1983 (7) TMI 135 - AT - Income Tax

Tribunal Upholds Deduction of Unpaid Dividends from Reserves for Surtax

Ingersoll-rand India Ltd. Versus Income-Tax Officer

Ingersoll-rand India Ltd. Versus Income-Tax Officer - ITD 017, 1002, Issues:Dispute over deduction of proposed dividends from general reserves for calculating Companies (Profits) Surtax Act payable by the assessee for four years.Analysis:The case involved a dispute regarding the deduction of proposed dividends from the general reserves of the assessee for calculating the Companies (Profits) Surtax Act payable for the years 1975-76 to 1978-79. The directors of the company recommended a dividend of Rs. 30 lakhs from the profits of 1973, approved by shareholders in June 1974. However, due to the enactment of the Companies (Temporary Restrictions on Dividends) Act in July 1974, only Rs. 48,000 could be paid, and the balance of Rs. 29,52,000 remained unpaid. The Income Tax Officer (ITO) relied on the Vazir Sultan Tobacco Co. Ltd. case, deducting the proposed dividend amount from the general reserve, a decision upheld by the Commissioner (Appeals).The assessee contended that the unpaid amount should not be deducted as it was void under the Companies Act due to the restrictions on dividends. The Department of Company Affairs initially stated that such dividends were void but later allowed payment post-July 1976. The Tribunal analyzed the legal position, stating that once a dividend was declared, it became an existing liability, regardless of the temporary restriction on payment. The resolution to pay from the general reserve made it a provision against the liability, justifying the deduction from the general reserve for the relevant assessment years.The Tribunal rejected the argument that the declaration of dividend prior to the appointed day was void, emphasizing that the liability existed despite the temporary restriction on payment. The communication from the Department of Company Affairs clarified that the declaration was not void, only the payment was temporarily restricted. As the liability had to be met once the restriction was lifted, the provision created by shareholders at the annual general meeting justified the deduction of the unpaid dividend from the general reserve for determining the capital of the assessee for the relevant years.In conclusion, the Tribunal dismissed the appeals filed by the assessee, upholding the decision to deduct the proposed dividends from the general reserves for calculating the Companies (Profits) Surtax Act payable for the assessment years in question.