1976 (8) TMI 38 - HC - Income Tax

Court clarifies treatment of dividend equalisation reserve for surtax purposes

The court determined that for the assessment year 1965-66, the amount from the dividend equalisation reserve should be treated as a reserve for computing ... Capital Of Company, Computation Of Capital Issues:1. Treatment of proposed dividends on preference shares and equity shares as provision/liability for statutory deduction under the Companies (Profits) Surtax Act, 1964 for assessment year 1965-66.2. Treatment of proposed dividends on preference shares and equity shares as provision/liability for statutory deduction under the Companies (Profits) Surtax Act, 1964 for assessment year 1966-67.Analysis:For the assessment year 1965-66, an outstanding balance of Rs. 17,61,638 was in the dividend equalisation reserve account on January 1, 1964. Additionally, a sum of Rs. 39,26,469 from the profits ending December 31, 1963, was credited to this account, making the total amount Rs. 56,88,107. Directors recommended distributing Rs. 56,59,612 as dividend for the year ending December 31, 1963, which was approved by shareholders. Referring to previous judgments, it was concluded that Rs. 17,61,638 from the dividend equalisation reserve should be treated as reserve for computing the capital base for the assessment year 1965-66.Regarding the assessment year 1966-67, on January 1, 1965, Rs. 28,495 was in the dividend equalisation reserve account. During the year ending December 31, 1964, Rs. 1,47,43,658 was transferred from the development reserve to the dividend equalisation reserve, totaling Rs. 1,47,72,153. Directors recommended distributing Rs. 65,13,611 as dividend for the year ending December 31, 1964, which was approved by shareholders. It was determined that for the assessment year 1966-67, the entire amount of Rs. 1,47,72,153 should be included in the computation of capital for surtax purposes, as no amount was transferred from the profit and loss account for dividend distribution.The judgment clarified the treatment of proposed dividends on preference and equity shares in the context of statutory deductions under the Companies (Profits) Surtax Act, 1964 for the specified assessment years. The court's decision was based on the specific financial transactions and recommendations made by the directors, ensuring the correct computation of capital for surtax purposes. The judgment highlighted the importance of accurate accounting practices and adherence to legal provisions for determining the capital base under the relevant legislation.