PETITIONER:
\nJ. DALMIA<\/p>\n
Vs.<\/p>\n
RESPONDENT:
\nCOMMISSIONER OF INCOME-TAX, NEW DELHI<\/p>\n
DATE OF JUDGMENT:
\n01\/04\/1964<\/p>\n
BENCH:
\nSHAH, J.C.
\nBENCH:
\nSHAH, J.C.
\nSUBBARAO, K.
\nSIKRI, S.M.<\/p>\n
CITATION:
\n1964 AIR 1866 1964 SCR (7) 579
\nCITATOR INFO :
\nF 1965 SC1263 (18,20)
\nR 1965 SC1862 (14,27)
\nR 1970 SC 281 (5)
\nR 1971 SC 846 (10)
\nACT:
\nCompany Law-Resolution of Board of Directors-interim
\ndividend-If creates a debt enforceable against the company-
\nIncome Tax-Payable on the dividend in the year in which it
\nwas actually paid, credited, or distributed or deemed to be
\npaid-“Paid”-Meaning of-Indian Companies Act, 1913 (7 of
\n-1913), s. 17(2), Art. 95 Sch. I-Income-tax Act, 1922 (11
\nof 1922), s. 16 (2).<\/p>\n
<\/p>\n
HEADNOTE:
\nThe appellant held shares in a company the Board of
\nDirectors of which by a resolution dated August 30, 1950
\ndeclared interim dividends. The appellant received a
\ndividend -warrant dated December 28, 1950 for a certain
\namount being the interim dividend in respect of its share
\nholdings in the company. The appellant’s year of accounting
\nhad ended on September 30, 1950. The revenue authorities
\nbrought to tax the amount so received with other income of
\nthe appellant in the assessment year 1952-53 after rejecting
\nthe objection of the appellant that it represented income
\nfor the assessment year 1951-52. In a reference made under
\ns. 66(1) of the Indian Income-tax Act, 1922, the High Court
\nagreed with the Revenue authority that the dividend was in
\nview of Art. 95 of the First Schedule to Indian Companies
\nAct, 1913, liable to be included in the assessment year
\n1952-53.
\nHeld: A declaration of dividend by a company in a general
\nmeeting gives rise to a debt.
\nIn re Severn and Wile and Severn Bridge Railway Co. (1896) 1
\nCh. 559, referred to.
\nBut a mere resolution of the Directors resolving to pay a
\ncertain amount as interim dividend does not create a debt
\nenforceable against the company for it is always open to the
\nDirectors to rescind the resolution before payment of the
\ndividend.
\nThe Lagunas Nitrate Company (Ltd.) v. J. Henry Schroeder and
\nCompany, 17 Times Law Reports 625, referred to.
\nCommissioner of Income-tax, Bombay v. Laxmidas Mutraj
\nKhatau, 16 I.T.R. 248, distinguished.
\n(ii) The test applied by Chagla C. J. (in C.I.T., Bombay v.
\nLaxmidas Mulraj Khatau, 16 I.T.R. 248) that because the
\n,dividend becomes due to the assessee who has the right to
\ndeal with or dispose of the same in any manner he likes, it
\nis taxable in the year in which it is declared cannot be
\nregarded as correct.
\n(iii) Dividend may he said to be paid within the meaning of
\ns. 16(2) of the Indian Income-tax Act, 1922 when the company
\ndischarges its liability and makes the amount thereof
\nunconditionally available to the member entitled thereto.
\nPurshottamdas Thakurdas v. C.I.T., Bombay, 34 I.T.R, 204,
\nreferred to.
\nI P(1)) 1 S.C.I- 17 (a)
\n580
\n(iv) The declaration of interim dividend capable of being
\nrescinded by the directors does not operate as a payment
\nunder s. 16(2) of the Income-tax Act before the company has
\nparted ‘with the amount of dividend or discharged its
\nobligation by some other act.<\/p>\n
<\/p>\n
JUDGMENT:
\nCIVIL APPELLATE JURISDICTION: Civil Appeal No. 505 of 1963.
\nAppeal from the judgment and order dated March 6, 1961 of
\nthe Punjab High Court (Circuit Bench) at Delhi in I.T.R. No.
\n16 of 1959.
\nS. K. Kapur and B. P. Maheshwari, for the appellant.
\nC. K. Daphtary, Attorney-General, K. N. Rajagopal’ Sastri
\nand R. N. Sachthey, for the respondent.
\nApril 1, 1964. The judgment of the Court was delivered by.
\nSHAH, J.-The appellant which is a Hindu undivided family was
\nthe registered holder of 1,500 shares of M\/s Govan Bros.
\n(Rampur) Ltd. in the year of account October 1, 1950 to
\nSeptember 30, 1951. Pursuant to a resolution passed by the
\nboard of directors of M\/s Govan Bros. (Rampur) Ltd.-
\nhereinafter called ‘Govan Bros.’-at a meeting held on August
\n30, 1950, the appellant received a dividend warrant dated
\nDecember 28, 1950 for Rs. 4,12,500\/being interim dividend in
\nrespect of its shareholding in Govan Bros. This amount was
\nbrought to tax with the other income of the appellant in the
\nassessment year 1952-53 by the Revenue authorities. after
\nrejecting the objection of the appellant that it represented
\nincome for the assessment year 1951-52.
\nAt the instance of the appellant the Appellate Tribunal drew
\nup a statement of the case and referred the question set out
\nhereinbelow to the High Court of Punjab under s. 66(1) of
\nthe Indian Income-tax Act:
\n“Whether on a true interpretation of Article
\n95 of the First Schedule to the Indian
\nCompanies Act, 1913, the dividend of Rs.
\n4,12,500\/- was liable to be included in the
\nassessment year 1952-53.”
\nThe High Court recorded an answer to the question in the
\naffirmative. Against the order of the High Court, this
\nappeal is preferred by the appellant with certificate
\ngranted by the High Court.
\nEven though the question was framed a;-, if article 95 of
\nthe First Schedule to the Indian Companies Act, 1913, ap-
\nplies to Govan Bros, it is common ground that the company
\n581
\nwas registered under the Companies Act of the former Rampur
\nState, and it had adopted special Articles of Association in
\nsupersession of Table A of the Companies Act. The relevant
\narticles of Govan Bros. dealing with declaration or payment
\nof final and interim dividends were articles 73 and 74. The
\nHigh Court therefore proceeded to deal with the question on
\nthe footing that it was, by the question referred, called
\nupon to interpret article 74 of the Articles of Association
\nof Govan Bros. It is common ground between the appellant
\nand the Revenue that the provisions of the Companies Act of
\nthe former Rampur State were in terms identical with the
\nprovisions of the Indian Companies Act, 1913.
\nThe appellant contend that the directors of Govan Bros. had
\nin exercise of authority expressly conferred upon them by
\narticle 74 declared dividend in their meeting dated August
\n30, 1950 and on such declaration the dividend became a debt
\ndue to the appellant and under the Indian Income-tax Act it
\nbecame taxable in the year of assessment 1951-52, for the
\nprevious year of the appellant had ended on September 30,
\n1951. The Commissioner of Income-tax says that the
\ndirectors of Govan Bros. had paid by warrant issued on
\nDecember 28, 1950 pursuant to a resolution dated August 30,
\n1950, interim dividend and it was only on payment the
\ndividend became taxable under s. 16(2) of the Indian Income-
\ntax Act. It is said by the Commissioner that dividend final
\nor interim is taxable not in the year in which it is
\ndeclared but only in the year in which it is paid, credited
\nor distributed, or deemed to be paid, credited or
\ndistributed, and that in any event a resolution by the Board
\nof Directors to pay interim dividend does not create an
\nenforceable obligation, for it is always open to the
\ndirectors to rescind the resolution for payment of dividend
\neven if it is one in form declaring dividend.
\nThe Indian Companies Act, 1913 contains no provision for
\ndeclaration of dividend either interim or final: it does not
\nsay as to who shall declare the dividend, nor does it say
\nthat dividend may be declared in a general meeting of the
\ncompany. But s. 17(2) provides that the company may adopt
\nall or any of the regulations contained in Table A in the
\nFirst Schedule to the Companies Act as its articles of
\nassociation, and shall in any event be deemed to contain
\nregulations identical with or to the same effect, amongst
\nothers, as regulation 95 and regulation 97 contained in that
\nTable. Regulation 95 of Table A provides that the company
\nin general meeting may declare dividends, but no dividends
\nshall exeed the amount recommended by the directors, and
\nregulation 97 states that no dividends shall be paid
\notherwise than out of profits of the year or any other
\nundistributed profits. Regulation 96, which is not an
\nobligatory article, provides that the
\n582
\ndirectors may from time to time pay to the members such
\ninterim dividends as appear to the directors to be justified
\nby the profits of the company. Govan Bros. had in their
\nArticles of Association made the following provision with
\nregard to dividends:
\n“Art. 73. The Company in general meeting may
\ndeclare a dividend to be paid to the members
\naccording to their rights and interests in the
\nprofits.
\nArt. 74. When in their opinion the profits of
\nthe company permit, the directors may declare
\nan interim dividend.
\nArt. 77. No dividend shall be payable, except
\nout of the net profits arising from the
\nbusiness of the company, and no larger
\ndividends shall be declared than is
\nrecommended by the directors.”
\nBy Art. 80 it was provided that unless otherwise directed by
\nthe company in general meeting any dividends may be paid by
\ncheque or warrant sent through the post to the registered
\naddress of the member entitled to the same. In Art. 74
\nrelating to payment of interim dividend. there was a slight
\ndeparture from the regulation under Table A of the First
\nSchedule to the Companies Act. Whereas under regulation 96
\nTable A the directors are authorised to pay to the members
\ninterim dividends, by Art. 74 of the Articles of Association
\nof Govan Bros. the directors are authorised to declare
\ninterim dividend. It may be noticed that under s. 17, adop-
\ntion of an article in form identical with, or to the same
\neffect as regulation 96 of Table A, is not made obligatory.
\nThe material part of s. 16(2) of the Income-tax Act as it
\nstood before it was deleted by s. 7 of the Finance Act, 1959
\nwith effect from April 1, 1960, read as follows:
\n“For the purposes of inclusion in the total
\nincome of an assessee any dividend shall be
\ndeemed to be income of the previous year in
\nwhich it is paid, credited or distributed or
\ndeemed to have been paid, credited or
\ndistributed to him
\nThe clause in terms made dividend the income of the year in
\nwhich it was paid, credited or distributed or was deemed to
\nhave been paid, credited or distributed. In the present
\ncase dividend was paid to the appellant on December 28,
\n1950. It is not the case of the appellant that the amount
\nwas either credited in the books of account of Govan Bros.
\nto the appellant or was distributed or deemed to have been
\npaid, credited or distributed to the appellant before the
\nclose of the appellant’s year of account ending September
\n30, 1950. But Mr. Kapur contends that under the law
\ngoverning companies
\n583
\non declaration, dividend interim or final becomes due, and
\nit must be regarded for the purpose of the Income-tax Act as
\npaid to the member on the date on which it is declared.
\nThere is no doubt that a declaration of dividend by a
\ncompany in general meeting gives rise to a debt. “When a
\ncompany declares a dividend on its shares, a debt imme-
\ndiately becomes payable to each shareholder in respect of
\nhis dividend for which he can sue at law, and the Statute of
\nlimitation immediately begins to run”: In re Severn and Wye
\nand Severn Bridge Railway Company(1). But this rule applies
\nonly in case of dividend declared by the company in general
\nmeeting. A final dividend in general may be sanctioned at
\nan annual meeting when the accounts are presented to the
\nmembers. But power to pay interim dividend is usually
\nvested, by the articles of association, in the directors.
\nFor paying interim dividend a resolution of the company is
\nnot required: if the directors are authorised by the
\narticles of association they may pay such amount as they
\nthink proper, having regard to their estimate of the profits
\nmade by the company. Interim dividend is therefore paid
\npursuant to the resolution of the directors on some day
\nbetween the ordinary general meetings of the company. On
\npayment, undoubtedly interim dividend becomes the property
\nof the shareholder. But a mere resolution of the directors
\nresolving to pay a certain amount as interim dividend does
\nnot create a debt enforceable against the company, for it is
\nalways open to the directors to rescind the resolution
\nbefore payment of the dividend. In The Lagunas Nitrate
\nCompany (Limited) v. J. Henry Schroeder and Company (2) the
\ndirectors of a company passed a resolution declaring interim
\ndividend payable on a future date, and requested the
\ncompany’s bankers to set apart, out of the money of the
\ncompany in their hand, into a special account entitled
\n“interim Dividend Account”, a sum sufficient to cover the
\ndividend, pending the company’s instructions. But before
\nthe date fixed for payment, the directors resolved that
\npending certain litigation to which the company was a party,
\npayment of dividend be postponed. it was held by the Court
\nthat the directors had the right even after resolving to pay
\ninterim dividend to rescind the resolution and no
\nenforceable right arose in favour of the members of the
\ncompany by the declaration of interim dividend.
\nIn Halsbury’s Laws of England, III Edn., Vol. 6 p. 402,
\nArt. 778, it has been stated:
\n“A directors’ declaration of an interim dividend may
\nbe rescinded before payment has been made.”
\n(1) (1896) 1 Ch. 559.
\n(1)17 Times Law Reports 625.
\n584
\nTherefore a declaration by a company in general meeting
\ngives rise to an enforceable obligation, but a resolution of
\nthe Board of Directors resolving to pay interim dividend or
\neven resolving to declare interim dividend pursuant to the
\nauthority conferred upon them by the articles of association
\ngives rise to no enforceable obligation against the company,
\nbecause the resolution is always capable of being rescinded.
\nTherefore departure in the text of Art. 74 of the Articles
\nof Association of Govan Bros. from the statutory version
\nunder Table A of the power in respect of interim dividend
\nwhich may be entrusted to the directors, makes no real
\ndifference in the true character of the right arising in
\nfavour of the members of the company on execution of the
\npower. The directors by the Articles of Association are
\nentrusted with the administration of the affairs of a
\ncompany; it is open to them if so authorised to declare
\ninterim dividend. They may, but are not bound to, pay
\ninterim dividend, even if the finances of the company
\njustify such payment, even if the directors have resolved to
\npay interim dividend, they may before payment rescind the
\nresolution.
\nCounsel for the appellant does not rely upon any evidence of
\nactual payment or upon any credit given to the appellant in
\nthe books of account of the company nor upon any
\ndistribution. Even the resolution of the directors of
\nAugust 30, 1950 is not on the record, and there is no
\nevidence that it was resolved to pay the dividend on any
\ndate before it was actually paid, and the company had taken
\nany step to implement the resolution within the year of
\naccount corresponding to the assessment year 1951-52. There
\nis no statutory provision which gives rise to a fiction that
\non declaration of interim dividend, it should be deemend to
\nbe paid, credited or distributed.
\nIn support of the plea that interim dividend was taxable in
\nthe year of assessment 1951-52, the appellant relies upon
\ntwo facts only-the power vested in the directors to declare
\ninterim dividend, and the passing of a resolution by the
\ndirectors relating to interim dividend on August 30, 1950
\nfollowed by the drawing of dividend warrants dated December
\n28, 1950. But for reasons already stated a resolution of
\nthe board of directors declaring interim dividend, until it
\nis implemented by some step taken by the company, creates no
\nenforceable right in the shareholders. The judgment of the
\nBombay High Court in Commissioner of Income-tax, Bombay v.
\nLaxmidas Mulraj Khatau(1) on which counsel for the appellant
\nrelies, does not assist him either. In that case the
\ncompany declared a dividend out of its profits, and made it
\npayable a few days later. The dividend was paid on the
\n(1) 16 I.T.R. 248.
\n585
\ndate on which it was made payable by the resolution of the
\ncompany. The Income-tax Officer treated the amount received
\nby the member as dividend income for the assessment year in
\nwhich it was actually received. The High Court of Bombay in
\na reference under s. 66 observed that a;-, soon as the divi-
\ndend was declared it became the income of the assessee which
\nincome the assessee could deal with or dispose of in any
\nmanner he liked. Chagla C. J., speaking for the Court enun-
\nciated the law as follows:
\n“It is impossible to give a literal
\nconstruction to the expression “paid” used in
\nthis sub-section (sub-s. (2) of s. 16). If a
\nliteral construction were to be given, then it
\nwould amount to this that “until the dividend
\nwarrant was actually cashed and the dividend
\namount was actually realised it cannot be
\nstated that the dividend was paid to the
\nshare-
\nholder. * * * * *
\nI think the proper construction to give to
\nthat word is when the dividend is declared
\nthen a liability arises on the part of the
\ncompany to make that payment to the
\nshareholder and with regard to the shareholder
\nwhen the income represented by that dividend
\naccrues or arises to him.
\nThe mere fact that the actual payment of the
\nincome is deferred is immaterial and
\nirrelevant.”
\nBut whether dividend-interim or fixed-is income taxable in a
\nparticular year of assessment must be determined in the
\nlight of s. 16(2) of the Indian Income-tax Act. The
\nLegislature had not made dividend income taxable in the year
\nin which it becomes due: by express words of the statute, it
\nis taxable only in the year in which it is paid, credited or
\ndistributed or is deemed to be paid, credited or
\ndistributed. The Legislature has made distinct provisions
\nrelating to the year in which different heads of income
\nbecome taxable. Salary becomes taxable by s. 7 when it is
\nallowed to the employee or becomes due to him, whether it is
\nactually paid to him or not. Interest on securities under
\ns. 8 is taxable when it is received by the assessee. Under
\ns. 9 tax on property becomes payable not on any actual
\nreceipt of income from the property but on a purely national
\ncomputation in the year of account of a bona fide annual
\nvalue of the property, subject to the adjustments provided
\nin that section. Profits and gains of business, profession
\nor vocation carried on by an assessee are computed in
\naccordance with the method of accounting regularly employed
\nby the assessee, unless the Income-tax Officer being of the
\nopinion that profits or gains cannot properly be deduced
\ntherefrom, directs otherwise. Other sources of income-and
\ndividends are included in this residuary class-become
\ntaxable in the year in which they
\n586
\nare received or accrue or arise or are deemed to be
\nreceived, accrued or arise, according to the nature of the
\nparticular income. The year in which a particular class of
\nincome be comes taxable must therefore be determined, in
\nthe light of its true character, and subject to the special
\nprovision, if any, applicable thereto. The Legislature has
\nenacted an express provision making dividend income taxable
\nin the year in which it is paid, credited or distributed or
\nis to be deemed, so paid, credited or distributed. The test
\napplied by Chagla C. J., that because the dividend becomes
\ndue to the assessee who has the right to deal with or
\ndispose of the same in any manner he likes, it is taxable in
\nthe year in which it is declared, cannot be regarded as
\ncorrect. The expression “paid” in s. 16(2) it is true does
\nnot contemplate actual receipt of the dividend by the
\nmember. In general, dividend may be said to be paid within
\nthe meaning of s. 16(2) when the company discharges its
\nliability and makes the amount of dividend unconditionally
\navailable to the member entitled thereto. Chagla C. J., has
\nhimself in Purshotamdas Thakurdas v. Commissioner of Income-
\ntax, Bombay City'(2) expressed a different view. The
\nlearned Chief Justice in delivering the judgment of the
\ncourt referred to Laxmidas Mulraj Khatau’s case (3) and
\nobserved that the principle of that case applied only to
\nthose cases where in facts the dividend was paid to the
\nshareholder and not to cases where a contingent liability
\nwas undertaken and no payment was made. He observed:
\n“* * * one thing is clear from the language
\nused by the Legislature that it did not intend
\nto equate “paid” with “declared” in every
\ncase. Therefore, it is open to us to
\nconsider, notwithstanding the Khatau Mills’
\ncase, whether on the facts of this case, it
\ncould be said that dividend has been paid,
\nwhich although it may have been declared may
\nnever be payable and in fact has not been
\npaid.”
\nIf the mere declaration of dividend in general meeting of
\nthe company is not to be regarded as payment within the
\nmeaning of s. 16(2), much less can it be said that a
\nresolution declaring interim dividend-which is capable of
\nbeing rescinded by directors-operates as payment before the
\ncompany has actually parted with the amount of dividend or
\ndischarged obligation by some other act. The High Court was
\ntherefore right in recording an affirmative answer to the
\nquestion propounded for the consideration of the Court.
\nThe appeal fails and is dismissed with costs.
\nAppeal dismissed.
\n(1) 34 I.T.R. 204.
\n587<\/p>\n
<\/p>\n
<\/p>\n","protected":false},"excerpt":{"rendered":"
PETITIONER: J. DALMIA Vs. RESPONDENT: COMMISSIONER OF INCOME-TAX, NEW DELHI DATE OF JUDGMENT: 01\/04\/1964 BENCH: SHAH, J.C. BENCH: SHAH, J.C. SUBBARAO, K. SIKRI, S.M. CITATION: 1964 AIR 1866 1964 SCR (7) 579 CITATOR INFO : F 1965 SC1263 (18,20) R 1965 SC1862 (14,27) R 1970 SC 281 (5) R 1971 SC 846 (10) ACT: Company … Read more<\/a><\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"fifu_image_url":"","fifu_image_alt":""},"categories":[4928],"tags":[],"amp_enabled":true,"_links":{"self":[{"href":"https:\/\/www.kopykitab.com\/blog\/wp-json\/wp\/v2\/posts\/29810"}],"collection":[{"href":"https:\/\/www.kopykitab.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.kopykitab.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.kopykitab.com\/blog\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.kopykitab.com\/blog\/wp-json\/wp\/v2\/comments?post=29810"}],"version-history":[{"count":1,"href":"https:\/\/www.kopykitab.com\/blog\/wp-json\/wp\/v2\/posts\/29810\/revisions"}],"predecessor-version":[{"id":115000,"href":"https:\/\/www.kopykitab.com\/blog\/wp-json\/wp\/v2\/posts\/29810\/revisions\/115000"}],"wp:attachment":[{"href":"https:\/\/www.kopykitab.com\/blog\/wp-json\/wp\/v2\/media?parent=29810"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.kopykitab.com\/blog\/wp-json\/wp\/v2\/categories?post=29810"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.kopykitab.com\/blog\/wp-json\/wp\/v2\/tags?post=29810"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}