Citation Codes

Equivalent Citations

citation codes

Case Number

No. 213 of 1973

Judges

Deb
Dipak Kumar Sen, JJ.

Acts

Clause 7, Schedule VI to the Companies Act, 1956,
Section 256(1) of the Income-tax Act, 1961.
Profits Tax Act, 1963,
Limitation Act, 1939,

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Smart Summary

Annotated Summary of the Opinion — Orient Paper Mills Ltd. (Reference under Section 256(1), Income-tax Act, 1961)

Factual and Procedural Background

This reference arises from assessment of super profits tax for the assessment year 1963-64 (previous year ended 31 March 1963). The Tribunal, at the instance of the assessee (Orient Paper Mills Ltd.), referred a question to this Court under Section 256(1) of the Income-tax Act, 1961.

The core dispute concerned three amounts shown in the assessee's accounts: (i) forfeited dividend of Rs. 3,18,143 (declared dividend not paid/forfeited), (ii) provision for taxation of Rs. 44,23,892, and (iii) proposed dividend of Rs. 48,24,530. The assessee argued these sums should be treated as "reserves" within the meaning of the Second Schedule to the Super Profits Tax Act, 1963, for the purpose of computing capital.

Procedural history in the tax authorities' hierarchy: the Super Profits Tax Officer rejected the assessee's claims; the Appellate Assistant Commissioner confirmed that rejection (characterising forfeited dividend as a "liability fund"). The Tribunal later held that all three amounts were provisions (i.e., not reserves). The question whether the Tribunal was justified in so holding was referred to this Court.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that (a) forfeited dividend of Rs. 3,18,148 (recorded in accounts as Rs. 3,18,143), (b) provision for taxation of Rs. 44,23,892, and (c) proposed dividend of Rs. 48,24,530 were not "reserves" for the purposes of computation of the assessee-company's capital under the Second Schedule to the Super Profits Tax Act, 1963.

Arguments of the Parties

Appellant's (Assessee's) Arguments — Mr. R. N. Bajoria

For the heads "proposed dividend" and "provisions for taxation", an earlier (unreported) decision of this Court in Income-tax Reference No. 262 of 1969 (Braithwaite & Co. [India] Ltd. v. Commissioner of Income-tax) supports the assessee's position that such amounts should be treated as reserves; the assessee invited the Court to follow a contrary later decision of the Gujarat High Court (Commissioner of Income-tax v. Mafatlal Chandulal & Co. Ltd.) and to review the earlier judgment of this Court. The bench noted earlier judgment of this Court is binding and declined to accept the invitation to depart from it.
On forfeited dividend, the assessee's counsel contended ( relying on accounting principles as set out in Metal Box Company Of India Ltd. v. Workmen) that a sum is a provision only if set aside for a known liability; otherwise it is a reserve. He argued that forfeiture is a disclaimer of liability — any later payment to shareholders would be ex gratia and would not convert the fund into a provision. He also emphasised there was no finding of waiver of forfeiture.

Respondent's (Revenue's) Arguments — Mr. A. K. Sengupta

The Appellate Assistant Commissioner had found as a fact that the "forfeited dividend" fund was available to meet dividends as and when shareholders made claims (i.e., the fund operated as a liability fund). That factual finding was not challenged as perverse and therefore should be conclusive.
Reliance was placed on the Allahabad High Court decision in Commissioner of Income-tax v. British India Corporation (P.) Ltd., where the court held that a "forfeited money reserve" was a provision if declared dividends uncollected by shareholders were transferred to it and payments were made from it on claims — treating such a fund as representing an existing liability.
Textbook authorities on company law and accountancy were cited (Gore Browne on Companies; Palmer's Company Law; William Pickles' Accountancy) to show (i) that a properly declared final dividend becomes a debt payable to members and forfeiture must be strictly construed, and (ii) under English practice forfeited dividends are transferred to reserve or profit & loss appropriation accounts — supporting the contention that the fund in issue here was not a general reserve but a special fund payable on claims.
The Bombay High Court decision in Commissioner of Income-tax v. Tata Sons Private Ltd. was cited for the proposition that High Courts should accept the view taken by another High Court on an all-India statute, inviting the Court to follow the Allahabad decision in British India Corporation.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
First National City Bank v. Commissioner of Income-tax (Supreme Court)	Authority relied upon by the Tribunal for the proposition that forfeited dividend is not something kept apart for specific future use and therefore cannot come within the concept of a reserve.	The Tribunal relied on this decision to treat forfeited dividend as not being a reserve. The Court recorded that the Tribunal referred to this authority in reaching its view (para. 5), but the Court's final conclusion on forfeited dividend was reached after analysing facts and other authorities.
Metal Box Company Of India Ltd. v. Workmen (Supreme Court)	Explains the accounting distinction between a provision (charge against profits for known liabilities/contingencies) and a reserve (appropriation of profits not designed to meet a known liability).	The Court cited this passage to restate the accepted distinction between provision and reserve and used that conceptual framework in assessing whether the forfeited dividend fund was a provision or a reserve (paras. 6, 14).
Commissioner of Income-tax v. British India Corporation (P.) Ltd. (Allahabad High Court)	Held that where declared dividends remained unclaimed and were transferred to a "forfeited moneys account" from which payments were made on shareholders' claims, the account represented an existing liability and was a provision (not a reserve).	The Court examined the factual basis of that decision and distinguished it from the present case — noting that in British India Corporation there was no finding of actual forfeiture and that shareholders' claims were met from the account; hence that decision was not applicable to the present facts (paras. 10, 15, 21).
Commissioner of Income-tax v. Tata Sons Private Ltd. (Bombay High Court)	Observed that a High Court should accept the view taken by another High Court on the interpretation of an all-India statute.	This case was relied upon by the revenue to invite acceptance of the Allahabad High Court's approach; the Court considered the point but distinguished the factual findings in British India Corporation (paras. 15–16).
Braithwaite & Co. [India] Ltd. v. Commissioner of Income-tax (Income-tax Reference No. 262 of 1969) (this Court, unreported)	An earlier (unreported) decision of this Court that, according to counsel for the assessee, covered the position of "proposed dividend" and "provision for taxation" (supporting treatment as reserves).	The Court recorded that this earlier decision was binding and therefore declined the assessee's invitation to follow the later Gujarat High Court decision (para. 5).
Commissioner of Income-tax v. Mafatlal Chandulal & Co. Ltd. (1971) 107 ITR 489 (Gujarat High Court)	Held that amounts set apart on account of proposed dividend should be included in computing the capital of a company for the Super Profits Tax Act and should not be treated as a provision.	The assessee relied on this decision and invited the Court to follow it and review the earlier in-house decision; the Court declined because the earlier decision of this Court was binding (para. 5).

Court's Reasoning and Analysis

The Court proceeded by reference to (i) the facts found by the Tribunal and recorded in the proceedings, (ii) the accounting and legal distinction between reserves and provisions, and (iii) relevant precedent and factual distinctions with other decisions.

Findings of fact adopted by the Court (from the Tribunal):
- Rs. 3,18,143 had originally been declared as dividend but had not been claimed or paid to shareholders and had been forfeited.
- The amount held as "forfeited dividend" was not something kept apart for any specific future use.
Conceptual framework: the Court relied on the Metal Box decision to restate the established accounting distinction: provisions are charges against profits made to meet known liabilities or contingencies; reserves are appropriations of profits not designed to meet a known liability and form part of capital employed.
Application to the forfeited dividend fund: applying that framework to the Tribunal's factual findings, the Court concluded that the fund did not exhibit characteristics of a provision because it was not set aside for any anticipated loss or contingent claim; it had not been set apart for a specific future use and shareholders were not shown to have an entitlement to claim from the fund "as of right".
Evaluation of the revenue's factual reliance: the Court noted that the Appellate Assistant Commissioner had found dividend payable from the fund on shareholder claims, but the Tribunal had reached different findings. The Court treated the Tribunal's findings as overriding those of the Appellate Assistant Commissioner and therefore conclusive for present purposes.
Distinguishing contrary authority: the Court examined the Allahabad High Court decision in British India Corporation and found its facts different: in that case unclaimed dividends and other amounts were transferred to a "forfeited money reserve" and there was a finding that claims were in fact met from that account — the Allahabad High Court accepted that those unclaimed dividends represented an existing liability. The Court observed that in the present case there was a finding of actual forfeiture and no finding that shareholders' claims were regularly met from the fund; hence British India Corporation did not apply.
On the heads of "proposed dividend" and "provision for taxation": the Court recorded that an earlier decision of this Court covered those questions in favour of treating those heads as provisions (i.e., not reserves). The Court considered the later Gujarat High Court decision (Mafatlal) but declined to follow it because the earlier decision of this Court is binding.
Outcome of the analysis: having applied the accounting-law distinction and the facts found by the Tribunal, the Court concluded that forfeited dividend should be treated as a reserve (i.e., not a provision), while proposed dividend and provision for taxation should be treated as provisions (i.e., not reserves).

Holding and Implications

Holding (core ruling):

(a) In respect of the forfeited dividend (Rs. 3,18,143) the Court answered the referred question in the negative and in favour of the assessee — the Tribunal was not justified in treating the forfeited dividend as a provision; it is to be regarded as a reserve for the purposes of the Second Schedule to the Super Profits Tax Act, 1963.

(b) In respect of provision for taxation (Rs. 44,23,892) and proposed dividend (Rs. 48,24,530) the Court answered the referred question in the affirmative and in favour of the revenue — those amounts are to be treated as provisions (and not as reserves) for the purpose of computing capital under the Second Schedule.

Direct consequences for the parties

The forfeited dividend item will be treated as a reserve and thus included in the computation of capital under the Second Schedule for the assessee.
The amounts shown as provision for taxation and proposed dividend will be treated as provisions and therefore will not qualify as reserves for computation of capital under the Second Schedule.
The Court directed that there would be no order as to costs.

Broader implications: The opinion bases its conclusions on the facts found in the record and on the established accounting distinction between reserves and provisions. The Court distinguished contrary High Court authority on the basis of differing facts and adhered to an earlier (binding) decision of this Court with respect to "proposed dividend" and "provision for taxation." The opinion does not elaborate broader rule-making beyond these factual and precedential applications.

(Concurring remark: Deb, J. agreed with the judgment.)

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Orient Paper Mills Ltd. v. Commissioner Of Income-Tax, West Bengal-1, Calcutta

JUDGMENT Dipak Kumar Sen, J.

1. This reference arises out of an assessment of super profits tax of the applicant, Orient Paper Mills Ltd., in the assessment year 1963-64. The corresponding previous year ended on the 31st March, 1963. At the instance of the assessee, the Tribunal has referred to this court the following question, under Section 256(1) of the Income-tax Act, 1961.

" Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that forfeited dividend of Rs. 3,18,148, provision for taxation of Rs. 44,23,892 and proposed dividend of Rs. 48,24,530 were not reserves for purposes of computation of capital of the assessee-company within the meaning of the Second Schedule to the Super Profits Tax Act, 1963 ?"

2. The facts found by the Tribunal including those which are matters of record may shortly be stated as follows : In the assessment year in question it was claimed by the assessee that forfeited dividend of the amount of Rs. 3,18,143, provision for taxation of the amount of Rs. 44,23,892 and proposed dividend of Rs. 48,24,530 should be treated as reserve within the meaning of the Second Schedule to the Super Profits Tax Act, 1963, for the purpose of computation of capital.

3. The Super Profits Tax Officer rejected the contention of the assessee in respect of each of the said amounts. On appeal, the Appellate Assistant Commissioner confirmed the order of the Super Profits Tax Officer. He held, inter alia, that the amount under the head " forfeited dividends " could not be called a reserve since it was in the nature of a " liability fund ". Dividend would become payable out of this amount as and when claims would be made by shareholders.

4. A further appeal was preferred by the assessee to the Tribunal. The Tribunal held that Rs. 3,18,143 represented forfeited dividends. This sum, though declared as dividend, had not in fact reached the shareholders or, alternatively, there was some difficulty on its payment to the shareholders and the said amount, therefore, was forfeited. On the authority of the decision of the Supreme Court in First National City Bank v. Commissioner of Income-tax , the Tribunal held that as forfeited dividend was not something kept apart for specific future use and was an amount which had already been distributed but which could not be paid to the shareholders for some reason or other, it could not come within the concept of a reserve. The Tribunal held that all the three amounts under the headings " Provision for taxation ", " Proposed dividend " and " Forfeited dividend " should all be treated as provisions.

5. Mr. R. N. Bajoria, learned counsel appearing for the assessee, has fairly submitted that the question in respect of " proposed dividend " and " provisions for taxation " was covered by an unreported decision of this court in Income-tax Reference No. 262 of 1969, in this case of Braithwaite & Co. [India] Ltd. v. Commissioner of Income-tax--Since . Mr. Bajoria, however, contended that a contrary view has been taken by the Gujarat High Court in a subsequent decision in the case of Commissioner of Income-tax v. Mafatlal Chandulal & Co. Ltd. [1971] 107 ITR 489 (Guj), where it has been held that amounts set apart on account of proposed dividend should be included in computing the capital of a company for the purpose of the Super Profits Tax Act, 1963, and should not be treated as a provision. Mr. Bajoria invited us to follow the later decision of the Gujarat High Court and review the earlier judgment of this court. The earlier judgment of this court is binding on us and as such we are unable to accept the contentions of Mr. Bajoria.

6. The only point which remains to be considered is whether the amount standing as forfeited dividend in the accounts of the company should be treated as a reserve or as a provision. Mr. Bajoria contended that it was now settled that only if an amount was set apart for a known liability it should be treated as a provision and not otherwise. He cited the case of Metal Box Company Of India Ltd. v. Workmen , where the Supreme Court, in dealing with computation of bonus under the Payment of Bonus Ordinance, observed as follows (at page 67) :

" The next question is whether the amount so provided is a provision or a reserve. The distinction between a provision and a reserve is in commercial accountancy fairly well known. Provisions made against anticipated losses and contingencies are charges against profits and, therefore, to be taken into account against gross receipts in the P. & L. account and the balance-sheet. On the other hand, reserves are appropriations of profits, the assets by which they are represented being retained to form part of the capital employed in the business. Provisions are usually shown in the balance-sheet by way of deductions from the assets in respect of which they are made whereas general reserves and reserve funds are shown as part of the proprietor's interest (See Spicer and Pegler's Book-keeping and Accounts, 15th edition, page 42). An amount set aside out of profits and other surplus, not designed to meet a liability, contingency, commitment or diminution in value of assets known to exist at the date of the balance-sheet is a reserve but an amount set aside out of profits and other surpluses to provide for any known liability of which, the amount cannot be determined with substantial accuracy is a provision (See William Pickles' Accountancy, second edition, page 192 ; Part III, Clause 7, Schedule VI to the Companies Act, 1956, which defines provision and reserve)."

7. Mr. Bajoria contended that in the instant case the act of forfeiture did not provide for any liability but on the contrary recorded a disclaimer of liability. Even if there would be subsequent payment to shareholders on account of dividends which had been forfeited, the same would be payments ex gratia and not in acknowledgment of any legal liability. Such a payment could not alter the character of the fund. In any event before any such payment was made there had to be a waiver of forfeiture and there was no finding to that effect.

8. Mr. A. K. Sengupta, learned counsel for the revenue, has contended that it has been found as a fact by the Appellate Assistant Commissioner in this case that from this fund, that is, the amount set apart as " forfeited dividend ", dividend was payable as and when claims would be made by the shareholders. This finding not having been challenged as perverse or without evidence the question was concluded. Mr. Sengupta cited the case of Commissioner of Income-tax v. British India Corporation (P.) Ltd. , where the Allahabad High Court considered whether " forfeited money reserve " should be treated as a reserve or as a provision. There the Appellate Assistant Commissioner had found that the assessee had been transferring to the " forfeited monies account " declared dividends which had not been collected by various shareholders. The Appellate Assistant Commissioner also found that, as and when some shareholders made claims, the assessee, though not bound, did in fact make payment and debit the account. On such facts the Appellate Assistant Commissioner held that this fund could not be treated as a reserve. The Tribunal also found that this " forfeited money reserve " arose because unclaimed dividends and other amounts were being transferred to this account. The High Court accepted the above findings of fact and held that the unclaimed dividends represented an existing liability of the assessee to its shareholders, as such unclaimed dividend was payable whenever a shareholder puts forward his claim from the " forfeited monies account ". Accordingly, it was held that the " forfeited monies account " was a provision and not a reserve.

9. Mr. Sengupta has cited certain passages from authoritative text books on English company law and has contended that a dividend once declared is not meant to be forfeited lightly. Gore Browne on Companies, 42nd edition, at pages 297-298, was cited for the following passage :

As soon as a final dividend is properly declared it is a debt payable to the members; .........If not paid within the period limited by the Limitation Act, 1939, the dividend is irrecoverable,.........It is also frequently provided that dividends unclaimed for three or five years may be forfeited for the benefit of the company ; but this provision should not be inserted if there is any likelihood of the company applying for an official quotation,.........Any such forfeiture must be carried out with the utmost strictness.

10. A passage in Palmer's Company Law, 21st edition, at page 655, was also cited for the proposition that relief against forfeiture would be given in most cases and that a forfeiture clause should be strictly construed.

11. Mr. Sengupta also cited William Pickles' Accountancy, 3rd edition, page 990, to show that, according to English practice, dividend when forfeited is transferred, to the reserve or profit and loss appropriation account. He contended that in the instant case the forfeited dividend had been transferred neither to the general reserve account nor to the profit and loss account. This was a special account and as and when shareholders preferred their claims for dividend after due time payment was made therefrom. In the premises this particular fund could not be treated as a reserve.

12. On the authority of a decision of the Bombay High Court in Commissioner of Income-tax v. Tata Sons Private Ltd. [1974] 97 ITR 128, Mr. Sengupta invited this court to follow the decision of the Allahabad High Court in the case of British India Corporation (P.) Ltd, and hold that the " forfeited dividend fund " was a provision. The Bombay High Court observed as follows (page 131) :

" We must accept the view taken by another High Court on the interpretation of the section of a statute which is an all India statute."

13. We have carefully considered the respective submissions of the parties and it appears to us that the following have been found as facts :

(a) The sum of Rs. 3,18,143 had originally been declared as dividend and for some reason had not been claimed by the shareholders or were not paid to them and had been forfeited.

(b) The said amount kept apart as " forfeited dividend " was not something kept apart for specific future use.

14. The aforesaid are the findings of the Appellate Tribunal and must be held to override any finding of the Appellate Assistant Commissioner to the contrary. On such facts it does not appear to us that this particular fund has the characteristics of a provision and not of a reserve. Mr. Sengupta could not cite any authority for the proposition that under general law a dividend cannot be forfeited or that even after forfeiture a shareholder retains a valid claim for the forfeited dividend without any waiver on the part of the company. The Supreme Court has clearly laid down in the case of Metal Box Company of India Ltd. that a provision is created against anticipated losses or contingencies, whereas reserves are appropriated out of profits and are retained to form part of the capital employed in the business. In this case, the fund under the head " Forfeited dividend " has not been set apart ex facie for any anticipated loss or contingent claim. It is also not found that the shareholders are entitled to claim from this fund directly or as a matter of course. The contention of Mr. Sengupta that this is a special fund and not a part of the reserve is not borne out by facts. This fund along with other funds of different nomenclature are shown in the accounts under the general head of " Reserve ".

15. The facts found in the case of British India Corporation (P.) Ltd. appear to be different from the facts found in the case before us. It was found in that case that the declared dividends which remained unclaimed and other amounts were being transferred to an account named as " forfeited money reserve. " There was no finding that such unclaimed dividend had been forfeited. The Allahabad High Court did not consider the factual and legal aspects of forfeiture of dividend. It was accepted as a fact that a shareholder's claim against unclaimed dividend was met from the " forfeited moneys account ".

16. In the case before us there is a clear finding that the fund in question consists of forfeited dividend and that this fund has not been set apart for any specific future use. These findings clearly distinguish the case before us from the case before the Allahabad High Court.

17. For the reasons given above, in respect of forfeited dividend we answer the question referred in the negative and in favour of the assessee. As regards provision for taxation and proposed dividend we answer the question in the affirmative and in favour of the revenue. In the facts and circumstances, there will be no order as to costs.

Deb, J.

18. I agree.

Orient Paper Mills Ltd. v. Commissioner Of Income-Tax, West Bengal-1, Calcutta

Annotated Summary of the Opinion — Orient Paper Mills Ltd. (Reference under Section 256(1), Income-tax Act, 1961)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's (Assessee's) Arguments — Mr. R. N. Bajoria

Respondent's (Revenue's) Arguments — Mr. A. K. Sengupta

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Direct consequences for the parties

Orient Paper Mills Ltd. v. Commissioner Of Income-Tax, West Bengal-1, Calcutta

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