Kantawala, C.J:— The questions referred for our determination are as under:

“1. Whether, on the facts and in the circumstances of the case, the dividend reserve was a reserve includible in the computation of capital of the assessee-company as contemplated under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964?

2. If the answer to question No. 1 is in the affirmative, whether the dividend reserve includible in the computation of capital of the assessee-company as on July 1, 1964, was in the amount of Rs. 5,90,000 or in the amount of Rs. 3,60,000?”

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

Rs. Rs. Reserves and Surplus Dividend reserve: as per last account … 3,45,000 Less transferred to profit & loss account for dividend for 1962-63 … 1,90,000 1,55,000 Set aside this year … 4,35,000 5,90,000

3. The directors in their report dated October 22, 1964, stated that after transferring an amount of Rs. 4,35,000 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, July 1, 1964.

4. So far as the Income-tax Officer was concerned, he did not take into account the balance in the dividend reserve account as on July 1, 1964, in computing the capital of the company for the surtax assessment year 1966-67. The assessee did not prefer any appeal against the said order of the Income-tax Officer. However, on February 15, 1967, the assessee made an application for rectification to the Income-tax Officer under section 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 Income-tax Officer on the ground that this was in the nature of a liability for paying the dividends declared by the company.

5. In an appeal preferred by the assessee before the Appellate Assistant Commissioner it was contended on behalf of the assessee that the entire dividend reserve amount of Rs. 5,90,000 as on July 1, 1964, was a reserve includible in the computation of capital for the surtax assessment year 1966-67. In the alternative, it was contended that in any case the balance of Rs. 3,60,000 in the dividend reserve account, after excluding the sum of Rs. 2,30,000 recommended by the directors for the payment of dividends for the year ended June 30, 1964, was dividend reserve and that such amount of Rs. 3,60,000 formed part of the capital of the assessee-company as on July 1, 1964, for the purposes of surtax assessment for the assessment year 1966-67. The Appellate Assistant Commissioner took the view that the Explanation to rule 1 of the Second Schedule to the Act was not applicable; that the reserve of capital as on July 1, 1964, as the directors had recommended a payment of dividend therefrom of Rs. 2,30,000. He, however, took the view that the balance of Rs. 3,60,000 was a reserve for the purposes of computation of capital as on July 1, 1964, relevant to the assessment year 1966-67.

6. Aggrieved by the order passed by the Appellate Assistant Commissioner the revenue filed an appeal before the Tribunal contending that the Appellate Assistant Commissioner was in error in holding that the dividend reserve was a reserve and not a liability and in holding that the balance of Rs. 3,60,000 be taken as a reserve in computing the capital of the company. The assessee filed cross-objections before the Tribunal contending that the entire dividend reserve of Rs. 5,90,000 was includible in computing the capital of the company as on July 1, 1964.

7. The Tribunal held that the stand adopted by the revenue was not justified and so also the stand taken by the assessee-company was equally not justified. The Tribunal took the view that on the first day of the previous year, i.e, as on July 1, 1964, the balance-sheet clearly showed the said sum of Rs. 3,60,000 as constituting part of the dividend reserve, the amounts in question having been duly transferred from profits to reserve in the earlier years by the authorities of the company competent to do so. The Tribunal further held that the same, however, could not be said in regard to the sum of Rs. 2,30,000 paid out as dividend for the year ended June 30, 1964, and the said sum was treated by the directors themselves as a provision for payment of dividends and not as a reserve. Accordingly, the Tribunal took the view that the sum of Rs. 2,30,000 earmarked for payment of dividends was not a reserve as on July 1, 1964, but the balance amount of Rs. 3,60,000 in the dividend reserve account was a reserve includible in the computation of capital as on July 1, 1964, for surtax purposes for the assessment year 1966-67. The questions referred to above arise from this order of the Tribunal.

8. Mr. Joshi on behalf of the revenue submitted that in computing the capital employed in the business for the purpose of surtax regard must be had to the substance of the matter and not merely to the nomenclature given as regards the character of the amount. He submitted that for the year ending June 30, 1964, in the dividend reserve account under the head “Reserves and Surplus” there was already a sum of Rs. 1,55,000 and that out of the profits of the current year ending June 30, 1964, the directors appropriated a sum of Rs. 4,35,000 to be credited to the said account. Thus, the aggregate amount came to Rs. 5,90,000. At the same time the directors in the report recommended a dividend to be paid at the rate of Rs. 8 per share and the total amount of dividend payable was Rs. 2,30,000 and the same was to be paid out of the amount standing to the credit of the dividend reserve account. He, accordingly, submitted that, even though the sum of Rs. 4,35,000 was directed to be appropriated to the dividend reserve account, in fact out of the said sum a sum of Rs. 2,30,000 was for the proposed dividends and only the balance would be added to the dividend reserve account. He, therefore, submitted that out of the total amount of Rs. 5,90,000 standing to the credit of the dividend reserve account a sum of Rs. 2,30,000 which was for proposed dividends should be deducted and the balance of Rs. 3,60,000 should alone be regarded as properly included for computation of capital for the purposes of surtax. Mr. Munim on behalf of the assessee, on the other hand, submitted that as a sum of Rs. 1,55,000 was already standing to the credit of the dividend reserve account only a sum of Rs. 75,000 should be treated as being available from the current profits for payment of the sum of Rs. 2,30,000 as proposed dividend and, therefore, a sum of Rs. 5,15,000 should be regarded as includible in computation of capital for the purpose of surtax. He submitted that even though the dividend reserve account balance of Rs. 1,55,000 was to be utilised for the payment of the proposed dividend, as such dividend was to be paid only as and when it was declared by the shareholders at the annual general meeting as on July 1, 1964, it was a part of the capital employed in the business and was to be included in computation of capital.

9. At the outset, it may be stated that the submission which has been made by Mr. Munim on behalf of the assessee is made before us for the first time. Neither before the taxing authorities nor before the Tribunal was any such contention advanced though a claim was made that the whole amount of Rs. 5,90,000 ought to be treated as includible in computation of capital. In the report the directors have not clearly stated that the sum of Rs. 1,55,000 which was already standing to the credit of the dividend reserve account under the head “Reserves and surplus” was to be utilised for partial payment of the dividend of Rs. 2,30,000 recommended. If it was so specifically stated then there might be some basis for Mr. Munim to advance such a submission, but in the absence of a specific statement to that effect in the directors' report the matter has to be looked at generally from the commonsense and commercial point of view. For the year ending June 30, 1964, the directors had recommended an aggregate amount of Rs. 2,30,000. No independent provision was made for payment of this amount but it was stated in the report that the said amount will be paid out of the dividend reserve. Out of the profits or income for the year ending June 30, 1964, a sum of Rs. 4,35,000 was directed to be appropriated towards the dividend reserve account. Thus, the whole of the sum of Rs. 2,30,000 could come out of the said amount and the balance will be credited to the dividend reserve account so as to be added to the amount of Rs. 1,55,000 already standing to the credit of the dividend reserve account. From the commercial point of view if any amount is required for incurring any expenditure or making any disbursements in a current year, then ordinarily the same will come out of the income of the company if it is available and only if it is insufficient then the past savings will be resorted to for the purpose of incurring the expenditure or making disbursements. In the present case there is no doubt that, ordinarily, if the current profits are sufficiently available, then the same will be utilised for the purpose of payment of the dividend and, looked at from that point of view, the sum of Rs. 2,30,000 should be regarded as having been paid out of the sum of Rs. 4,35,000. The aggregate amount thus standing to the credit of the dividend reserve account would be Rs. 3,60,000 after payment of the dividend amount of Rs. 2,30,000. Thus, our answers to the questions referred are as under:

Question No. 7 is answered in the affirmative, but the quantum of the amount which should be treated as reserve includible in the computation of capital of the assessee-company will depend upon the facts of the case.

Question No. 2: The dividend reserve includible in the computation of the capital of the assessee-company as on July 1, 1964, was in the amount of Rs. 3,60,000.

10. There will be no order as to costs.