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India Motor Parts & Accessories Ltd. v. Commissioner Of Income-Tax, Madras
Structured Summary of the Court Opinion (S. Rathnavel Pandian, J.)
Factual and Procedural Background
The Income-tax Appellate Tribunal, Madras Bench, referred three questions to this Court concerning the treatment of certain amounts as "reserve" for computation of capital under the Second Schedule to the Super Profits Tax Act, 1963 and the Second Schedule to the Companies (Profits) Surtax Act, 1964. The questions relate to assessment years 1963-64, 1964-65 and 1965-66.
Broadly, the assessee sought inclusion in the capital base of: (i) a provision for taxation, (ii) a surplus in the profit and loss appropriation account, and (iii) amounts described as "proposed dividends." The specific proposed-dividend amounts asserted as "reserve" in the opinion are:
- 1963-64: Rs. 4,05,000
- 1964-65: Rs. 2,65,000
- 1965-66: Rs. 2,12,500
The Assessing Officer (ITO) disallowed the claim, treating the sums as proposed dividends/current liabilities under the Companies Act balance-sheet classification and invoking the Second Schedule's exclusion of items falling under "Current Liabilities and Provisions." The Appellate Assistant Commissioner (AAC) confirmed exclusion. On appeal, the Tribunal dismissed the assessee's appeals and referred the legal questions to this Court.
Legal Issues Presented
- For assessment year 1963-64: Whether the sums of Rs. 6,25,000 (provision for taxation), Rs. 4,05,000 (proposed dividends), and Rs. 4,664 (surplus in profit & loss appropriation account) could be considered "reserve" and therefore includible in the computation of the capital of the company for assessment year 1963-64 under Schedule II to the Super Profits Tax Act, 1963.
- For assessment year 1964-65: Whether the sum of Rs. 2,65,000 (proposed dividends) could be considered "reserve" and therefore includible in the computation of the capital of the company for assessment year 1964-65 under Schedule II to the Companies (Profits) Surtax Act, 1964.
- For assessment year 1965-66: Whether the sum of Rs. 2,12,500 (proposed dividends) could be considered "reserve" and therefore not includible in the computation of the capital of the company for the assessment year 1964-65 under Schedule II to the Companies (Profits) Surtax Act, 1964. This phrasing reproduces the question as presented in the referred matter.
Arguments of the Parties
Assessee's Arguments
- The amounts labeled "proposed dividends" were shown in the accounts and described as "reserve."
- These dividends were only at the proposal stage; no liability existed as on the relevant accounting date because shareholder approval (in the general meeting) was given later, so the sums represented a reserve rather than an accrued liability.
- Reliance was placed (before the Tribunal) on the decision in CIT v. Security Printers of India (P.) Ltd., [1972] 86 ITR 210 (All).
Revenue's / Departmental Arguments
- The ITO maintained the sums represented proposed dividends and thus should be classified under "Current Liabilities and Provisions" as per the Companies Act balance-sheet format.
- Items falling under "Current Liabilities and Provisions" are excluded from being treated as "reserve" for the purpose of capital computation under Schedule II to the relevant Surtax Acts.
- The departmental representative relied on a decision of the Mysore High Court (T.R.C No. 11 of 1977) concerning provisions for dividends and taxation.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court (as stated in the opinion) |
|---|---|---|
| CIT v. Security Printers of India (P.) Ltd., [1972] 86 ITR 210 (All) | Authority relied upon by the assessee before the Tribunal for treating proposed dividends as reserve. | The opinion records that the assessee relied on this decision before the Tribunal; the Court's ultimate conclusions were reached after considering this and other authorities, but the opinion does not state that this case alone dictated the result. |
| Madras Motor and General Insurance Co. Ltd. v. CIT (Tax Case No. 257/74), judgment dated 9-11-1977, [1979] 117 ITR 534 [FB] | Elaborate discussion on whether provision for proposed dividends constitutes a reserve for capital computation; principles distinguishing reserves for possible liabilities from accrued liabilities. | The Court treated the Bench's opinion in this decision as squarely applicable to the present facts and relied upon its observations to resolve the questions about proposed dividends, adopting its reasoning rather than repeating extensive additional discussion. |
| Kesoram Industries and Cotton Mills Ltd. v. CWT, [1966] 59 ITR 767 (Supreme Court) | Principle that a provision for taxation cannot be regarded as a "reserve" where the tax has already accrued and a specific liability exists. | The Court held that the Rs. 6,25,000 provision for taxation could not be included as reserve in capital computation because tax had accrued and a specific liability had arisen, citing the Supreme Court decision in support. |
| Nagammal Mills Ltd. v. Commissioner of Income-Tax, Madras, [1974] 94 ITR 387 | Authority involving payment out of money provided for dividend where shareholders later approved the proposal and the money was actually expended. | The Court distinguished Nagammal Mills on the ground that that decision focused on payment out and later shareholder approval; it held that Nagammal Mills was not a precedent for the particular question here and left related issues open for another case. |
| T.R.C. No. 11 of 1977 (Mysore High Court) | Decision relied upon by the departmental representative concerning provision for dividends and taxation (as a contrary authority before the Tribunal). | The opinion notes departmental reliance upon this Mysore High Court decision; the Court considered this, among other authorities, in reaching its conclusions but ultimately applied its analysis and the Madras Motor decision. |
Court's Reasoning and Analysis
The Court's analysis proceeded by applying existing precedent and legal distinctions to each item in dispute:
- The Court began by observing that a recent Bench decision of this Court (Madras Motor and General Insurance Co. Ltd. v. CIT) had already elaborately addressed the key legal question about whether amounts shown as proposed dividends could constitute "reserve" for capital computation. The Court treated that Bench opinion as directly applicable and therefore did not repeat full doctrinal exposition.
- Provision for taxation (Rs. 6,25,000): The Court held that a provision for taxation could not be a "reserve" because the tax had already accrued and a specific liability existed. The Court relied on the Supreme Court's authority (Kesoram Industries) to support this principle and rejected the assessee's contention to include the taxation provision in capital.
- Surplus in profit & loss appropriation account (Rs. 4,664): The Court noted that the learned counsel for the assessee made no particular point regarding this small amount and therefore did not conduct any detailed analysis of it in the judgment.
- Proposed dividends (Rs. 4,05,000 for 1963-64; Rs. 2,65,000 for 1964-65; Rs. 2,12,500 for 1965-66): The Court applied the reasoning from the Madras Motor decision and the relevant Supreme Court authority to hold that where directors have proposed dividends and a corresponding sum is set aside as a reserve for that possible liability, such a provision is not converted into a non-reserve merely because it is a provision for a possible payment. Crucially, where shareholder approval (and thus an enforceable liability) had not arisen as on the first day of the year of account, the provision remained a reserve that could be included in capital computation.
- The Court distinguished Nagammal Mills Ltd. because that case involved circumstances where directors' proposals were later approved by shareholders and money was actually expended; the present case did not raise the same factual question (actual payment during the year), and the Court left open related questions for future consideration.
- On balance, applying the above authorities and distinctions, the Court concluded that provisions for accrued liabilities (taxation) are not reserves, whereas provisions set aside for proposed dividends (where no accrued liability existed at the relevant date) are reserves and may be included in capital computation.
Holding and Implications
Holding:
- Provision for taxation (Rs. 6,25,000) and the surplus in the profit & loss appropriation account (Rs. 4,664) for assessment year 1963-64: These sums are not "reserve" and therefore are not includible in the computation of capital for that assessment year. The Court answered this part of the first question in the affirmative and in favour of the revenue.
- Proposed dividends for assessment years 1963-64, 1964-65 and 1965-66 (Rs. 4,05,000; Rs. 2,65,000; Rs. 2,12,500 respectively): These amounts constitute "reserve" and are includible in the computation of the capital of the company for the respective assessment years. The Court answered the question(s) concerning proposed dividends in the negative (i.e., they should not be excluded) and in favour of the assessee for the three years.
Implications:
- Direct effect on the parties: The revenue succeeds in respect of the taxation provision and the small surplus in the appropriation account for 1963-64; the assessee succeeds in respect of the proposed-dividend amounts for all three assessment years and may have those amounts included in its capital computation for calculating standard profit under the relevant Surtax Schedules.
- The Court relied on existing authorities (including a prior Bench decision of this Court and a Supreme Court decision) and distinguished other authorities; it did not claim to establish a new novel precedent but applied and clarified existing law in the context of these facts. The opinion expressly left open certain related questions (for example, issues arising where payment is made during the year of account), reserving them for future appropriate cases.
- The Court awarded no costs and directed that a copy of the judgment, under the Registrar's signature and court seal, be sent to the Income-tax Appellate Tribunal.
End of summary. This summary is strictly limited to the content and reasoning contained in the provided opinion and does not assert facts or conclusions beyond that text.
S. Rathnavel Pandian, J.:— The Income-tax Appellate Tribunal, Madras Bench, has referred the following questions relating to the assessment years 1963-64, 1964-65 and 1965-66, for the opinion of this court:
Assessment year 1963-64:
“Whether, on the facts and in the circumstances of the case, it has been rightly held in law that the sums of Rs. 6,25,000, being provision for taxation, Rs. 4,05,000, being proposed dividends, and Rs. 4,664, being the surplus in the profit and loss appropriation account, could not be considered as ‘reserve’ and, therefore, not includible in the computation of the capital of the company for the assessment year 1963-64, under the Second Schedule to the Super Profits Tax Act, 1963?”
Assessment year 1964-65:
“Whether, on the facts and in the circumstances of the case, it has been rightly held in law that the sum of Rs. 2,65,000, being proposed dividends, could not be considered as ‘reserve’ and, therefore, not includible in the computation of the capital of the company for the assessment year 1964-65, under the Second Schedule to the Companies (Profits) Surtax Act, 1964?”
Assessment year 1965-66:
“Whether, on the facts and in the circumstances of the case, it has been rightly held in law that the sum of Rs. 2,12,500, being proposed dividends, could not be considered as ‘reserve’ and, therefore, not includible in the computation of the capital of the company for the assessment year 1964-65, under the Second Schedule to the Companies (Profits) Surtax Act, 1964?”
2. The brief details relating to the above three assessment years may be stated thus: With regard to the assessment year 1963-64, the assessee was subjected to the Super Profits Tax Act of 1963. For the other two assessment years, the assessee was subjected to surtax under the Companies (Profits) Surtax Act, 1964. The dispute arose for all these assessment years regarding the computation of capital to work out the standard profit. The claim of the assessee for inclusion in the capital consisted of provision for taxation, surplus in the profit and loss appropriation account and proposed dividends. So far as these references are concerned, the inclusion or otherwise of the dividend reserve is relevant for all the assessment years in question. The following are the proposed dividends claimed as “reserve” for the said three years:
Rs. 1963-64 4,05,000 1964-65 2,65,000 1965-66 2,12,500
3. The ITO negatived the claim on the ground that these sums represented only proposed dividend and that they are liable to be included under the head “Current Liabilities and Provisions” in the form of balance-sheet prescribed under the Companies Act of 1956. Further, according to him, the Second Schedule to the Surtax Act has set out that any item which fell under the head “Current Liabilities and Provisions” should not be treated as “reserve” for the purpose of capital computation. On appeal by the assessee-company, the AAC confirmed the exclusion of these sums from the capital base. Thereupon, this matter came up before the Tribunal before which it was contended that these sums were only “reserve” and also had been termed as “reserve” in the account, that the dividends were only at the proposal stage and no liability existed for the company as on the date of making these provisions and that the liability arose only on or after the approval of the proposal in the general body meeting which was held long after the accounting years. Reliance was placed on the decision in CIT v. Security Printers of India (P.) Ltd., [1972] 86 ITR 210 (All). So far as the assessment year 1963-64 was concerned, there were two further points which related to the provision for taxation amounting to Rs. 6,25,000 and Rs. 4,664, being the surplus in the profit and loss appropriation account. The departmental representative had relied on the decision of the Mysore High Court in T.R.C No. 11 of 1977 for provision for dividends and taxation. The Tribunal, after considering the respective contentions of both the parties, dismissed the appeals, making the following observation:
“We, therefore, hold that the Appellate Assistant Commissioner had rightly held that both provision for taxation and provision for proposed dividends would not constitute reserves of the company and, therefore, has rightly rejected the assessee's claim. We, therefore, uphold the order of the Appellate Assistant Commissioner.”
4. The questions that have been referred to us arise in construing the provisions in Sch. II to the Super Profits Tax Act, 1963, and in Sch. II to the Companies (Profits) Surtax Act, 1964. At the outset we may point out that a Bench of this court, to which one of us was a party, had in Madras Motor and General Insurance Co. Ltd. v. CIT (judgment of this court in Tax Case No. 257/74, dated 9-11-1977) [1979] 117 ITR 534 [FB] elaborately discussed this aspect of the legal question in the judgment dated November 9, 1977, and hence we feel that it is not necessary for us to launch on a discussion referring to the various rules, Acts and judicial pronouncements touching this question. Suffice to say that the opinion expressed by the Bench in the above decision would squarely apply to the facts of the present case.
5. As we have already indicated, one point is common in all these questions. As regards the assessment year 1963-64, there are two more points, viz., relating to the provision for taxation and the surplus in the profit and loss appropriation account, the amount under the first heading being Rs. 6,25,000 and the one under the second heading being Rs. 4,664. As pointed out by the Bench in the said decision, provision for taxation cannot be “reserve” for the simple reason that the tax had already accrued due and a specific liability towards the same had arisen. The matter is covered by the decision of the Supreme Court and hence we negative the contention of the assessee that the said sura of Rs. 6,25,000 should be included in the computation of capital.
6. Coming to the question relating to the surplus in the profit and loss appropriation account, it is significant to note that no particular point was made about this small amount by the learned counsel for the assessee and hence we do not deal with this sum.
7. Then, we come to the complicated question relating to the “proposed dividends the total amount claimed under this head for the year 1963-64 is Rs. 4,05,000, the one claimed for 1964-65 is Rs. 2,65,000 and the amount claimed for 1965-66 is Rs. 2,12,000. After referring to various decisions, this court in Madras Motor and General Insurance Co. Ltd. v. CIT, [1979] 117 ITR 534, 541 [FB] has made the following observations:
“The question, therefore, is whether any amount shown to represent a dividend proposed by the directors represent any liability for the company from the 1st day of the year of account. Any provision made by way of reserve of an amount for the purpose of a possible liability that may arise in the payment of dividend cannot be refused to be taken into account merely on the ground that the amount represented a provision or a reserve for an accrued liability, as there was no accrued liability as on the relevant date, namely, first day of the year of account. It has been so held by the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. CWT, [1966] 59 ITR 767. So, in all these cases, we think, where a proposal has been made by the directors and by virtue of this proposal, a reserve has been made for a possible liability towards dividend, that provision or reserve could not cease to be a reserve on the ground that it is a reserve for the purpose of payment of an accrued liability as on that date. On the facts of the case before us, it has not been contended that the shareholders had approved the proposal as on that date. There is, therefore, no liability to pay that amount as on that date. This aspect was not urged before this court when it decided the case in Nagammal Mills Ltd. v. Commissioner Of Income-Tax, Madras, [1974] 94 ITR 387 and the question has not been considered at all in the judgment under consideration. We think, therefore, that the decision cannot be taken to be a precedent for the question which has to be dealt with in this judgment, but can be distinguished, as we propose to do, as a case where the emphasis had been on the payment out of the money which was at one time provided for dividend and in view of the fact that the proposal of the directors was later approved by the shareholders of the company and the money had been actually expended for the purpose. We are not called upon in this case to consider whether payment out during the year of account will deprive the right of an assessee to claim the benefit, for, that question does not arise before us, no point having been taken in that behalf. We, therefore, leave that question open to be considered in another appropriate case.
In the light of what we have stated above it is clear that the amount provided cannot be said to be not a reserve merely on the ground that it represented a sum set apart for the purpose of meeting a specific accrued liability.”
8. In the light of the above observations, we hold that the various amounts mentioned under the head “Proposed dividends” for the assessment years 1963-64, 1964-65 and 1965-66 are “reserve” and as such they are includible in the computation of capital of the company for the respective assessment years. In the result, we answer the three questions as follows: The first question is answered in the affirmative and in favour of the revenue, so far as the provision for taxation and the surplus in the profit and loss appropriation account is concerned, and it is answered in the negative and in favour of the assessee, so far as the provision for the proposed dividend is concerned. The second and third questions are answered in the negative and in favour of the assessee. In the circumstances, we award no costs.
9. A copy of this judgment under the signature of the Registrar and the seal of this court will be sent to the Income-tax Appellate Tribunal.
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