Dividend proposal is not a liability before shareholder approval and cannot reduce general reserves for capital computation.

A proposed dividend does not become a known or contingent liability before shareholder approval in general meeting, because the obligation to pay dividend is prospective and does not relate back to the first day of the accounting year. On that basis, the amount set aside for a later dividend declaration could not be treated as a provision or deducted from general reserves when computing capital under the Surtax Act, 1964. The analysis distinguished cases involving existing reserve items or already sanctioned reserves, which were not applicable where only a dividend recommendation existed and no amount had been set apart as a dividend reserve.

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Issues: Whether the amount of dividend declared at a later date could be treated as a provision or deducted from general reserves while computing capital under the Surtax Act, 1964.

Analysis: A reserve is an appropriation of profits, whereas a provision is made for a known liability or anticipated diminution in value of assets. Until dividend is declared by the shareholders in general meeting, no liability, even contingent liability, arises. The obligation to pay dividend is prospective and does not relate back to the first day of the accounting year. Decisions dealing with distinct reserve items, or with reserves already created and sanctioned, did not apply because in the present case no amount had been set apart for dividend reserve and only a recommendation for declaration of dividend existed.

Conclusion: The amount proposed for dividend could not be treated as a provision or deducted from general reserves for computing capital under the Surtax Act, 1964; the issue was decided against the assessee and in favour of the Revenue.

Final Conclusion: General reserves were not to be reduced by the amount of dividend declared at a later date for the purpose of capital computation under the Surtax Act, 1964.

Ratio Decidendi: A future dividend declaration does not create a known or contingent liability before shareholder approval and therefore cannot be treated as a provision or as reducing general reserves for capital computation.

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