Judgment:
1. This appeal by the Revenue arises out of the order dt. 11th July, 1989, of the CIT(A) for the asst. yr. 1977-78.
2. Ground No. 1 is general in nature. Ground No. 2 relates to allowance of development rebate and ground No. 3 relates to the rate at which the development rebate will be available to the assessee.
3. The brief facts of the case are that when the case went before the AO on the direction of the Tribunal for a fresh decision on the question of the rate at which the development rebate was to be allowed to the assessee, the AO noticed that the development rebate reserve amounting to Rs. 13.66 lakhs created by the assessee on 31st July, 1976, relevant for the asst. yr. 1977-78 was transferred by the assessee to its P&L a/c on 31st July, 1984, that is, before the expiry of a period of eight years. The profits available for appropriation in the year ended 31st July, 1984, after this transfer of the reserve amounted to Rs. 107.28 lakhs, but a sum of Rs. 19.21 lakhs was appropriated by the assessee in its audited P&L a/c for this period towards dividend on preferential and equity shares. Dividend amounting to Rs. 98,958 on preference shares had already been paid, while dividend amounting to Rs. 18,22,000 on equity shares was duly proposed by the directors of the company in its P&L Appropriation account. The transfer of such development rebate reserve to the P&L a/c before the expiry of eight years and the transfer of the amount to the provision for the proposed dividend raises the question whether the assessee was entitled for the development rebate for the asst. yr. 1977-78. The AO found that the assessee has transferred this reserve for development rebate before the expiry of the period of eight years to the P&L a/c and declared dividend of Rs. 19.21 lakhs, which was more than the reserve so transferred. Accordingly he held that the assessee has violated the conditions mentioned in s. 34(3)(a) and, therefore, no development rebate was admissible to the assessee for the asst. yr.
1977-78. The assessee appealed to the CIT(A), who held that the assessee has not violated the condition given under s. 34(3)(a) because the dividend was declared only in January, 1985, and the amount became payable 42 days after the declaration. Being aggrieved the Revenue has come up in appeal before us.
4. The learned Departmental Representative relied on the decision of the AO, while the assessee's authorised representative relied on the order of the CIT(A). He also relied on the order of the Hon'ble Supreme Court in the case of CIT vs. Express Newspapers Ltd. (1998) 230 ITR 477 (SC).
5. We have heard the rival contentions and also perused the material on record. In order to appreciate the point at issue it is essential to refer to the provisions of s. 34(3)(a), which are as under: "The deduction referred to in s. 33 shall not be allowed unless an amount equal to seventy-five per cent of the development rebate to be actually allowed is debited to the P&L a/c of any previous year in respect of which the deduction is to be allowed under sub-s. (2) of that section or any earlier previous year (being a previous year not earlier than the year in which the ship was acquired or machinery or plant was installed or the ship, machinery or plant was first put to use and credited to a reserve account to be utilised by the assessee during a period of eight years next following for the purpose of the business of the undertaking, other than - On a perusal of the aforesaid section it appears to us that the assessee is required to create a development rebate reserve of an amount equal to seventy-five per cent of the development rebate to be actually allowed by debiting the said amount to the P&L a/c in the year in which the deduction is actually allowed. The reserve so created can be utilised by the assessee during the period of eight years next following for the purpose of the business other than distribution of dividends or profits. In the case of the assessee the reserve for a sum of Rs. 13.66 lakhs was created on 31st July, 1976. The said reserve was transferred by the assessee during the period of eight years to its P&L Appropriation account in the following manner as appears from the Directors' Report for the year ended 31st July, 1984, which was filed before us by the assessee's authorised representative during the course of hearing :Development Rebate Reserve beyond the statutory period 13,66,568"written backappropriation of the profit in the following manner :"Which is appropriated as follows : Rs.Debenture Redemption Reserve 4,50,000General Reserve 55,00,000Dividend on Preference Shares (already paid) 98,958Proposed Dividend on Equity Shares 18,22,000Balance carried forward 28,57,799 ?" In the said Directors' Report it was also stated in respect of dividend that the directors recommend the declaration of dividend at 20 per cent on equity shares subject to deduction of tax as applicable. The company, no doubt, has made the provisions during the year for the proposed dividend on equity shares amounting to Rs. 18,22,000 and paid during the year a sum of Rs. 98,958 by way of dividend on preference shares. So far as the issue of utilisation of the development rebate reserve for the distribution by way of dividend on preference share is concerned, there is no doubt that the company has distributed the dividend on preference shares and thus there is clear violation of s.
34(3)(a) to the extent of Rs. 98,958.
6. On the issue whether the proposed dividend on the equity shares as debited to the P&L a/c and shown in the balance sheet of the assessee under the head 'Current liabilities and provision' can tantamount to distribution by way of dividend, we do not agree with the authorised representative of the assessee that for the violation of the provisions of s. 34(3)(a) the date of the payment of the dividend to the shareholders or the date of approval of the dividend by the shareholders in the General Body Meeting will be the date of distribution of dividend. The case law cited by the learned authorised representative of the assessee deals with the interim dividend.
Declaration of the interim dividend is the prerogative of the board of directors of the company and they can make the payment from time to time if such interim dividend appears to be justified to them by the profits of the company. No doubt declaration of dividend is to be approved in the General Body Meeting of the company, but the declaration of the dividend is to be recommended by the directors and for that they have to make the proper provision in their annual statements, i.e., balance sheet and P&L a/c. It is a settled view that failure to make provision for taxation and proposed dividend would not disclose the true and fair state of affairs of the company. A company is statutorily required to provide for proposed dividend in its P&L a/c and to show the same under the head 'Current liabilities and provisions' in the balance sheet. Failure to make such provision in the accounts amounts to contravention of Schedule VII to the Companies Act r/w s. 211. Dividend can be declared only out of the current profits as envisaged under s. 205 of the Companies Act. Development rebate reserve is not regarded to be a free reserve for the purpose of the declaration of the dividend. The moment such reserve is written back it becomes available for the purpose of declaration of the dividend as per the Companies Act. The assessee-company is following mercantile system of accounting. The recommendation of the dividend and the appropriation of the amount for the proposed dividend, in our opinion, is utilisation of the amount for distribution by way of dividend. Utilisation does not mean the actual payment. The wording used in the section 'to be utilised ...... other than for distribution by way of dividends or profits' clearly denotes that if sum has been appropriated for distribution by way of dividend it will be covered. Had there been no such intention, the wording of the section would have been 'to be utilised ......... other than by way of distribution of or payment of dividend. Not only this if we give the interpretation as has been suggested by the authorised representative then this provision will become redundant. We cannot give such interpretation where the language of the section is plain and simple. Accordingly we are inclined to disagree with the CIT(A) and uphold the order of the AO.7. Ground No. 3 becomes infructuous in view of our finding that the assessee is not entitled to development rebate due to the violation of s. 34(3)(a). This ground is hence dismissed.