COMMISSIONER OF INCOME TAX Vs. BHARAT BIJLEE LIMITED

JUDGEMENT

(1.) THE questions referred for our determination are as under :

(2.) THE questions referred to above relate to the asst. year 1966 67, and what is the capital employed in the business of the assessee company as on the 1st July, 1964, is relevant for the purpose of determining the statutory deductions. The balance sheet of the company for the year ending 30th June, 1964, showed an item of dividend reserve under the head "Reserves and Surplus". The relevant part of the balance sheet is as under :

(3.) ,35,000 to the dividend reserve the balance to be carried forward is Rs. 1,941. The directors recommended that a dividend of Rs. 8 per share on the 20,000 old equity shares (subject to deduction of tax) and a dividend of Rs. 7 per share on the 10,000 new equity shares (subject to deduction of tax) aggregating to Rs. 2,30,000 be paid out of the dividend reserve. The dividend as recommended by the board of directors was approved of by the shareholders at the annual general meeting and ultimately was paid to them. The question arose before the taxing authorities as to what is the capital employed in the business on the relevant date, namely, 1st July, 1964. 4. So far as the ITO was concerned, he did not take into account the balance in the dividend reserve account as on 1st July, 1964, in computing the capital of the company for the surtax Asst. yr. 1966 67. The assessee did not prefer any appeal against the said order of the ITO, However, on 15th Feb., 1967, the assessee made an application for rectification to the ITO under S. 13 of the Companies (Profits), Surtax Act, 1964, inter alia, contending that the balance in the dividend reserve account should be treated as part of the capital employed in the business for the purposes of calculating the standard deduction under the Surtax Act. That contention of the assessee was rejected by the ITO on the ground that this was in the nature of a liability for paying the dividends declared by the company.