Court rules for assessee on dividend and bonus shares, capital computation clarified.

The court ruled in favor of the assessee on both issues. Regarding the first issue, the court held that the amount of dividend recommended by the directors out of the general reserve after the first day of the accounting year should not be excluded from computing the capital. On the second issue, the court determined that the general reserve should not be reduced by the value of bonus shares issued after the first day of the previous year. As a result, both questions were resolved in favor of the assessee, with no costs awarded in the case.

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Issues:
1. Whether the amount of dividend recommended by the directors out of the general reserve after the first day of the accounting year and declared and paid in the next year should be excluded from computing the capital.
2. Whether the general reserve should be reduced by the value of bonus shares issued after the first day of the previous year.

Analysis:
1. The first issue involved whether the amount of dividend recommended by the directors out of the general reserve after the first day of the accounting year should be excluded from computing the capital. The Department argued that the Supreme Court decision in Vazir Sultan Tobacco Co. Ltd. v. CIT was applicable and the amount should be excluded. However, the assessee's counsel contended that the assessment year was 1972-73, and the dividend was proposed for the following accounting year. The balance-sheet as of December 31, 1971, supported the assessee's case. The court agreed with the assessee, stating that the amount should not be excluded from the general reserve, and the Supreme Court decision was not applicable. Therefore, the first question was answered in favor of the assessee.

2. The second issue revolved around whether the general reserve should be reduced by the value of bonus shares issued after the first day of the previous year. The assessee argued that a subsequent decision of the court in CIT v. New Swadeshi Sugar Mills Ltd. was relevant, stating that until a resolution for the issue of bonus shares is passed, no liability is incurred by the company. The court clarified that the dispute was solely about reducing the general reserves by the value of bonus shares issued after the first day of the previous year. Following the court's decision in New Swadeshi Sugar Mills Ltd.'s case, it was held that the general reserve should not be reduced by the amount of bonus shares issued after the first day of the previous year. Consequently, the second question was answered in favor of the assessee.

In conclusion, both issues were decided in favor of the assessee, and no costs were awarded in the case.

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