S.C : Whether, on the facts and in the circumstances, the provision for proposed dividend of Rs. 1,62,000 is a reserve for the purpose of computation of capital of the assessee-company under the Super Profits Tax Act, 1963 ?

Supreme Court Of India

CIT vs. Bhavnagar Salt & Industrial Works (P) Ltd.


Asst. Year 1963-64

B.P. Jeevan Reddy & K.S. Paripoornan, JJ.

Civil Appeal No. 492 of 1978

14th February, 1996

Counsel Appeared

J. Ramamurthi with Manoj Arora & S. N. Terdol, for the Appellant : B. V. Desai, Ashish Dholakia, Promila Chowdhary & H. A. Raichura, for the Respondent



Heard counsel for both the parties.

2. This appeal has to be allowed following the decision of this Court in Vazir Sultan Tobacco Co. Ltd. vs. CIT (1981) 25 CTR (SC) 186 : (1981) 132 ITR 559 (SC) : TC 68R.281. The relevant facts are the following : For the asst. yr. 1963-64 (accounting year ending June, 1962), the company had made a provision in a sum of Rs. 1,62,000 towards dividends proposed to be declared. In the proceedings under the Super Profits Tax Act, the assessee contended that the said amount of Rs. 1,62,000 should be treated as a reserve and should be taken into consideration while calculating the capital base. This was rejected by the Super Profits Tax Officer. On appeal, the AAC agreed with the assessee whose view was affirmed in appeal by the Tribunal. Thereupon, the following question was referred for the opinion of the High Court : “Whether, on the facts and in the circumstances, the provision for proposed dividend of Rs. 1,62,000 is a reserve for the purpose of computation of capital of the assessee-company under the Super Profits Tax Act, 1963 ?”

The High Court answered the said question in favour of the assessee and against the Revenue. Hence, this appeal. Now, it is not in dispute that the said amount was set apart to meet the liability arising on account of the dividend proposed to be declared. It is, therefore, a provision made for a known and existing liability. Mr. Desai, learned counsel for the assessee, however, submitted that inasmuch as by the end of the relevant accounting year, the general body of the shareholders had not met and had not approved the proposal to declare dividend, the amount does not become a provision but remains a reserve. In support of his submission, learned counsel placed strong reliance upon the following observations in Vazir Sultan’s case (supra). The decision says : “The question relates to the asst. yr. 1974-75, the relevant previous year being the calendar year 1973 and the material date being 1st Jan., 1973. After the accounts of the calendar year 1972 were finalised the directors transferred out of the profits of Rs. 61,03,382 of that year a sum of Rs. 29,77,000 to the general reserve. With such transfer the general reserve of the assessee-company as on 1st Jan., 1973, stood at Rs. 86,07,712. At the end of the calendar year 1973, admittedly, the directors did not make any provision for ‘proposed dividend’ in its accounts but there was a note on the balance sheet to the following effect : ‘The directors have recommended dividend for the year 1972, at the rate of Rs. 10 per share free of tax. The dividend, if approved by the shareholders at the forthcoming annual general meeting, will be paid out of general reserve and no separate provision has been made therefor in the accounts.’

At the annual general meeting, held on 30th June, 1973, dividend of Rs. 3,10,450 was declared by the shareholders and the same was soon thereafter paid out of the said general reserve. In the surtax assessment proceedings under the 1964 Act, the assessee claimed that the entire general reserve which stood at Rs. 86,07,712 as on 1st Jan., 1973,should be taken into account while computing the capital of the assessee-company. But the taxing officer reduced the general reserve by the aforesaid sum of Rs. 3,10,450 and only the balance of Rs. 82,97,262 was added in computing the capital.”

5. The contention of the assessee on the basis of the above facts was indeed rejected by the Court. Apart from the above, it would be noticed that the facts in the case before us are entirely different. Here, not only there was a recommendation by the directors to declare dividend at a particular figure but the requisite amount was also set apart and shown as a provision in the balance sheet itself. This specific circumstance was not there in the facts of the case considered in the above decision. In view of this distinguishing circumstance, we are of the opinion that no reliance can be placed upon the said judgment since the provision here was made expressly for the purpose of meeting the liability of dividend. It is a provision and not a reserve.

6. The appeal is accordingly allowed. The judgment of the High Court is set aside and the question referred is answered in favour of the Revenue and against the assessee. No costs.

[Citation: 236 ITR 311]

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