1976 (6) TMI 30 - HC - Income Tax

Court Rules Future Dividends Not Deductible from Reserves

The court ruled that the 'general reserve' should not be reduced by the amount of dividend declared when calculating capital under the Surtax Act, 1964. ... Computation Of Capital, General Reserve Issues:- Whether the 'general reserve' should be reduced by the amount of dividend declared while computing the capital under the Surtax Act, 1964.- The distinction between a reserve and a provision.- The timing of shareholder's right to dividend and the related liability.- Application of past judgments regarding reserves and dividend reserves.Analysis:The judgment addresses the issue of whether the 'general reserve' should be decreased by the amount of dividend declared when calculating capital under the Surtax Act, 1964. The court highlights the distinction between a reserve and a provision, emphasizing that reserves are appropriations of profits retained as part of the capital, while provisions are deductions from assets to meet known liabilities or contingencies. The court cites the Metal Box Company case to support this distinction.Regarding the timing of shareholder's right to dividend and the related liability, the court refers to the Purshotamdas Thakurdas case, stating that a shareholder's right to dividend arises only upon its declaration at the annual general meeting. Until the resolution is passed, there is no liability, either actual or contingent, related back to the last day of the accounting year. The liability for dividend payment is prospective and only arises post-resolution.The judgment also discusses past decisions, such as the Mysore Electrical Industries Ltd. case and the Aryodaya Ginning and Manufacturing Co. Ltd. case. In the former, the Supreme Court related the appropriation of reserves to the beginning of the accounting year, but this does not apply in the current case due to the absence of known liabilities. In the latter case, the High Court allowed reserves to be considered for abatement based on shareholder resolution, but in the absence of a specific allocation for dividend reserve in the present case, the liability for dividend payment is prospective and cannot be related back.Ultimately, the court upholds the Tribunal's view that the amount of dividend declared at a future date should not be deducted from general reserves for computing capital under the Surtax Act, 1964. The liability for dividend payment arises only post-resolution and cannot be antedated. Consequently, the rule is discharged with costs.