Dividend reserve and provision for surtax capital depend on substance, not accounting labels, when dividend liability has crystallised.

For surtax capital computation, the character of an amount appropriated from dividend reserve depends on its substance on the relevant valuation date. An amount set apart to meet a crystallised dividend liability is a provision, not a reserve, and the accounting label is not decisive. Once shareholders resolve to pay dividend, the liability to that extent crystallises and relates back to the accounting date. Applying that principle, the amount appropriated towards declared dividend was treated as a liability/provision and excluded from reserve capital, while only the balance retained its reserve character.

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Issues: Whether the amount appropriated by the general meeting towards dividend from the dividend reserve, as on the relevant valuation date, was a reserve or a provision for the purpose of computing capital under the Companies (Profits) Surtax Act, 1964.

Analysis: The decisive question was the true character of the sum on the relevant date. An amount set apart to meet a known liability is a provision, while an amount retained out of profits not earmarked for a known liability may be a reserve. The recommendation of dividend by the directors did not by itself create the reserve character; once the shareholders resolved to pay dividend, the liability to the extent of the declared dividend crystallised and related back to the accounting date. The substance of the transaction, not the label used in the accounts, governed the computation of capital. Applying that principle, the amount of Rs. 76 lakhs represented a liability/provision, and only the balance of Rs. 14 lakhs remained in the nature of reserve.

Conclusion: The amount of Rs. 76 lakhs was not includible in capital as reserve and the assessee succeeded only to the limited extent that Rs. 14 lakhs was treated as reserve; the finding was against the assessee on the main issue.

Ratio Decidendi: For surtax capital computation, a sum appropriated to meet a crystallised dividend liability is a provision and not a reserve, and its character is determined by the substance of the transaction as on the relevant date rather than by the accounting nomenclature.

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