Proposed dividend is not a deductible reserve in capital computation under the surtax schedule

Proposed dividend was held not to be a fund, surplus or reserve deductible from the cost of investments in computing capital under rule 2(ii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964. Although it had not matured into a present legal liability on the relevant date, its commercial character was that of an appropriation for an anticipated distribution, not an amount available as a reserve for capital computation. The amount therefore could not be deducted, and the issue was answered against the assessee and in favour of the Revenue.

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Issues: Whether, for computation of capital under rule 2(ii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, proposed dividend could be deducted from the cost of investments as a fund, surplus or reserve.

Analysis: The proposed dividend had not become a present legal liability on the relevant date, so it could not be treated as a provision. Even so, the negative and non-exhaustive concept of reserve required the true commercial nature of the appropriation to be examined. On that approach, proposed dividend represented an appropriation to meet an anticipated disbursement and was not a fund, surplus or reserve available for inclusion in capital. The amount therefore could not be deducted from the cost of investments under rule 2(ii).

Conclusion: The proposed dividend was not deductible in computing capital under rule 2(ii) of the Second Schedule, and the answer to the question was against the assessee and in favour of the Revenue.

Final Conclusion: The reference was answered by holding that proposed dividend does not form part of the deductible fund, surplus or reserve for capital computation under the surtax schedule.

Ratio Decidendi: An appropriation for proposed dividend, though not a matured debt on the valuation date, is not a reserve or surplus available for deduction in capital computation if, on its commercial character, it represents an anticipated distribution rather than an asset of the company.

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