INDIAN TUBE CO. (P) LTD vs. COMMISSIONER OF INCOME-TAX, CALCUTTA

CIVIL APPEAL No. 1254/1976Supreme Court[1992] 1 S.C.R. 2214 January 1992Bench: 2 JudgesAuthor: K. RAMASWAMY, B.P. JEEVAN REDDY A INDIAN TUBE CO.9 pages
AI SummaryDismissed

What did the Supreme Court hold?

The Supreme Court held that an appropriation made by the Board of Directors recommending dividend payment does not constitute a reserve. A reserve is an amount set aside out of profits and other surpluses not to meet a known liability, contingency, commitment, or diminution in asset value. An amount set aside to meet a known liability with certainty is a provision. The creation of a reserve is distinct from and anterior to the recommendation of dividend payment. The true nature of the sum must be determined by its substance, not its nomenclature. The Rs. 76,00,000 worked out for dividend payment and appropriated by resolution was a provision, and the residue of Rs. 14,00,000 was the reserve. Although the shareholders' resolution on May 31, 1963, appropriated Rs. 76,00,000 from the Rs. 90,00,000 reserve, it related back to the relevant assessment year. Therefore, as on January 1, 1963, Rs. 76,00,000 was a provision and could not be computed as capital. Only Rs. 14,00,000 was to be treated as a reserve. The Tribunal and High Court correctly laid down the law. The appeal was dismissed.

What were the facts?

The appellant, Indian Tube Co. (P) Ltd., sought to include a sum of Rs. 90,00,000 transferred to a 'Dividend Reserve Account' in the computation of its capital for Sur-tax purposes for the assessment year 1964-65, considering the position as of January 1, 1963. The Directors approved this transfer from profits of the 1962 year on May 1, 1963. Shareholders approved the accounts and declared a dividend of Rs. 76,00,000 on May 31, 1963, which was subsequently paid by adjusting the dividend reserve. The Assessing Officer excluded the Rs. 90,00,000. The Appellate Assistant Commissioner allowed it as a reserve. The Income-tax Appellate Tribunal, however, held that only Rs. 14,00,000 constituted a reserve, considering Rs. 76,00,000 as a liability as of January 1, 1963. The High Court, on reference, upheld the Tribunal's decision. The assessee appealed to the Supreme Court.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that a sum of Rs. 76,00,000, paid as dividend for the year 1962 following the General Meeting on May 31, 1963, out of a dividend reserve of Rs. 90,00,000 as on January 1, 1963, was not to be taken into account for the computation of capital as on January 1, 1963, in pursuance of Rule 1 of the Second Schedule to the Companies (Profits) Sur-tax Act, 1964. Assessee's contention: The appellant contended that the entire sum of Rs. 90,00,000 transferred to the dividend reserve should be considered a reserve for capital computation. Revenue's contention: The Revenue contended that the sum of Rs. 76,00,000 appropriated for dividend payment was a liability or provision, not a reserve, and thus should be excluded from capital computation. The Tribunal, on appeal by the Revenue, held that only Rs. 14,00,000 was a reserve.

Which sections of the Income-tax Act were involved?

Section 2(b),Section 4,Section 18

AI-generated summary — verify with the full judgment below

r. A INDIAN TUBE CO. (P) LTD. v. COMMISSIONER OF INCOME-TAX, CALCUTI A JANUA,RY 14, 1992 B [K. RAMASWAMY AND B. P. JEEVAN REDDY, JJ.) c D E F G H Companies (Profit) Sur Tax Act, 1964 Sections-2 (b), 4, 18--Payment of dividend-Recommendation of Board of Directors-Whether reserve-- Whether to be taken into consideration for computation of capital.

This appeal arises out of proceedings initiated to compute the capital of the appellant-company for the purpose of Sur-tax. The previ- ous year relevant to the assessment year of the paid up capital, the reserve, the debentures etc. under Rule 1 of Second Schedule to the Sur- tax Act is the calendar year 1963. The assessment year is 1964-65. The position of the capital was to be considered as on the 1st day of January, 1963. In this connection it may be mentioned that the Directors of the appellant-assessee's company at their meeting held on 1.5.1963 approved the transfer of a sum Rs. 90,00,000 out of the profits for the 1962 year to a 'Dividend Reserve Account', 121/ 2 % which amounted to Rs. 76,00,000 on the ordinary shares on the amount paid on those shares prior to 31.12.1962. On 31.5.1963 in the general meeting

The order continues below.

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