Dividend proposed and approved by shareholders is excluded from reserve treatment in surtax capital computation.

For capital computation under the Companies (Profits) Surtax Act, 1964, only reserves existing on the first day of the previous year count under Rule 1 of the Second Schedule. Where the board merely proposes a dividend and the balance-sheet and directors' report remain subject to approval by the general body, the earmarked dividend amount does not continue as part of reserve once approved. The statutory Explanation to Rule 1 also excludes amounts in the nature of proposed dividends from reserve treatment. The text therefore explains that dividend-appropriated sums are not includible in capital for statutory deduction purposes.

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Issues: Whether the amount of Rs. 18,64,065 distributed as dividend to shareholders had to be excluded from the computation of capital for determining the statutory deduction under the Companies (Profits) Surtax Act, 1964.

Analysis: The statutory deduction was to be computed with reference to the capital of the company as on the first day of the previous year under Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The company law scheme required the board of directors only to propose or recommend reserves and dividends, while the authority to adopt the balance-sheet and approve the proposal rested with the general body. The balance-sheet and directors' report in the present case showed that the reserve and dividend proposal were both subject to approval at the general meeting. Once the general body approved the balance-sheet and the report, the reserve and the dividend declaration took effect together, and the amount earmarked for dividend could not continue to be treated as part of the reserve. Independently, the Explanation to Rule 1 also excluded amounts of the nature of proposed dividends from being regarded as reserve for capital computation. The earlier and later decisions discussed in the judgment were distinguished or aligned consistently with this approach.

Conclusion: The amount of Rs. 18,64,065 was not includible in the capital for computing the statutory deduction and the answer to the reference was against the assessee.

Ratio Decidendi: For capital computation under the Second Schedule to the Companies (Profits) Surtax Act, 1964, an amount approved as dividend by the general body does not remain a reserve, and amounts of the nature of proposed dividends are excluded by the statutory Explanation.

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