SUHRID GEIGY LIMITED Vs. COMMISSIONER OF SURTAX

JUDGEMENT

(1.) BY this Surtax Reference which relates to asst. yrs. 1970 -71 and 1972 -73, the Tribunal, Ahmedabad, has referred, for the opinion of this Court, the following questions under S. 18 of the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as the Act) r/w S. 256(2) of the IT Act, 1961.

(2.) IN respect of the asst. year 1970 -71 the assessee had filed a return on 9th Dec., 1970 for the accounting period from 1st April, 1969 to 31st March, 1970 showing the chargeable profit of Rs. 34,33,577. The Surtax Officer issued notice under S. 6(1) of the said Act. In those proceeding, the assessee, by its letter dt. 19th Jan., 1971, intimated the Surtax Officer that it had no objection if the reserve for additional depreciation and rehabilitation and development rebate reserve were not considered as reserve in the computation of capital. In the order passed on 28th Aug., 1974, the Surtax Officer, taking the figure of general reserve of Rs. 1,61,83,570 as on 1st April, 1969, deducted the reserve for additional depreciation, rehabilitation and reserve for gratuity. No deduction was however made by the Surtax Officer in respect of the proposed dividend for 1968 -69 which was shown to have been deducted in the accounting year 1969 -70 on page 20 of the balance sheet of the year ending 31st March, 1969, being a sum of Rs. 29,25,000. That balance sheet, which is a part of the record, shows that certain sums were transferred from tax exempt profit reserve, statutory development rebate reserve and P&L a/c to the general reserve, reaching the figure of Rs. 1,61,83,570 which is shown as the figure of the general reserve as on 1st April, 1969 from which the dividend amount which was proposed for the year 1968 -69 in that accounting year came to be paid in the accounting year 1969 -70. The dividend which was proposed so paid was, according to the Revenue, required to be deducted from the general reserve as on 1st April, 1969 in respect of the said year. Since this was not done, the Surtax Officer proceeded to rectify the mistake by issuing a notice under S. 13 of the said Act to the assessee as to why the general reserve should not be reduced to the extent of Rs. 16,38,000 on the first day of the accounting year 1969 -70 before its inclusion in the computation of capital base. In the rectification order which was made on 7th April, 1977, the Surtax Officer found that there was a mistake committed in the assessment order dt. 28th Aug., 1974 and that the proposed dividend, which was to be distributed out of the general reserve, was not deducted from the balance of the general reserve as on 1st April, 1969. It was held that the proposed dividend for the accounting year 1969 -70 should be related back to the first day of the accounting year in view of the decision of the Supreme Court in CIT vs. Mysore Electrical Industries Ltd. (1971) 80 ITR 566 (SC) and the general reserve as on 1st April, 1969 should be reduced to that extent before including it in the capital base of the assessee. On behalf of the assessee, it was contended before the officer that, on the first day of the previous year, that is, on 1st April, 1969, the amount of proposed dividend was neither the liability nor a debt of the assessee -company and, therefore, it was rightly included in the capital base of the company for the purpose of standard deductions. It was contended that there was no present liability existing on the first day of the previous year, that is, on 1st April, 1969 in respect of the proposed dividend. The Surtax Officer held that the objection of the assessee, whether the proposed dividend was reserve or not, being a matter in litigation, cannot be said to be a mistake apparent from the record was not acceptable since the recommendation of the directors about the dividend had the same character as that of a proposed dividend to be shown under the heading "Current liabilities and provisions" in the statutory form of the balance sheet. It was held that the amount proposed as dividend was for a known liability for which there could be no two opinions and, therefore, non -deduction of the proposed dividend from the general reserve was a mistake apparent from the record. It was held that the board of directors recommend dividend subject to the approval by the shareholders in the annual general meeting and when the shareholders give such approval at a later date, the liability becomes due as on the first day of the accounting year. Therefore, the objection of the assessee that there was no liability on the first day of the accounting year was incorrect. It was held that the recommendation of the directors for distribution of the dividend when approved at the annual general meeting of the shareholders related back to the first day of the accounting year on the ratio of the decision of the Supreme Court in Mysore Electrical Industrial Ltd. (supra). The Surtax Officer, therefore, rectified the mistake by deducting the amount of proposed dividend from the general reserve. It will be noted that the amount of proposed dividend to be deducted from the general reserve as on 1st April, 1969 was taken to be Rs. 16,38,000. The figure of general reserve of Rs. 1,61,83,570 which was taken to be the figure as on 1st April, 1969 in the earlier order dt. 28th Aug., 1974 was already reduced to Rs. 1,58,41,268 by deducting the amounts of reserves for additional depreciation and rehabilitation and reserve for gratuity and from this figure the amount of the proposed dividends was to be deducted and for that purpose, the Surtax Officer, in his rectification order, took the figure of Rs. 16,38,000 as the proposed dividend which was required to be deducted while, admittedly, as per the balance sheet in the annual report 1969 -70, the amount of dividend paid for 1968 -69 in the accounting year 1969 -70 was Rs. 29,25,000 which was shown to be deducted from the said general reserve figure of Rs. 1,61,83,510 as on 1st April, 1969. We may immediately note here that this discrepancy has surfaced for the first time at the hearing of this reference and all throughout the rectification proceedings and the appeals before the first appellate authority and the Tribunal, the figure of the proposed dividend which was required to be deducted from the general reserve as on 1st April, 1969 was taken to be Rs. 16,38,000 instead of the correct figure of Rs. 29,25,000. Against the rectification order dt. 7th April, 1977 for the asst. year 1970 -71, an appeal was preferred by the assessee under S. 11 of the said Act before the CIT(A) who, by his order dt. 19th March, 1979, negativing the contention of the appellant that the action of the Surtax Officer in rectifying the mistake was not legal, held that there was a mistake of law apparent from the record which required to be rectified and that on merits, in the assessee's own case in respect of asst. yrs. 1965 -66, 1966 -67 and 1968 -69, the Tribunal had held against the assessee following the decision dt. 13th Dec., 1976 of the Gujarat High Court in IT Ref. No. 4/73 in the case of Karamchand Premchand Pvt. Ltd. Following the ratio of that decision, the CIT(A) held that the action of the Surtax Officer was right and no interference was called for.

(3.) AS regards asst. year 1972 -73, the assessee had filed return of chargeable profits under the said Act on 29th Sept., 1972 showing chargeable profits of Rs. nil in respect of the accounting period from 1st April, 1971 to 31st March, 1972. The figure of general reserve for the said accounting year as on 1st April, 1971 was admittedly Rs. 2,74,00,912 as per the balance sheet for the accounting year 1971 -72 which is on record. In the said balance sheet, admittedly, dividend amount of Rs. 39 lakhs was deducted from the general reserve as on 1st April, 1971. However, in the assessment order dt. 24th Sept., 1975, the Surtax Officer, while deducting certain amounts which were not treated as reserve, omitted to deduct from the general reserve as on 1st April, 1971, the amount of dividend of Rs. 39 lakhs which was proposed for the year 1970 -71 and paid in the year 1971 -72. The Surtax Officer, noticing the mistake of not deducting the proposed dividend from the amount of general reserve as it stood as on 1st April, 1971, issued a notice under S. 13 of the Act to the assessee for showing cause as to why the general reserve should not be reduced to the extent of Rs. 40,04,000 on the first day of the accounting year before its inclusion in the computation of capital base. Contentions similar to those which were canvassed in response to the notice which was issued under S. 13 in respect of the asst. year 1970 -71 were also canvassed in response to this notice and, by a similarly worded order, for the same reasons which the Surtax Officer had given for rectifying the mistake in respect of the asst. year 1970 -71, the Surtax Officer, by his order passed on the same date, that is, on 7th April, 1977, held that the proposed dividend which was required to be shown under the heading "Current liabilities and provisions" in the statutory form of balance sheet, was required to be reduced to that extent from the general reserve. He, however, proceeded to deduct the proposed dividend of Rs. 40,04,000 as against the actual figure of Rs. 39 lakhs which was the dividend proposed for the accounting year 1970 -71 and paid in the accounting year 1971 -72 as reflected from the balance sheet of 1971 -72 at page 20. We may again note that this discrepancy in the amount surfaced for the first time during the hearing of this reference and even according to the learned counsel for the assessee, the amount which was deducted from the general reserve of Rs. 2,74,00,912 which stood as on 1st April, 1971 was of Rs. 39 lakhs, being the amount of dividend which was proposed for the year ending 31st March, 1971. In the appeal which was preferred by the assessee against the rectification order, the CIT(A), on the ratio of Karamchand Premchand's case (supra), by an identically worded order as he had made in respect of the asst. year 1970 -71, dismissed the appeal on 19th March, 1979.