IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SUR TAX REFERENCE No 5 of 1981 For Approval and Signature: Hon'ble MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE A.R.DAVE ============================================================ 1. Whether Reporters of Local Papers may be allowed to see the judgements? Yes 2. To be referred to the Reporter or not? Yes To be referred to the Reporter or not? Yes To be referre to the Reporter or not? Yes To be referred to the Repor er or not? Yes To be referred to the Reporter or not? Y s To be referred to the Reporter or not? Yes To be referred to the Reporter or not? Yes To b referred to the Reporter or not? Yes To be referred to he Reporter or not? Yes To be referred to the Reporter o not? Yes To be referred to the Reporter or not? Yes To be referred to the Reporter or not? Yes To be referred to the Reporter or not? Yes To be ref rred to the Reporter or not? Yes To be referred to the R porter or not? Yes To be referred to the Reporter or not Yes 3. Whether Their Lordships wish to see the fair copy of the judgement? No 4. Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? No 5. Whether it is to be circulated to the Civil Judge? No -------------------------------------------------------------- SUHRID GEIGY LTD. Versus COMMISSIONER OF SUR-TAX -------------------------------------------------------------- Appearance: MR DK MEHTA for MR KC PATEL for Petitioner MR BB NAIK for MR MANISH R BHATT for Respondent No. 1 -------------------------------------------------------------- CORAM : MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE A.R.DAVE Date of decision: 10/09/98 ORAL JUDGEMENT (per R.K. Abichandani, J.) By this Sur Tax Reference which relates to Assessment Years 1970-71 and 1972-73, the Income Tax Appellate Tribunal, Ahmedabad, has referred, for the opinion of this court, the following questions under sec. 18 of the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as the Act) read with sec. 256(2) of the Income-tax Act, 1961. 1. "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the Sur Tax Officer was well within his jurisdiction in passing the rectification orders for the Assessment Years 1970-71 and 1972-73." 2. "Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that the orders passed in the two assessment years were valid in law?" 2. In respect of the Assessment Year 1970-71 the assessee had filed a return on 9.12.1970 for the accounting period from 1.4.1969 to 31.3.1970 showing the chargeable profit of Rs. 34,33,577/-. The Sur-tax Officer issued notice under sec. 6(1) of the said Act. In those proceeding, the assessee, by its letter dated 19.1.1971, intimated the S.T.O. that it had no objection if the reserve for additional depreciation and rehabilitation and development rebate reserve were not considered as reserve in computation of capital. In the order passed on 28.8.1974, the STO, taking the figure of general reserve of Rs. 1,61,83,570/- as on 1.4.1969, deducted the reserve for additional depreciation, rehabilitation and reserve for gratuity. No deduction was however made by the STO in respect of the proposed dividend for 1968-69 which was shown to have been deducted in the accounting year 1969-70 on page 20 of the balance sheet of the year ending 31.3.1969, being a sum of Rs. 29,25,000/-. That balance sheet, which is a part of the record, shows that certain sums were transferred from tax exempt profit reserve, statutory development rebate reserve and profit and loss account to the general reserve, reaching the figure of Rs. 1,61,83,570/- which is shown as the figure of the general reserve as on 1.4.1969 from which the dividend amount which was proposed for the year 1968-69 in that accounting year came to be paid in the accounting year 1969-70. The dividend which was proposed so paid was, according to the Revenue, required to be deducted from the general reserve as on 1.4.1969 in respect of the said year. Since this was not done, the STO proceeded to rectify the mistake by issuing a notice under sec. 13 of the said Act to the assessee as to why the general reserve should not be reduced to the extent of Rs. 16,38,000/- on the first day of the accounting year 1969-70 before its inclusion in the computation of capital base. In the rectification order which was made on 7.4.1977, the STO found that there was a mistake committed in the assessment order dated 28.8.1974 and that the proposed dividend, which was to be distributed out of the general reserve, was not deducted from the balance of the general reserve as on 1.4.1969. It was held that the proposed dividend for the accounting year 1969-70 should be related back to the first day of the accounting year in view of the decision of the Supreme Court in CIT vs. Mysore Electrical Industries Ltd. reported in 80 ITR 566 and the general reserve as on 1.4.1969 should be reduced to that extent before including it in the capital base of the assessee. On behalf of the assessee, it was contended before the officer that on the first day of the previous year, that is, on 1.4.1969, the amount of proposed dividend was neither the liability nor a debt of the assessee company and, therefore, it was rightly included in the capital base of the company for the purpose of standard deductions. It was contended that there was no present liability existing on the first day of the previous year, that is, on 1.4.1969 in respect of the proposed dividend. The STO held that the objection of the assessee, whether the proposed dividend was reserve or not, being a matter in litigation, cannot be said to be a mistake apparent from the record was not acceptable since the recommendation of the directors about the dividend had the same character as that of a proposed dividend to be shown under the heading "Current Liabilities and Provisions" in the statutory form of the Balance Sheet. It was held that the amount proposed as dividend was for a known liability for which there could be no two opinions and, therefore, non-deduction of the proposed dividend from the general reserve was a mistake apparent from the record. It was held that the Board of Directors recommends dividend subject to the approval by the shareholders in the Annual General Meeting and when the shareholders give such approval at a later date, the liability becomes due as on the first day of the accounting year. Therefore, the objection of the assessee that there was no liability on the first day of the accounting year was incorrect. It was held that the recommendation of the directors for distribution of the dividend when approved at the Annual General Meeting of the shareholders related back to the first day of the accounting year on the ratio of the decision of the Supreme Court in Mysore Electrical Industries Ltd. (supra). The STO, therefore, rectified the mistake by deducting the amount of proposed dividend from the general reserve. It will be noted that the amount of proposed dividend to be deducted from the general reserve as on 1.4.1969 was taken to be Rs. 16,38,000/-. The figure of general reserve of Rs. 1,61,83,570/- which was taken to be the figure as on 1.4.69 in the earlier order dated 28.8.74 was already reduced to Rs. 1,58,41,268/by deducting the amounts of reserves for additional depreciation and rehabilitation and reserve for gratuity and from this figure the amount of the proposed dividends was to be deducted and for that purpose, the STO, in his rectification order, took the figure of Rs. 16,38,000 as the proposed dividend which was required to be deducted while, admittedly, as per the balance sheet in the annual report 1969-70, the amount of dividend paid for 1968-69 in the accounting year 1969-70 was Rs. 29,25,000 which was shown to be deducted from the said general reserve figure of Rs. 1,61,83,510/- as on 1.4.1969. We may immediately note here that this discrepancy has surfaced for the first time at the hearing of this Reference and all throughout the rectification proceedings and the appeals before the first appellate authority and the Tribunal, the figure of the proposed dividend which was required to be deducted from the general reserve as on 1.4.69 was taken to be Rs. 16,38,000/- instead of the correct figure of Rs. 29,25,000/-. Against the rectification order dated 7.4.77 for the Assessment Year 1970-71, an appeal was preferred by the assessee under sec. 11 of the said Act before the CIT (Appeals) who, by his order dated 19.3.79, negativing the contention of the appellant that the action of the STO in rectifying the mistake was not legal, held that there was a mistake of law apparent from the record which required to be rectified and that on merits, in the assessee's own case in respect of Assessment Years 1965-66, 1966-67 and 1968-69, the Tribunal had held against the assessee following the decision dated 13.12.76 of the Gujarat High Court in Income-tax Reference No. 4/73 in the case of Karamchand Premchand Pvt. Ltd. Following the ratio of that decision, the CIT (Appeals) held that the action of the STO was right and no interference was called for. 3. As regards Assessment Year 1972-73, the assessee had filed return of chargeable profits under the said Act on 29.9.1972 showing chargeable profits of Rs. Nil in respect of the accounting period from 1.4.71 to 31.3.72. The figure of general reserve for the said accounting year as on 1.4.71 was admittedly Rs. 2,74,00,912/- as per the Balance Sheet for the accounting year 1971-72 which is on record. In the said balance sheet, admittedly, dividend amount of Rs. 39 lakhs was deducted from the general reserve as on 1.4.1971. However, in the assessment order dated 24.9.75, the STO, while deducting certain amounts which were not treated as reserve, omitted to deduct from the general reserve as on 1.4.1971, the amount of dividend of Rs. 39 lakhs which was proposed for the year 1970-71 and paid in the year 1971-72. The STO, noticing the mistake of not deducting the proposed dividend from the amount of general reserve as it stood as on 1.4.71, issued a notice under sec. 13 of the Act to the assessee for showing cause as to why the general reserve should not be reduced to the extent of Rs. 40,04,000/- on the first day of the accounting year before its inclusion in the computation of capital base. Contentions similar to those which were canvassed in response to the notice which was issued under sec. 13 in respect of the Assessment Year 1970-71 were also canvassed in response to this notice and, by a similarly worded order, for the same reasons which the STO had given for rectifying the mistake in respect of the Assessment Year 1970-71, the STO, by his order passed on the same date, that is, on 7.4.77, held that the proposed dividend which was required to be shown under the heading "Current Liabilities & Provisions" in the statutory form of balance sheet, was required to be reduced to that extent from the general reserve. He, however, proceeded to deduct the proposed dividend of Rs. 40,04,000/- as against the actual figure of Rs. 39 lakhs which was the dividend proposed for the accounting year 1970-71 and paid in the accounting year 1971-72 as reflected from the balance sheet of 1971-72 at page 20. We may again note that this discrepancy in the amount surfaced for the first time during the hearing of this Reference and even according to the learned counsel for the assessee, the amount which was deducted from the general reserve of Rs. 2,74,00,912/- which stood as on 1.4.71 was of Rs. 39 lakhs being the amount of dividend which was proposed for the year ending 31.3.1971. In the appeal which was preferred by the assessee against the rectification order, the CIT (Appeals), on the ratio of Karamchand Premchand's case (supra), by an identically worded order as he had made in respect of the Assessment Year 1970-71, dismissed the appeal on 19.3.1979. 4. Against the two appellate orders by CIT (Appeals) made in respect of Assessment Years 1970-71 and 1971-72, the assessee appealed before the Tribunal under sec. 12 of the said Act. Before the Tribunal the assessee raised, through its learned counsel, the following contentions during the hearing of the appeals: 1. That the dividend proposed should form part of the general reserve and hence there was no mistake at all in the record. 2. In any case, even if there was a mistake, it was not one which could be rectified under sec. 13 of the said Act as the legal position was at best not clear, which would involve arguments and it was not possible to arrive at in a firm conclusion without a debate. The learned counsel had relied upon the decision of the Supreme Court in Volkart Brothers and Others reported in 82 ITR 50 in support of his contentions. 5. The contention raised for the Department was that, in the assessee's own case for the Assessment Years 1965-66, 1966-67 and 1967-68, the Income Tax Tribunal had, following the decision of the Gujarat High Court in Karamchand Premchand Pvt. Ltd. (supra), held that the proposed dividend could not form part of reserves. It was contended that Rule 1 of the Second Schedule to the said Act specifically provided that such proposed dividend should not be treated as a reserve. It was contended on behalf of the Department that the decision in Karamchand Premchand's case (supra) was given by the High Court on 13.12.1976 while the STO had passed his orders under sec. 13 on 7.4.1977 and that such rectification orders could be passed in keeping with the decision of the jurisdictional High Court. The Department had also relied upon the decisions of this court in Parshuram Pottery Works Co. Ltd. v. D.R. Trivedi, Wealth-tax Officer, Morvi and Anr. reported in 100 ITR 651 and in Padmavati Jaykrishna v. Commissioner of Wealth-tax, Gujarat III reported in 105 ITR 115 in support of these contentions. The learned counsel for the assessee had in reply urged that the matter appeared to be debatable in spite of some decisions and that whether proposed dividend would form a part of the reserve or would be a mere provision was subject-matter of controversy in respect of which two opinions were possible. We have narrated the contentions raised before the Tribunal by the rival parties in detail with a view to focus upon the exact nature of controversy which the Tribunal was called upon to decide. This has become necessary because, as will be seen later on, the scope of contentions raised before this court on behalf of the assessee was much wider, and went beyond the controversy which actually was raised before the Tribunal and which the Tribunal decided in Para 8 of its order in the following terms:- " In our view, after the decision of Their Lordships of Gujarat High Court in case of Karamchand Premchand, at least as far as this charge is concerned it cannot be treated as a question not settled. The position has been explained in 105 ITR 115 Padmavati Jaykrishna's case. After the decision of Their Lordships a rectification order passed in keeping with the same is, according to us, valid and, therefore, the S.T.O. was well within his jurisdiction when he passed the rectification orders. We dismiss the assessee's appeals." 6. When the hearing commenced, the learned counsel appearing for the assessee had strongly contended that there was no mistake apparent on record in the making of the original order in respect of those two assessment orders requiring any rectification under sec.13 of the Act. It was contended that at the stage when dividend is proposed there was no "debt owed" till the company in its General Body Meeting accepts the recommendation in respect of the proposed dividend. It was, therefore, contended that, since it could not be known whether the recommendation would be accepted or not in respect of the dividend proposed out of the profits at the end of the accounting year, there being no liability arising as on the first day of the previous year immediately following such accounting year for which the dividend is proposed, the amount of proposed dividend could not be deducted from the general reserve as on the first day of the previous year. The learned counsel read the decisions of the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. Commissioner of Income-tax, A.P. & Ors. reported in 132 ITR 559 and in Commissioner of Income-tax, Mysore v. Mysore Electrical Industries Ltd. reported in 80 ITR 566 and proceeded to contend that at the time when the original orders of assessment under the said Act were made in respect of these two years, the point was highly debatable and the subsequent decision of this court which settled the point was not available at the stage when the original assessment orders were made. After such detailed arguments on this point, the learned counsel submitted that he would not pursue the question as to whether the point was debatable and that he would confine his challenge to the following two contentions:- 1. That the Tribunal had fallen into an error in upholding the jurisdiction of the STO in spite of the fact that there was no mistake in the assess- ment order dated 28.8.74 for the Assessment Year 1970-71 and dated 24.9.1975 for the Assessment Year 1972-73. 2. In absence of any mistake which is a prerequisite condition for initiating proceedings under sec. 13 of the said Act, the rectification orders for both the years were not followed in law. Elaborating these contentions, the learned counsel submitted that for the Assessment Year 1970-71 the relevant previous year would be 1969-70 covering the accounting period from 1.4.1969 to 31.3.1970 and therefore the Balance Sheet as on 31.3.1970 was relevant and any recommendation of dividend made in relation to the Balance Sheet on 31.3.1970 would be deductible from the profits as on 31.3.1970 and therefore could be deducted from the general reserve as on 1.4.1970 and not 1.4.1969. He argued that for deducting any proposed dividend from the general reserve as it stood on 1.4.1969 the relevant balance sheet would be as on 31.3.1969 and only the dividend proposed for 1968-69 which was to be paid out of the profits worked out at the end of that year i.e. on 31.3.1969 could be deducted from the general reserve as on 1.4.1969. He submitted that since the dividend of Rs.16,38,000 proposed as per the Directors' Report dated 8.10.1970 for the accounting year 1969-70 could be paid only in the next accounting year 1970-71, it was deductible, if at all, only from the profits worked out at the end of the year, that is, on 31.3.1970, and therefore from the general reserve as on 1.4.1970 if the profits without deduction thereof are transferred to the general reserve as on 1.4.1970, and not from the general reserve as on 1.4.1969. It was submitted that in respect of the first day of the previous year of the accounting year 1969-70, the relevant date was 1.4.1969 and from the reserve as it stood on 1.4.1969, the dividend proposed to be paid in that accounting year of 1969-70 would be for the preceding previous year for which it was proposed. In other words, the dividend which was proposed for the accounting year 1968-69 and which admittedly as per the assessee's balance sheet was Rs. 29,25,000/- was relatable to the first day of the previous year 1969-70 and not the proposed dividend of Rs, 16,38,000/- which was recommended for the accounting year 1969-70 and could be paid only from the profits at the end of that accounting year as on 31.3.1970 which, if transferred to the general, would warrant deduction from the general reserve as on 1.4.1970. It was, therefore, contended that, by not deducting the said amount of Rs. 16,38,000, the STO did not commit any mistake. As regards the A.Y. 1972-73, the learned counsel contended in the same vein that the amount of Rs. 40,04,000 recommended by the directors as the proposed dividend for the accounting year 1971-72 was payable only from the profits standing at the end of the said accounting year, i.e., as on 31.3.1972 and if profits are transferred to the general reserve, then from such general reserve as on 1.4.1972 and the said amount of Rs. 40,04,000/- could not have been deducted from the general reserve as on the first day of the previous year, i.e., as on 1.4.1971. He pointed out from page 20 of the Balance Sheet in respect of accounting year 1971-72 that the dividend which was proposed for the year ending 31.3.1971 was Rs. 39 lakhs which was relatable to the first day of the previous year, i.e., 1.4.1971 and not the sum of Rs. 40,04,000 which was relatable only to 1.4.1972. It was, therefore, contended that in the original assessment order, the STO did not commit any mistake when he did not deduct any proposed dividend from the general reserve as on 1.4.1971. It was submitted that thus, in the rectification order a wrong basis has been adopted by making deduction of the proposed dividend of Rs. 16,38,000/- as on 1.4.1969 being the first day of the previous year of 1969-70 and similarly a wrong basis even for the accounting year 1971-72 by deducting the proposed dividend amount of Rs. 40,04,000/from the general reserve as on 1.4.1971. It was, therefore, contended that the rectification orders were bad on the ground that a wrong basis of deduction was chosen as the amounts which were not deductible as proposed dividends from the general reserves as on the first day of the previous years were sought to be deducted while purporting to rectify the original orders. 7. The learned counsel appearing for the Revenue contended that at no point of time till the midst of the reference did it occur to anyone that the figures taken of the proposed dividend in respect of the two relevant years were not correct. It was submitted that the real issue involved before the Tribunal on which contentions were canvassed by both the sides was only whether there was a debatable point calling for no rectification since it could not be considered as a mistake and only an erroneous view out of the two possible views, or whether, in view of the clear provisions of Rule 1 read with its Explanation contained in the Second Schedule to the Act and the decision of this court, proposed dividend was required to be deducted from the general reserve as it stands on the first day of the previous year. It was contended that the grounds which are now sought to be raised after jettisoning the main question as to whether there was a debatable issue involved and, therefore, no mistake, were never raised before any authority so far, and they do not arise from the decision of the Tribunal which was rendered only on the points which were argued before it. It was also submitted that even if there is any error in taking the correct figure of the proposed dividend for reducing the same from the general reserve as it stood on the first day of the relevant previous year in respect of A.Y. 1970-71, that could be corrected by giving a direction to that effect to the Tribunal so that the assessee may not get the undue benefit of a deduction of a much lesser amount of proposed dividend, namely, of Rs. 16,38,000 as against the actual amount of dividend of Rs. 29,25,000 which was paid for the year 1968-69 in the accounting year 1969-70 and was deductible from the general reserve