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

Citation: [1992] 1 S.C.R. 22 · Decided: 14-01-1992 · Supreme Court of India · Bench: K. RAMASWAMY · Disposal: Dismissed

Judgment (excerpt)

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 accounts were 
passed by the share-holders and the dividend as recommended by the 
Directors was declared. Subsequently, the dividend was paid and it was 
adjusted by transferring Rs. 76,00,000 from the dividend reserve account 
through the Profit and Loss Appropriation Account. The question there-
fore arose whether a sum. of Rs. 90,00,000 or any part thereof would be 
reserve for computing the capital as on January 1, 1963. The appellant 
claimed in its assessment a sum of Rs. 90,00,000 transferred to the 
dividend reserve as a reserve entering into capital computation. The 
assessing authority excluded this sum from the computation of the 
capital but on appeal the Appellate Assistant Commissioner found it to 
be a reserve created out of amounts which had not been allowed as 
deduction for computing the profits of that year. He therefore held that 
Rs. 90,00,000 was the reserve fund qualified for inclusion under Rule I 
(III) of the Second Schedule to the Sur-tax Act. On appeal by the 
Revenue, the Income-tax Appellate Tribunal held that "the assessee had 
appropriated Rs. 76,00,000 out of the Year's profit and transferred the 
balance of Rs. 14,00,000 to the dividend reserve" : Rs. 76,00,000 was 
taken as liability as on 1.1.1963 and as the creation of Rs. 90,00,000 was -· 
22 
INDIAN TUBE CO. v. C.l.T. 
23 
to be taken as reserve on 1.1.1963, only a sum of Rs. 14,00,000 has been 
A 
transferred to the reserve account. Accordingly the Tribunal held that a 
sum of Rs. 14,00,000 would only be treated as a reserve and directed 
modification of the capital computation. On a reference under section 
256(1) of the Income-tax Act and Section 18 of the companies (Profits) 
Sur-tax Act, 1964 at the behest of the appellant, the High Court an-
swered the question in the negative and against the assessee. Hence this 
B 
appeal by certificate under Section 261 of the Income-Tax Act, 1961. 
Dismissing the appeal, this Court, 
HELD : A conjoint reading of the scheme of the Sur-tax Act and 
the Company's Act suggests that the appropriation made by the Board 
C 
of Directors by recommending payment of dividend, in the nature of 
things does not constitute a reserve. [288] 
If an amount is satisfied out of profits and other surpluses, not to 
meet the liability, contingency, commitment or diminution in the value of 
assets known to exist at the time of the balance-sheet, it was a reserve. 
D 
The amount set aside out of profits and other surpluses to profit for any 
known liability for which the amount could be determined with cer-
tainty, it is a provision. [27H] 
Creating of reserve. out of the profit is a stage distinct in point of 
fact and anterior in point of time to the stage of making recommendation E 
for payment of dividend by the general body of the shareholders. [28AJ 
1:he true nature and character of the djsputed sum, therefore must 
be determined with reference to the substance of the matter and not by 
the mere entry or nomenclature which the assessee company had chosen 
to be given. [27G] 
F 
A sum of Rs. 76,00,000 worked out for the payment of dividend and 
appropriated by subsequent resolution was only a provision and the 
residue of Rs. 14,00,000 was reserve. [28C] 
Though the general body of the shareholders resolved and appro-

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