JUDGMENT - Mrs. SUJATA MANOHAR, J. :---I.T.R. No. 223 of 1978 : This reference pertains to assessment years 1973-74 and 1974-75. The first dates of the previous years are 1-10-1971 and 1-10-1972 respectively. For the purposes of capital computation under the Companies (Profits) Sur-tax Act, 1964 the capital has to be computed as on the first day of the previous year relevant to the assessment year. 2. The Directors of the assessee Company in their reports dated 25-1-1972 and 20-1-1973 recommended equity dividends of Rs. 5,40,000/- and Rs. 6,30,000/- respectively from out of the profits of the years ending 30-9-1971 and 30-9-1972. These were approved by the share-holders in the Annual General Meeting held on 17-3-1972 and 15-3-1973 respectively. 3. It was contenced by the assessee that the recommendation for the declaration of dividend was not done on the first day of the previous year much less was there any declaration of dividend on that date and hence the general reserves cannot be reduced by the quantum of dividends which have been subsequently declared. The Tribunal has held that there was no liability to pay dividends on the first day of the previous year. The recommendation by the Directors was made after the first date of the previous year and hence the Sur-tax Officer was wrong when he held that the dividend declared out of general reserve, which was not a free reserve to the extent of the dividend declared, is deductible from the capital of the Company. From this decision of the Tribunal, the following question of law has been referred to us under section 256(1) of the Income-tax Act : "Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that sum of Rs. 5,40,000/- (1973-74)/Rs. 6,30,000/- (1974-75), being the amount of Dividend declared from the General Reserve was includible in computing the capital for the purpose of statutory deduction under the Companies (Profits) Sur-tax Act, 1964?" I.T.R. No. 335 of 1978 : 4. This reference pertains to the assessement years 1070-71 and 1971-72, the respective previous years ending on 30-9-1969 and 30-9-1970. The capital which is, therefore, required to be determined for the purposes of assessment of sur-tax for these assessment years has to be determined as on 1-10-1968 and 1-10-1969. The credit balance outstanding in the general reserve account on 1-10-1968 and 1-10-1969 was Rs. 40,27,470/- and Rs. The capital which is, therefore, required to be determined for the purposes of assessment of sur-tax for these assessment years has to be determined as on 1-10-1968 and 1-10-1969. The credit balance outstanding in the general reserve account on 1-10-1968 and 1-10-1969 was Rs. 40,27,470/- and Rs. 42,81,971/- respectively. This credit balance was inclusive of profits of the immediately preceding year appropriated and transferred to the General Reserve Account. The Company declared dividends out of the General Reserve as follows : For 1967-68 on 1-10-1968 .. .. Rs. 4,50,000/- For 1968-69 on 1-10-1969 .. .. Rs. 5,40,000/- 5. The Tribunal has held that the general reserves on the first day of the accounting period have to be reduced by the amount of dividends so declared. Hence, the following question has been referred to us under section 256(1) of the Income-tax Act : "Whether on the facts and in the circumstances of the case, the amounts of proposed dividends have to be excluded from the General Reserve for the purpose of assessments to Sur-tax for assessment years 1970-71 and 1971-72 respectively?" I.T.R. No. 230 of 1978 : 6. In this reference the assessment years are 1971-72, 1972-73 and 1973-74. The relevant previous year for the assessment year 1971-72 is from 1-4-1970 to 31-12-1970. The relevant previous year for the assessment year 1972-73 is the calender year 1971 while the relevant previous year for the assessment year 1973-74 is the calender year 1972. For the purposes of capital computation under the Companies (Profits) Sur-tax Act, 1964, the following facts are relevant. The assessee had shown general reserves as on 1-4-1970 as Rs. 53,50,000/-. The assessee had not created a dividend reserve. The Directors recommended a dividend of Rs. 13,20,000/-, which if approved by the shareholders was to be paid out of the general reserves. The share-holders accepted this recommendation on 26-8-1970. The Tribunal has held that the general reserves as on 1-4-1970 have to be reduced by the dividend so declared subsequently. Similarly, for the assessment year 1972-73, the general reserve as on 1-1-1971 which is shown at Rs. 80,52,000/- has been reduced by the Tribunal by the proposed dividend of Rs. 13,20,000 for the period 1-1-1970 to 31-12-1970 declared and paid after 1-1-1971. For the assessment year 1973-74 also the general reserves as on 1-1-1972 have been reduced by the proposed dividend for the period 1-1-1971 to 31-12-1971 of Rs. 80,52,000/- has been reduced by the Tribunal by the proposed dividend of Rs. 13,20,000 for the period 1-1-1970 to 31-12-1970 declared and paid after 1-1-1971. For the assessment year 1973-74 also the general reserves as on 1-1-1972 have been reduced by the proposed dividend for the period 1-1-1971 to 31-12-1971 of Rs. 16,50,000/- which was declared and paid on 17-5-1972. In view of these findings of the Tribunal, the following common question of law for the three assessment years is referred to us : "Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount standing to the credit of the general reserve as on 1st day of the previous year should be reduced by the dividend declared from it after the first day of the previous year for the purpose of computing the capital base under the Companies (Profits) Sur-tax Act, 1964?" 7. In the case of (Vajir Sultan Tobacco Co. Ltd. v. C.I.T.)1, reported in 132 I.T.R. 559, the Supreme Court has dealt at length on the distinction between a reserve and a provision. It has held that if any retention or appropriation of a sum falls within the definition of a provision, it can never be a reserve. But it does not follow that if the retention or appropriation is not a provision, it is automatically a reserve and the question will have to be decided having regard to the true nature and character of the sum so retained or appropriated depending on several factors including the intention with which and the purpose for which such retention and appropriation has been made. The true nature and character of the sums so appropriated must be determined with reference to the substance of the matter. It has referred to some aspects which would indicate whether the sum is set apart as an appropriation or as a reserve. The relevant aspect for our purpose is that if there is a clear conduct on the part of the Directors in setting apart a sum from out of the mass of undistributed profits avowedly for the purpose of distribution as dividend in the same year, this would run counter to any intention of making that amount a reserve. But basically the question will have to be decided having regard to the surrounding circumstances. But basically the question will have to be decided having regard to the surrounding circumstances. On the facts which were before the Supreme Court in the above case, the Directors had made a recommendation that a certain sum be paid as dividend during the relevant previous year. However, the declaration of dividend at the Annual General Meeting was made in the subsequent year. The Court held that the appropriation made by the Directors about the proposed dividend did not constitute reserves and the concerned amounts so set apart would have to be ignored or excluded from the capital computation although they were so set apart after the first day of the relevant year. 8. In the case of (Indian Tube Co. P. Ltd. v. CIT)2, reported in 194 I.T.R. 102, which was also a case under the Companies (Profits) Sur-tax Act, 1964, in respect of the accounts of the appellant Company for the calender year 1962, its board of directors, in a meeting held on May 1, 1963 approved transfer of Rs. 90 lakhs out of the profits to the Dividend Reserve Account. In the general meeting held on May 31, 1963, the shareholders declared a dividend 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 Profit and Loss Appropriation Account. The question was whether, for the previous year 1963 relevant to the assessment year 1964-65, the entire amount of Rs. 90 lakhs could be included in the capital computation as a reserve for the purposes of sur-tax under the Companies (Profits) Sur-tax Act, 1964, or whether the reserves would be reduced by Rs. 76 lakhs which were appropriated subsequently for distribution as dividend. The Supreme Court has held that only Rs. 14 lakhs out of Rs. 90 lakhs would be treated as a reserve in the computation of capital for the purposes of sur-tax. 9. The Supreme Court, after referring to the Vajir Sultan Tobacco Co. Ltd.'s case, supra, as also several other decisions including (CIT v. Mysore Electrical Industries Ltd.)3, reported in 80 I.T.R. 566 held that though the general body of the share-holders resolved and appropriated on May 31, 1963, the dividend of Rs. 76,00,000/- from the reserve of Rs. 90,00,000/-, it related back to the relevant assessment year and, therefore, as on January 1, 1963, Rs. 76,00,000/- from the reserve of Rs. 90,00,000/-, it related back to the relevant assessment year and, therefore, as on January 1, 1963, Rs. 76,00,000/- was a provision and could not be computed as capital. The Supreme Court has, therefore, clearly indicated that even a subsequent declaration of dividend can relate back to the appropriate year for the purposes of determining capital computation under the Companies (Profits) Sur-tax Act. 10. In the Indian Tube Co. P. Ltd.'s case above, the Supreme Court approved the decision of the Bombay High Court in the case of (Hyco Products (P) Ltd. v. CIT)4, reported in 132 I.T.R. 559, which has also been one of the matters dealt with by the Supreme Court in the case of Vajir Sultan Tobacco Co. Ltd., supra. Our attention in this regard is drawn by Mr. Mistry, learned Counsel for the assessee (in I.T.R. No. 230 of 1978) to the case of (Commissioner of Income-tax v. Burmah Shell Refineries Ltd.)5, reported in 186 I.T.R. 138. In the above case, the relevant date for capital computation was December 31, 1963. In the report for the year dated March 17, 1964 the Directors had recommended a final dividend to be paid out of the general reserves, if approved by the shareholders at the Annual General Meeting. In May, 1964 the Annual General Meeting approved the Director's recommendations and the final dividend was paid out of the general reserve. The Division Bench said that the dividend declared in the year 1964 would not relate back to 31st December 1963 and the amount of general reserves as on that date should not be reduced by the dividend subsequently declared. The Division Bench distinguished the decision of the Supreme Court in the case of Vajir Sultan Tobacco Co. Ltd., supra by pointing out that in the case before the Supreme Court, the recommendation of the directors for the dividend was made before the relevant date for computation of capital. While in the case before it both the recommendations of the Board of Directors as well as the declaration of dividends were made at a subsequent date. The attention of the Division Bench does not appear to have been drawn to the case of Hyco Products Pvt. Ltd. v. CIT, which was expressly referred to and approved of in Vajir Sultan Tobacco Co. Ltd.'s case by the Supreme Court. The attention of the Division Bench does not appear to have been drawn to the case of Hyco Products Pvt. Ltd. v. CIT, which was expressly referred to and approved of in Vajir Sultan Tobacco Co. Ltd.'s case by the Supreme Court. Moreover, now in view of the express findings of the Supreme Court in the subsequent case of Indian Tubes Co. P. Ltd., (supra) that such a declaration of divident can relate back to the first date of the relevant accounting year for the computation of the capital, the judgment of the Bombay High Court in the Burmah Shell Refineries' case no longer holds the field. Mr. Mistry has sought to make a distinction between cases where there is only a mass of undistributed profits on the first day of the computation period and cases where either a general reserve or a dividend reserve has been expressly created on the first day of the subsequent year. He has submitted that when a reserve has been expressly made on the first day of the computation period, it cannot be subsequently diminished with reference to the dividend subsequently paid out of the reserve. This argument cannot be accepted in view of the decision of the Supreme Court in the case of the Indian Tubes Co. P. Ltd. (supra). 11. In the premises, the questions which are referred to us are answered as follows : I.T.R. No. 233 of 1978 : The question is answered in the negative and in favour of the Revenue. I.T.R. No. 335 of 1978 : The question is answered in the affirmative and in favour of the Revenue. I.T.R. No. 230 of 1978 : The question is answered in the affirmative and in favour of the Revenue. No order as to costs. Questions answered in affirmative. *****