1996 (2) TMI 132 - SC - Income Tax

Supreme Court: Dividend provision /= reserve for capital under Tax Act. Importance of specific circumstances

Commissioner Of Income-Tax Versus Bhavnagar Salt And Industries Works Pvt. Limited

The Supreme Court allowed the appeal, overturning the High Court's judgment. The Court held that the provision for proposed dividend should be treated as ... Super Profits Tax, Company, Capital, Dividends Issues:1. Treatment of provision for proposed dividend as reserve for computation of capital under Super Profits Tax Act, 1963.Analysis:The appeal in this case revolves around the treatment of a provision for proposed dividend as a reserve for the purpose of computing capital under the Super Profits Tax Act, 1963. The company had made a provision of Rs. 1,62,000 towards dividends proposed to be declared for the assessment year 1963-64. The Super Profits Tax Officer rejected the contention that this amount should be treated as a reserve, but the Appellate Assistant Commissioner and the Tribunal sided with the assessee. The High Court also ruled in favor of the assessee, leading to the appeal before the Supreme Court.The key argument presented by the assessee was that since the shareholders had not approved the proposal to declare dividend by the end of the relevant accounting year, the amount should be considered a reserve and not a provision. The counsel for the assessee relied on a previous case, Vazir Sultan's case, to support this argument. However, the Supreme Court distinguished the facts of the current case from the precedent cited by the assessee. In the present case, the directors had recommended a specific dividend figure, and the amount was set apart and shown as a provision in the balance-sheet. This crucial distinction led the Court to conclude that the amount in question was indeed a provision made expressly to meet the liability of dividend and not a reserve.Based on the above analysis, the Supreme Court allowed the appeal, setting aside the judgment of the High Court. The Court answered the question referred in favor of the Revenue and against the assessee, emphasizing that the amount in question was rightfully treated as a provision and not a reserve. The decision underscores the importance of specific circumstances and intentions behind the creation of provisions in financial statements, especially in the context of tax assessments under relevant legislation like the Super Profits Tax Act, 1963.