Judgment :- K. A. THANIKKACHALAM J. In pursuance of the directions given by this court dated November 4, 1980, in T. C. P. No. 242 of 1980, the Tribunal has referred the following question for the opinion of this court under section 256(2) of the Income-tax Act, 1961, (hereinafter referred to as "the Act") "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right 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 the purpose of allowing relief under section 80J as a debt owed as on January 1, 1971?" The assessee is a private limited company engaged in the business of manufacturing motor cycles, agro-industrial engines and other spare parts for the aforesaid items. While furnishing the return for the assessment year 1972-73, the assessee claimed relief under section 80J of the Income-tax Act as on Rs. 3, 49, 636 being 6 per cent. of the capital employed of Rs. 58, 27, 269. The Income-tax Officer, however, computed the capital at Rs. 38, 45, 962 and restricted the relief to Rs. 2, 30, 757. In so doing, he has excluded as sum a of Rs. 2, 40, 000 representing provision for the proposed dividend, as capital On appeal, the Appellate Assistant Commissioner 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 January 1, 1971. According to the Appellate Assistant Commissioner, only when the general body meeting has approved declaring the dividend, it can be said that the debt has become accrued and, therefore, the proposed dividend of Rs. 2, 40, 000 should be taken into account for the purpose of computation of capital under section 80J of the Act, as it was not a debt owed as on the first day of the computation period, i.e., January 1, 1971. The Department preferred further appeal to the Appellate Tribunal and the Tribunal, following its order in S. T. A. No. 32/Mds of 1975-76 dated November 23, 1976, held that the capital for the purpose of section 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 Appellate Assistant Commissioner. 2, 40, 000 representing the proposed dividend. Accordingly, the Tribunal confirmed the order passed by the Appellate Assistant Commissioner. Aggrieved, the Department has sought for the reference, as stated aboveBefore us, learned standing counsel for the Department submitted that in view of the decisions of the Supreme Court in CIT v. Mysore Electrical Industries Ltd. 1971 (80) ITR 566, 1971 (S) SCR 521, 1971 AIR(SC) 1361, 1971 (2) SCC 243 , 1971 (41) CC 617 and Indian Tube Co. P. Ltd. v. CIT 1992 (194) ITR 102, 1992 (1) JT 112, 1992 (1) Scale 26, 1992 (1) SCR 22, 1992 (101) CTR 446, 1992 (60) TAXMAN 399, 1992 (101) CTR(SC) 446 applying the doctrine of "relation back" the resolution passed in the general body meeting held on June 18, 1971, would relate back to the date January 1, 1971, on which date, the directors recommended and that, therefore, on January 1, 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 section 80J of the Act read with rule 19A of the Rules framed under the Act 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 January 1, 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 Appellate Assistant Commissioner in holding that this sum of Rs. 2, 40, 000 should not be excluded while computing the capital employed for the claim made under section 80J of the Act We have considered the rival submissions made by both counsel. While calculating the capital for the purpose of deduction under section 80J of the Act, the assessee claimed Rs. 3, 49, 636 as deduction, which is worked out at 6 per cent. of Rs. 58, 27, 269. The Income-tax Officer has calculated the capital employed at Rs. 38, 45, 962 and deduction under section 80J at Rs. 2, 30, 757. As regards the provision of Rs. 3, 49, 636 as deduction, which is worked out at 6 per cent. of Rs. 58, 27, 269. The Income-tax Officer has calculated the capital employed at Rs. 38, 45, 962 and deduction under section 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., January 1, 1971, and, hence, that amount cannot be deducted while computing the capital for the purpose of section 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 June 18, 1971, declaring the dividend to the shareholders would relate back to the first day of the computation period, viz., January 1, 1971. If that is so, on January 1, 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 section 80J of the ActIn Kothari Textiles Ltd. v. CWT 1963 (48) ITR 816, 1963 (33) CC 217 this court while considering the provisions of section 2(m) and section 7(2) of the Wealth-tax 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 In Lohia Machines Ltd. v. Union of India 1985 AIR(SC) 421, 1985 (1) CompLJ 249, 1985 (152) ITR 308, 1985 (1) Scale 115 , 1985 (2) SCC 197 , 1985 (2) SCR 686 , 1985 (44) CTR 328, 1985 (20) TAXMAN 9, 1985 TaxLR 353, 1985 SCC(Tax) 245, 1985 (44) CTR(SC) 328 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." According to the facts arising in the case of Indian Tube Co. P. Ltd. v. CIT 1992 (194) ITR 102, 1992 (1) JT 112, 1992 (1) Scale 26, 1992 (1) SCR 22, 1992 (101) CTR 446, 1992 (60) TAXMAN 399, 1992 (101) CTR(SC) 446 (SC), in respect of the accounts of the assessee-company for the calendar year 1962, its board of directors in the meeting held on May 1, 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 May 31, 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 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. 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 surtax under the Companies (Profits) Surtax Act, 1964 1971 (80) ITR 566, 1971 (S) SCR 521, 1971 AIR(SC) 1361, 1971 (2) SCC 243 , 1971 (41) CC 617 while considering the provisions of sections 2(5), (8), 4; Schedule II, rule 1, of the Companies (Profits) Surtax Act, 1964 1995 (213) ITR 397, 1995 (123) CTR 423, 1995 (80) TAXMAN 234 has taken into consideration the decision of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. CWT 1966 AIR(SC) 1370, 1966 (59) ITR 767, 1966 (2) SCR 688 , 1966 (1) ITJ 277, 1966 (1) CompLJ 154, and held that on the first day of the computation period there 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-section (1) of section 80JFrom 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 section 80J of the Act as "debt owed" on January 1, 1971. In that view, we answer the question referred to us in the affirmative and against the Department. No costs.