JUDGMENT
Thanikkachalam, J.
1. In pursuance of the directions given by this Court dt. 4th Nov., 1980 in TCP No. 242 of 1980, the Tribunal has referred the following question for the opinion of this Court under S. 256(2) of the IT Act, 1961 (hereinafter referred to as the Act).
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the proposed dividend in Rs. 2,40,000 should not be taken into account for the purpose of computation of capital for the purpose of allowing relief under S. 80J as a debt owed as on 1st Jan., 1971 ?”
2. The assessee is a private limited company engaged in the business of manufacturing motorcycles, agro industrial engines and other spare parts for the aforesaid, items. While furnishing the return for the asst. yr. 1972-73, the assessee claimed relief under S. 80J of the IT Act on Rs. 3,49,636, being 6% of the capital employed of Rs. 58,27,269. The ITO, however, computed the capital at Rs. 38,45,962 and restricted the relief to Rs. 2,30,757. In so doing, he has excluded a sum of Rs. 2,40,000 representing provision for proposed dividend, as capital.
3. On appeal, the AAC held that though the sum of Rs. 2,40,000 was only a provision for dividend, it cannot be treated as a debt owed by the assessee to the shareholders on 1st Jan., 1971. According to the AAC, only when the general body meeting has approved declaring the dividend, it can be said that the debt has become accrued and that, therefore, held that the proposed dividend of Rs. 2,40,000 should be taken into account for the purpose of computation of capital under S. 80J of the Act, as it was not a debt owed as on the first day of the computation period, i.e., 1st Jan., 1971. The Department preferred further appeal to the Tribunal and the Tribunal, following its order in STA No. 32/Mds/1975-76 dt. 23rd Nov., 1976, held that the capital for the purpose of S. 80J, should not be reduced by the amount of Rs. 2,40,000 representing the proposed dividend. Accordingly, the Tribunal confirmed the order passed by the AAC. Aggrieved, the Department has sought for the reference as stated above.
4. Before us, learned standing counsel for the Department submitted that in view of the decisions of the Supreme Court in CIT vs. Mysore Electrical Industries Ltd. and Indian Tube Co. (P) Ltd. vs. CIT applying the doctrine of ‘relation back’ the resolution passed in the general body meeting held on 18th June, 1971 would relate back to the date 1st Jan., 1971 on which date the directors recommended and that, therefore, on 1st Jan., 1971, there is a ‘debt owed’ by the assessee to the shareholders to the extent of Rs. 2,40,000, which has got to be excluded while computing the capital under S. 80J of the Act r/w r. 19A of the Rules framed under the Act.
5. However, learned counsel appearing for the assessee, relying upon the various decisions, submitted that this line of argument advanced by learned counsel for the Department was repelled by the various High Courts and that, therefore, as on 1st Jan., 1971, there is no ‘debt owed’ by the assessee to the shareholders to the extent of Rs. 2,40,000. According to learned counsel for the assessee, the Tribunal is justified in concurring with the view taken by the AAC in holding that this sum of Rs. 2,40,000 should not be excluded while computing the capital employed for the claim made under S. 80J of the Act.
6. We have considered the rival submissions made by both the counsel. While calculating the capital for the purpose of deduction under S. 80J of the Act, the assessee claimed Rs. 3,49,636 as deduction, which is worked out at 6% of Rs. 58,27,269. The ITO has calculated the capital employed at Rs. 38,45,962 and deduction under S. 80J at Rs. 2,30,757. As regards the provision of Rs. 2,40,000, the assessee pleaded that this is actually the proposed dividend to the shareholders and it ‘was not a debt owed’ on the first day of the relevant previous year, viz., 1st Jan., 1971 and, hence, that amount cannot be deducted while computing the capital for the purpose of S. 80J. According to learned standing counsel for the Department, as per the doctrine of ‘relation back’, the resolution passed in the General Body Meeting held on 18th June, 1971 declaring the dividend to the shareholders would relate back to the 1st day of the computation period, viz., 1st Jan., 1971. If that is so, on 1st Jan., 1971, the assessee owed a debt of Rs. 2,40,000 to its shareholders and that, therefore, this amount of Rs. 2,40,000 is to be excluded while computing the capital for the purpose of relief under S. 80J of the Act.
7. In Kothari Textiles Ltd. vs. CWT (1963) 48 ITR 816 (Mad), this Court while considering the provisions of S. 2(m) and S. 7(2) of the WT Act, held that the mere recommendation of the directors that a certain dividend can be paid and appropriation can be made in the balance sheet on the basis of that recommendation, does not create a liability on the company to pay any dividend. Both the right on the part of the shareholder to receive the dividend and the liability on the part of the company to pay any amount as dividend, arises only on and after the declaration of the dividend by the General Body.
8. In Lohia Machines Ltd. vs. Union of India (1985) 152 ITR 308 (SC), the Supreme Court held thus :
“The deduction to be allowed is on the profits and gains of the undertaking earned in the relevant year in respect of the previous year relevant to the assessment year. Profits and gains which are to be taken into account are the profits and gains earned in the relevant year and the year must necessarily mean and include the whole of the year and not some days or months of the year. By prescribing the first day of the year to be the date of computation of the capital employed, the capital employed during the whole year is sought to be denied by the rule, the benefit to which the assessee is entitled under the section. Such a provision, therefore, is clearly contrary to and inconsistent with the specific provision of the statute, as by fixing the first day of the year to be the date of computation of the capital employed for the year, the rule making authority is seeking to deny the benefit conferred by the statute.”
9. According to the facts arising in the case of Indian Tube Co. (P) Ltd. vs. CIT (supra), in respect of the accounts of the assessee-company for the calendar year 1962, its board of directors in the meeting held on 1st May, 1963, approved the transfer of Rs. 90,00,000 out of the profits to the dividend reserve account. In the general body meeting held on 31st May, 1963, the shareholders declared the dividend in a sum of Rs. 76 lakhs, as recommended by the board. The dividend was paid subsequently by transferring the sum of Rs. 76 lakhs from the Dividend reserve account to the P&L appropriation account. The question was whether, for the previous year 1963 relevant to the asst. yr. 1964-65, the entire amount of Rs. 90 lakhs could be included in the capital computation as a reserve for the purposes of surtax under the Companies (Profits) Surtax Act, 1964. While answering this question, the Supreme Court held that though the general body of the shareholders resolved and appropriated the sum of Rs. 76 lakhs towards dividend from the revenue of Rs. 90 lakhs on 31st May, 1963, the appropriation related back to the calendar year 1962 to which it related and, as on 1st Jan., 1963, the sum of Rs. 76 lakhs was a provision and only Rs. 14 lakhs could be treated as a reserve in the computation of capital for the purpose of surtax. This decision was rendered while considering the Companies (Profits) Surtax Act, 1964 S. 2(8); Sch. II, r. 1 and Companies Act, 1956 S. 271, Sch. I, Table A Reg. 87.
10. Similarly, the Supreme Court in CIT vs. Mysore Electrical Industries Ltd. (supra), while considering the provisions of Ss. 2(5), (8) 4; Sch. II, r. 1 of Companies (Profits) Surtax Act, 1994, held that the determination of the Directors to appropriate the amount to the three items of reserve on 8th Aug., 1963, had to be related back to 1st April, 1963, viz., the beginning of the accounts for the new year and had to be treated as effective from that date. The three items had to be added to other items for the computation of the capital of the respondent as on 1st April, 1963, in terms of r. 1 to the Second Schedule to the Companies (profits) Surtax Act, 1964. Thus, while considering the provisions of the Companies (Profits) Surtax Act, 1964, the Supreme Court applied the doctrine of ‘relation back’. But, the same doctrine of ‘relation back’ cannot be made applicable to this case, while considering what is the ‘debt owed’ on 1st Jan., 1971, for the purpose of computation of capital for allowing relief under S. 80J of the Act, since in the matter of companies, the dividend declared should be approved by the general body. In such a case, the debt will be added from the date of the resolution of the general body meeting and not from the date of proposal of dividend by the Directors. Though there was a provision for dividend amounting to Rs. 2,40,000 in the balance sheet of the assessee-company as on 31st Dec., 1970, still, it cannot be treated as a ‘debt owed’ by the assessee to the shareholders as on 1st Jan., 1971, as the general body meeting in which the declaration of dividend was approved took place subsequent to 1st Jan., 1971. Thus, the provision for dividend crystalised into a debt owed only when the general body meeting approved the declaration of dividend. In fact, the Kerala High Court in CIT vs. Transformers & Electricals Ltd. (1995) 213 ITR 397 (Ker) has taken into consideration the decision of the Supreme Court in Kesoram Industries & Cotton Mills Ltd. vs. CWT held that the first day of the computation period was only a recommendation by the Directors to declare a dividend, but the actual declaration was yet to follow after the decision of the general body at the annual general meeting, that the proposed dividend was not a debt owed on the first day of the computation period and that, therefore, the Tribunal was correct in holding that the amount of the proposed dividend was not liable to be deducted from the aggregate value of the assets for determining the capital employed for the purpose of sub-s. (1) of S. 80J.
11. From the foregoing discussion we hold that there is no infirmity in the order passed by the Tribunal in holding that the proposed dividend of Rs. 2,40,000 should not be taken into account for the purpose of computation of capital for allowing relief under S. 80J of the Act as ‘debt owned’ on 1st Jan., 1971. In that view, we answer the question referred to us in the affirmative and against the Department. No costs.
