act, 1964 for assessment years 1972-73 and 1973-74. The court emphasized that the true nature of the disputed sum must be determined based on substance, not mere entry or nomenclature chosen by the company, and held that dividends declared constitute a provision, not a reserve. The liability to pay dividends crystallized upon declaration at annual general meetings, regardless of when Reserve Bank approval was obtained.

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Issues:
Computation of capital for Companies (Profits) Surtax Act, 1964 for assessment years 1972-73 and 1973-74 based on inclusion of dividends in general reserves.

Analysis:
The judgment pertains to the assessment years 1972-73 and 1973-74 concerning the computation of capital for the Companies (Profits) Surtax Act, 1964. The questions revolve around whether dividends declared at annual general meetings and paid out of general reserves should be included in the computation of capital. For the assessment year 1972-73, a dividend of Rs. 32,26,214 was declared on September 17, 1971, and for 1973-74, a similar dividend was declared on September 15, 1972. The company obtained permission from the Reserve Bank of India for these payments to non-resident shareholders.

The court referenced the Supreme Court decision in Indian Tube Co. P. Ltd. v. CIT [1992] 194 ITR 102, where it was held that dividends declared and paid out of general reserves should be deducted from the relevant reserves. The court emphasized that the true nature of the disputed sum must be determined based on substance, not mere entry or nomenclature chosen by the company. It distinguished between reserves and provisions, stating that dividends declared constitute a provision, not a reserve.

The court rejected the argument that the liability to pay dividends to non-residents crystallized only upon obtaining Reserve Bank approval. It held that regardless of when the liability crystallized, the company became liable to pay dividends on the dates of declaration at the annual general meetings. Therefore, the general reserves as of April 1, 1971, and April 1, 1972, should not include the declared dividends, which must be treated as provisions.

Consequently, the court answered the questions in favor of the Revenue, affirming that the dividends declared and paid out of general reserves should be deducted from the relevant reserves. No costs were awarded in the matter.

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