Declared dividend as existing liability must be deducted from general reserve when computing surtax capital despite temporary payment restrictions.

A dividend declared by a company in general meeting creates an enforceable liability to shareholders under the Companies Act, 1956. The temporary payment restriction in section 5 of the Companies (Temporary Restrictions on Dividends) Act, 1974 suspended payment beyond the permitted limit but did not extinguish the liability already created by the declaration. Where the declared dividend was chargeable against general reserve, it retained the character of a provision for that liability and had to be deducted from general reserve in computing capital for surtax purposes. The unpaid dividend amount was therefore rightly reduced from general reserve, and the assessee-company obtained no relief.

---

---

Issues: Whether the amount of proposed dividend declared before the appointed day but not paid because of the Companies (Temporary Restrictions on Dividends) Act, 1974 was deductible from the general reserve while computing the assessee-company's capital for surtax purposes.

Analysis: A dividend declared by a company in general meeting created an enforceable liability to shareholders under the Companies Act, 1956. The temporary restriction introduced by section 5 of the Companies (Temporary Restrictions on Dividends) Act, 1974 only suspended payment beyond the permitted limit and did not extinguish the liability already created by the declaration. Since the amount was declared to be paid out of general reserve and represented an existing liability, it had the character of a provision against that liability and had to be deducted from the general reserve for determining capital.

Conclusion: The deduction of the unpaid dividend amount from the general reserve was justified and the contention of the assessee failed.

Final Conclusion: The disputed dividend liability was rightly taken into account in reducing general reserve for surtax capital computation, and the assessee obtained no relief.

Ratio Decidendi: A dividend declared before a temporary statutory restriction on payment remains an existing liability, and where it is chargeable against general reserve it must be deducted in computing capital for surtax purposes.

---