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Issues: Whether the proposed dividend could be treated as a "surplus" within clause (ii) of rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, so as to be deducted from the cost of investment and only the balance deducted from capital computation.
Analysis: The expression "surplus" was construed according to its ordinary meaning as what remains after meeting required allocations. Once dividend had been proposed by the directors, the amount set apart for that purpose could not, in the commercial reality reflected by the balance-sheet form in Schedule VI to the Companies Act, 1956, continue to be treated as surplus. The distinction drawn in the cited taxation cases concerning a provision for taxation did not assist the assessee, because proposed dividend becomes payable upon declaration and is not in the same position as a contingent provision.
Conclusion: The proposed dividend was not a surplus within rule 2(ii) of the Second Schedule, and the question was answered in the negative, in favour of the revenue.
Ratio Decidendi: For purposes of rule 2(ii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, a proposed dividend is not "surplus" because surplus means the balance remaining after providing for proposed allocations, including dividend.
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