Proposed dividend is not a reserve for surtax capital computation; the amount was excluded from statutory deduction.

Under the Companies (Profits) Surtax Act, an amount earmarked as proposed dividend was not includible in capital for statutory deduction purposes because capital under rule 1 of the Second Schedule is computed by reference to reserves as on the first day of the previous year, and the balance-sheet showed only a proposal until adopted by the general body. Once the shareholders acted, the reserve and dividend declaration took effect together, leaving no reserve amount available for capital computation. The court also held that the Explanation to rule 1 excludes amounts of the nature of proposed dividends from reserve treatment. The amount was therefore excluded from capital computation, against the assessee.

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Issues: Whether the amount of Rs. 18,64,065 distributed as dividend to shareholders was to be excluded in computing the company's capital for determining the statutory deduction under the Companies (Profits) Surtax Act, 1964.

Analysis: Under rule 1 of the Second Schedule, capital is computed with reference to reserves as on the first day of the previous year. The balance-sheet and directors' report showed only a proposal and recommendation, and under section 217 of the Companies Act, 1956, the authority to create a reserve and declare dividend lies with the general body. When the general body adopted the balance-sheet and report, the reserve and dividend declaration took effect together. The amount proposed for dividend was therefore not part of the reserve available for capital computation. Even if the amount were assumed to be within a reserve, the Explanation to rule 1 excludes amounts of the nature of proposed dividends from being treated as reserve. The court also rejected the view that proposed dividend could be included as reserve merely because the resolution might relate back for other purposes.

Conclusion: The amount of Rs. 18,64,065 was not includible in the computation of capital for statutory deduction purposes, and the answer was against the assessee and in favour of the Revenue.

Ratio Decidendi: For surtax capital computation, an amount earmarked for proposed dividend and later approved by the general body is not a reserve includible in capital, because reserve status depends on the final corporate act and proposed dividends are excluded by the statutory scheme.

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