1989 (9) TMI 20 - HC - Income Tax

Court includes dividend from general reserve in statutory deduction calculation under Companies Surtax Act

Commissioner Of Income-Tax Versus Unichem Laboratories Limited

The court ruled in favor of the Revenue, holding that the dividend declared from the general reserve was to be included in computing the capital for ... Company, Surtax Issues:Interpretation of statutory deduction under the Companies (Profits) Surtax Act, 1964 based on the distribution of dividend from general reserve.Analysis:The primary issue in this case revolved around the interpretation of the statutory deduction under the Companies (Profits) Surtax Act, 1964 concerning the inclusion of a sum of Rs. 5,40,000, declared as dividend from the general reserve of Rs. 50,65,750, in computing the capital. The Revenue contended that the dividend was to be included based on the Supreme Court decision in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559. On the other hand, the assessee argued that the distribution of dividend was different in this case as it was from the general reserve of earlier years, citing the case of ITO. Corn. Cir. III(4) Bombay v. Bajaj Auto Ltd., Bombay and CIT v. Mysore Electrical Industries Ltd. The court examined the balance-sheet of the company for the relevant financial year to determine the basis of the dividend distribution recommendation.The court analyzed the balance-sheet and found that the recommendation for dividend distribution did not specify that the amount was to be paid from the general reserve brought forward from earlier years. Despite the Tribunal's observation that the dividend was to be distributed from the general reserve created earlier, the court found no basis for this assertion. The court emphasized that the amount appropriated towards the general reserve from the profits of the year became part of the general reserve as of the first day of the previous year, as per the decision in CIT v. Mysore Electrical Industries Ltd. The court highlighted that dividends are typically paid from current income and not past savings unless expressly stated otherwise by the directors in their report. In this case, the directors only mentioned that the dividend would be paid from the general reserve, without specifying it was from past savings.Moreover, the court confirmed that the dividend was indeed distributed from the general reserve of the current year, consisting of the general reserve brought forward from earlier years and the amount appropriated from the profits of the current year, reduced by the proposed dividend amount. The court concluded that the case aligned with the Supreme Court decision in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559, ruling in favor of the Revenue. Consequently, the court answered the question of law in the negative, supporting the inclusion of the dividend amount in computing the capital for statutory deduction under the Companies (Profits) Surtax Act, 1964.