Proposed dividend cannot be counted as capital for surtax computation; substance prevails over reserve nomenclature.

For surtax computation under the Second Schedule to the Companies (Profits) Surtax Act, amounts appropriated as proposed dividend cannot be treated as capital merely because they are carried to dividend reserve or general reserve. The substance of the allocation prevails over its label: the portion directed to be paid as dividend is excluded from capital, while only the remaining balance may be included. On that basis, the proposed dividend components in the relevant reserve accounts were not includible, and only the surplus after exclusion of those amounts retained capital character.

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Issues: (i) Whether the sum of Rs. 17,25,000 credited to dividend reserve, to the extent of Rs. 17,15,715 proposed as dividend, was includible in the computation of capital for assessment year 1965-66 under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964; (ii) Whether the sum of Rs. 18,35,715 transferred to general reserve, but directed to be paid as dividend, was includible in the computation of capital for assessment year 1966-67 under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Issue (i): Whether the amount standing in dividend reserve was includible in capital for assessment year 1965-66.

Analysis: The amount appropriated from current profits included a component directed to be paid as dividend in the same year. That component represented proposed dividend and could not form part of capital for surtax purposes. Only the balance remaining after excluding the proposed dividend retained the character of capital.

Conclusion: The sum of Rs. 17,15,715 was not includible, while the balance of Rs. 9,285 was includible in the computation of capital for assessment year 1965-66.

Issue (ii): Whether the amount transferred to general reserve was includible in capital for assessment year 1966-67.

Analysis: The label attached to the account was not conclusive. The amount directed to be paid as dividend in relation to the relevant year was in substance proposed dividend, and therefore could not be treated as capital even though it stood in general reserve.

Conclusion: The sum of Rs. 18,35,715 was not includible, while the balance of Rs. 6,64,285 was includible in the computation of capital for assessment year 1966-67.

Final Conclusion: Amounts representing proposed dividend were excluded from capital computation under the surtax schedule, and only the surplus remaining after such exclusion was treated as capital.

Ratio Decidendi: For surtax computation, amounts appropriated for proposed dividend cannot be included in capital merely because they are carried to dividend reserve or general reserve; the substance of the allocation prevails over its nomenclature.

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