Commissioner of Income Tax vs Crompton Parkinson (Works) Ltd. (Now Known As Crompton Greaves Ltd.)

T.D. Sugla, J.—In this departmental reference relating to the assessee''s surtax assessment for the assessment year 1965-66, the Tribunal has referred to this court the following three questions of law for opinion u/s 256(1) of the Income Tax Act, 1961, as applied to surtax by section 18 of the Companies (Profits) Surtax Act, 1964 :

"(1) Whether, on the facts and in the circumstances of the case, the retirement gratuity reserve of Rs. 16,17,966 constitutes a reserve includible in the computation of capital in terms of rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, for the assessment year 1965-66 ?

(2) Whether, on the facts and in the circumstances of the case, the dividend reserve of Rs. 10,00,000 constitutes a reserve includible in the computation of capital in terms of rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, for the assessment year 1965-66 ?

(3) Whether, on the facts and in the circumstances of the case, the taxation reserve in excess of the taxation liability for the relevant previous year constitutes a reserve includible in the computation of capital in terms of rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, for the assessment year 1965-66 ?"

Counsel are agreed that, in so far as question No. 1 and 3 are concerned, the issues involved herein are covered by the Supreme Court decision in the case of Vazir Sultan Tobacco Co. Ltd., Hyderabad and Others Vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad, and that, in view thereof, neither retirement gratuity reserve nor taxation reserve has to be treated as reserves as such but only that part of these reserves which is in excess of the liability of the assessee in the cases of gratuity reserve computed on the basis of actuarial valuation and in the case of taxation reserve, actual tax liability will have to be treated as reserve. These two questions are so answered.

As regards question No. 2, while it was the case of Dr. Balasubramanian, learned counsel for the Revenue, that this question was also covered by the aforesaid Supreme Court decision in favour of the Revenue, Shri Mistry, learned counsel for the assessee, stated that it was not so. He contended that the second question was, in fact, covered by our court''s judgment in Commissioner of Income Tax Vs. Burmah Shell Refineries Ltd., in favour of the assessee. In this context, he pointed to the admitted position that, in the present case, no reserve for the purpose of dividend was created out of the profits for the year, i.e., the previous year, July 1, 1963 to June 30, 1964. He also pointed out that, as held by the Supreme Court, the dividend proposed and approved by the shareholders in a general meeting held subsequently does not relate back although if a reserve is created out of the profits of the year which, according to him, meant the previous year, the reserve so created will have to be treated as a provision.

We are afraid that the arguments advanced by Shri Mistry are misconceived. We have carefully gone through our court''s judgment in Commissioner of Income Tax Vs. Burmah Shell Refineries Ltd., . The assessment year involved in that case also was 1965-66 for which the previous year was calendar year 1964. For the purpose of computing standard deduction, it was necessary in the first instance to compute the capital of the assessee as on the 1st day of the previous year, i.e., January 1, 1964. Balance-sheets are always drawn up on the last day of the accounting year and not on the 1st day of the accounting year. That is why for the purpose of computing capital, our court took the balance-sheet as on December 31, 1963, into account. No doubt, our court has, at a number of places, stated that has, at a number of places, stated that if reserve is created out of the profits of the year, the dividend to be distributed out of such a reserve makes that reserve a provision to the extend thereof. However, the expression "year" evidently meant the year ending December 31, 1963. It could not, by any stretch of imagination, be the year ending on December 31, 1964, as the capital was to be computed as on January 1, 1964, i.e., the first day of the year. Moreover, the finding in that case is very clear and categorical, namely, that no dividend reserve was created in the year ending December 31, 1963. On the contrary an amount was transferred from the general reserve to the profit and loss account for the purpose of distributing dividend. It is on these facts that our court took the view that the dividend proposed but approved in the annual general meeting held some time thereafter would not relate back and would not go to reduce the general reserve as on December 31, 1963. Accordingly, we agree with Dr. Balasubramanian that question No. 2 is also covered by the Supreme Court decision in Vazir Sultan Tobacco Co. Ltd., Hyderabad and Others Vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad, . We are told that the actual dividend declared was Rs. 9,37,500 only. Therefore, we will answer the second question thus :

The dividend reserve of Rs. 10,00,000 to the extent it is in excess of the amount of the dividend proposed and actually declared, i.e., Rs. 9,37,500 alone is to be treated as reserve.

No order as to costs.