1976 (7) TMI 38 - HC - Income Tax

Dividend reserve included in capital for surtax calculation clarifies assessment rules

The Court held that the balance of Rs. 3,60,000 in the dividend reserve account was to be included in the capital computation for surtax purposes. The ... Computation Of Capital, Dividend Reserve Issues involved: Determination of whether the dividend reserve is includible in the computation of capital of the assessee-company u/r 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 and the specific amount to be considered as part of the capital.Issue 1 - Inclusion of Dividend Reserve in Capital Computation:The balance-sheet of the company for the year ending June 30, 1964, showed a dividend reserve under 'Reserves and Surplus.' The directors recommended a dividend payment from this reserve, which was approved by shareholders. The Income-tax Officer initially did not consider the balance in the dividend reserve account for computing the capital. However, the assessee later contended that it should be included as part of the capital for surtax purposes. The Appellate Assistant Commissioner determined that the balance of Rs. 3,60,000 in the dividend reserve account was a reserve for capital computation. The Tribunal upheld this decision, stating that the balance amount was a reserve for surtax purposes.Issue 2 - Determination of Specific Amount for Inclusion:The revenue argued that only the balance of Rs. 3,60,000 should be considered as part of the capital, deducting the proposed dividend amount. On the other hand, the assessee contended that a larger amount of Rs. 5,15,000 should be included in the capital computation. The Court analyzed the situation and concluded that the sum of Rs. 3,60,000 should be regarded as the dividend reserve includible in the computation of capital for the assessment year 1966-67.The Court emphasized that the specific amount to be treated as reserve would depend on the facts of the case. Ultimately, it was determined that the dividend reserve amount to be included in the capital of the assessee-company as on July 1, 1964, was Rs. 3,60,000. The judgment clarified the interpretation of the dividend reserve and its treatment in the computation of capital for surtax purposes.