Kishinchand Chellaram Vs. Commissioner
of Income-Tax, Central Bombay  INSC 157 (19 April 1962)
19/04/1962 SHAH, J.C.
CITATION: 1963 AIR 390 1963 SCR (2) 268
D 1967 SC 767 (3) R 1972 SC 397 (5)
Income TaxDividend declared by company
inadvertently without providing for taxation--Can the character of dividend be
altered to a loan by a subsequent resolutionIndian Income-Tax Act, 1922 (11 of
1922), 8. 16 (2).
Chellsons Ltd., a private Ltd. Company,
declared dividends without taking into account the company's liability for
taxation, including Extra Profits Tax. The dividends so declared were credited
in the books of the company to the accounts of each of the share-holders. Share-holders
in their return for the relevant assessment year included the amounts credited
to them in the company's books of account.
Payment of dividends otherwise than out of
profits of the year, or other undistributed profits was at the material time
prohibited, by Art. 97 of Table A of the Indian Companies Act, 1913, as amended
by Act XXXII of 1936 read with s. 17 (2) of the Act; therefore such payment
could not be regarded as lawful, the company having failed to provide for
payment of tax before declaring dividend. On discovering its mistake at an
Extra Ordinary General Meeting another revolution purporting to reverse the
earlier resolutions declaring the dividends was moved, and the shareholders
unanimously resolved inter alia that all the shareholders having been fully
apprised of the bonafide mistake, the dividends inadvertently paid be
considered as loans to such individual shareholders. Before the Income Tax
Officer the assessee who was a shareholder did not file a revised return, nor
did he claim that the amount received by him was not liable to tax. But on
appeal before the Appellate Assistant Commissioner the assessee contended that
amount credited by the company to his account was not in view of the subsequent
resolution, liable to be taxed as dividend income. The plea was rejected.
Before the Tribunal the assessee contended that the dividends were declared out
of capital and such declaration was invalid under the Companies Act.
The tribunal held that what was paid and
received as dividend could not by a subsequent resolution of the company be
treated as paid otherwise than as dividend. The High 269 Court agreed with the
Tribunal observing that assessment for each year is self-contained and
subsequent events cannot justify modification of the assessment.
The assessee came up in appeal to the Supreme
Held, that if the directors of the company
have deliberately paid or negligently been instrumental in paying dividends out
of capital they may have, in an action by the company or if the company is
being wound up at the instance of the liquidator, to compensate the company for
loss occasioned by their wrongful or negligent conduct.
In Matter of The Union Bank, Allahabad Ltd.
(1925) I.L. R.
47 All. 669 approved.
Held, further, in ascertaining whether
liability to pay income tax on dividend arose, a resolution of the company
whereby payments made to the shareholders as dividends are to be treated as
loans cannot retrospectively alter the character of the payment and thereby
exempt it from liability which has already attached thereto.
Held, also, the payment made as dividend by a
company to its share holders does not lose the character, of dividend merely
because it is paid out of capital. Under the Income Tax Act, liability to pay
tax attaches as soon as dividend is paid, credited or distributed or is
declared. The Act does not contemplate an enquiry whether the dividend is
properly paid, credited or distributed before liability to pay tax attaches
CIVIL APPELLATE JURISDICTION: Nos. 462 to 465
Appeals from the judgment and order dated
September 26,1955, of the Bombay High Court I. T. R. No. 22 of 1955.
K. N. Rajagopal Sastri, J. K. Hiranandi and
N.H. Hingorani for the appellants.
N. D. Karkhanis and D. Gupta for the
1962. April 19. The Judgment of the Court was
delivered by 270 SHAH, J.-This is a group of appeals against orders passed by
the High Court of Bombay in Income Tax Reference under s. 66(1) of the Indian
Income Tax Act.
Chellsons Ltd. a Private Company was
incorporated in April 1941. The shareholders of the company at the material
time were Kishinchand Chellaram holding 6 shares and Shewakram Kishinchand,
Lokumal Kishinchand and Murli Tabilram each holding three shares. Kishinchand,
Shewakram and Lokumal were directors of the company. At a General meeting of
the shareholders of the company held on July 10, 1943, it was resolved to
declare dividend at "60 per cent on the shares" of the company and
for the purpose of that of declaration the profits of the year 1941-43 were
included in the profit of the year 1942-43. Pursuant to this resolution, Rs. 46,000/were
credited in the books of the company to the account of Kishinchand Chellaram on
March 31, 1944 and Rs. 23,000/were credited to each of the other three
shareholders. Another meeting of the shareholders was held on July 15, 1944,
and it was resolved to declare dividend at "60 per cent on the
shares" out of the profit of the company for 1943-44. Pursuant to this
resolution, on September 29, 1944, Rs. 30,000/were credited in the company's
books of account to Kishinchand and Rs. 15 000/were credited to the accounts of
each of the other there shareholders.
In their respective returns for the
assessment year 1945-46, Kishinchand, Showakram, Lokumal and Murli-who will
hereinafter be collectively called the assessees-included the amounts credited
to them in the company's books of account as dividends for the three years
1941-42 to 1943-44.
On December 4,1947, at an Extraordinary
General Meeting another resolution purporting to' reverse the earlier
resolutions dated July 10, 1943 and July 271 15, 1944, was passed by the
company. The resolution read as follows:"The notice dated 25th November,
1947 calling the Extraordinary General Body Meeting for today, was placed on
" Whereas the sum of Rs. 1,90,000 paid
to the shareholders during the year 1944-45 as per details given below viz1941-42
1942-43 1943-44 Total Mr. inch and Chellaram 10,000 36,000 30,000 76,000 Mr.
Shewakram Kishinchand 5,000 18,000 15,000 38,000 Mr. Lokumal Kishinchand 5,000
18,000 15,000 38,000 Mr. Murli Tahilram 5,000 18,000 15,000 38,000 Total 25,000
90,000 75,000 190,000 was sanctioned by the General Body inadvertently without
taking into consideration the Company's liability for taxation, including E.
P. T. and all the shareholders having been
fully apprised of the bona fide mistake it is hereby unanimously resolved that
such dividend inadvertently paid be considered as loan to such individual
shareholders' and be paid back to the Company forthwith, and the consideration
of any dividend to the shareholder be deferred to the next Annual General Meeting.
The adjustment in this regard will not 272 be made in the books of the Company
as on 6th April, 1947." Even though this resolution was passed, and the
proceedings for assessment before the Income Tax Officer were not disposed of
the assessees did not file revised returns excluding the amounts credited as
dividend, nor did they claim before the Income Tax Officer that those amounts
not being income were not liable to tax.
By his order dated January 1, 1950, the
Income Tax Officer brought the income returned by the assessees including the
amounts credited to them as dividends, for the three years to tax. In appeals
to the Appellate. Assistant Commissioner, the assessees contended that the
amounts credited by the Company to their accounts in respect of the years
1941-42, 1942-43 and 1943-44 were not, in view of the subsequent resolution,
liable to be taxed as dividend income. 'The Appellate Assistant Commissioner
rejected this plea. The assessees then appealed to the Appellate Tribunal and
contended that the dividends for the three years in question were declared out
of capital and such declaration of dividend being under the Indian,Companies
Act invalid, in the assessment the amounts, credited to their accounts as
dividend should be excluded. The Income Tax Appellate Tribunal held that the
dividends in respect of the years 1941-42 and 1942-43, having been received
before the year of account relevant to the year of assessment 1945-46, were not
liable to be taxed in that year. But the Tribunal confirmed the orders of
assessment as to the dividend for the year 1943-44, because, in their view, the
resolution declaring dividend could not be reversed by a resolution at a
subsequent General Meeting after the dividends had been paid. At the instance
of 273 the assessees the Appellate Tribunal referred in each of the four cases
the following two questions:(1) Whether the shareholders of the company at the
meeting held on December 4, 1947 could reverse the resolutions passed on July
10, 1943 and July 15, 1944 ? (2) Whether the sum of Rs............... received
by the assessee............... as dividend in the account year 1944-45 relevant
for the assessment year 1945-46 has been lawfully taxed in the assessment year
1945-46? If not, could only the dividends that could have been paid out of the
profits or a part thereof be taxed in the assessment year 194546 ? (In each set
of questions the appropriate amount received and the name of the assessee was
incorporated in the second question).
The Tribunal observed in the order of
reference that the Income Tax Department challenged the correctness of the
claim made by the shareholders that dividend was paid without making provision
for payment of tax, but they did not desire to go into accounts to ascertain
whether provision for tax was made, as "the parties at the time of the
hearing of the appeals proceeded on the footing that no such provision was
made. Even if provision was made, it makes no difference in so far as the
Department is concerned. The question is whether any divident has been declared
out of capital and that question will have to be examined at the time of
passing the order under Section 66 (5) of the Act, in view of question No.
2." The High Court declined to answer the first question because in their
view it was unnecessary, and 'answered the first part of the second 274
question in the affirmative, and hold that the second part did not on that view
arise for decision. Against the order of the High Court these four appeals have
been preferred by the assessees.
The only question material to these appeals
which was argued by the assessees before the Tribunal was whether it was competent
to the company by a subsequent resolution to reverse an earlier resolution
declaring the dividend. The Tribunal held that the earlier resolution could not
be reversed by a subsequent resolution, and therefore what was paid and
received as dividend could not by a subsequent resolution of the company be
treated as paid otherwise than as dividend. The High Court held that the
assessments were properly made by the Income Tax Officer. They observed that
the assessment of an assessee for each year is selfcontained and subsequent
events cannot justify modification of the assessment.
Section 16(2) provided (in so far as it is
material) that "for the purposes of inclusion in the total income of an
assessee any dividend shall be deemed to be income of the previous year in
which it is paid, credited or distributed or deemed to have been paid, credited
or distributed to him.. x x x". It is common ground that on July 15, 1944
dividend was declared by a resolution of the company and the amounts payable to
the assessees were, in fact, credited on September 29, 1944, in the accounts
maintained by the company, to each of the shareholders as dividend. The amounts
were therefore declared as dividend, treated as dividend and received by the
assessees as dividend. The assessees included the dividends so credited to
their accounts in the returns. It may be assumed that the company failed to
provide for payment of tax before declaring dividend and that after providing
for payment of tax the net profits of company may not have 275 been sufficient
to justify declaration of dividend at 60% of the value of the shares. On that
assumption it may be inferred that the dividend or a part thereof was in truth
paid out of the capital of the company. Payment of dividend otherwise than out
of profits of the year, or other undistributed profits was at the material time
prohibited by Art. 97 of Table Aof the Indian Companies Act, 1913 as amended by
Act. XXXII of 1936 read with s. 17(2) of the Act; and therefore such payment
may be regarded as unlawful.
If the Directors of a company have
deliberately paid or negligently been instrumental in paying dividend out of
capital they may have, in an action by the company-or if the company is being
wound up at the instance of the Liquidatorto compensate the company for loss
occasioned by their wrongful or negligent conduct. (In' the matter of The Union
Bank Allahabad Ltd. (1). In this case we are not concerned with the validity of
the distribution of dividend, 'or the liability of the directors arising out of
improper distribution of dividend. We are concerned with the true character of
the payment made on September 29, 1944, to the assessees. If dividend is
declared and the amount is credited or paid to the share-holders as dividend
can the character of the credit or payment be altered by a subsequent
resolution so as to alter the incidence of tax which attaches to that amount?
By virtue of s. 16(2) the liability to pay tax attaches as soon as dividend is
paid, credited or distributed or deemed to have been paid, credited or
distributed to the shareholders and the Income Tax Act contains no provision
for altering the incidence of liability to pay tax on the dividend, merely
because it is found that in declaring dividend and paying it the company violated
a prohibition (1) (1925) I.L.R. 47 All. 669.
276 relating to payment of dividend in the
Indian Companies Act.
It is not necessary to consider in this case
whether the shareholders may be compelled by the company to refund the amount
improperly paid as dividend out of capital. Even if the shareholders agree to
refund the amounts received by them as dividend the original character of the
receipt as dividend is not thereby altered. In ascertaining' whether liability
to pay Income-tax on dividend arose, a resolution of the company whereby
payments made to the shareholders as dividend are to be treated as loans cannot
retrospectively alter the character of the payment and thereby exempt it from
liability which has already attached thereto.
Before this Court two contentions were raised
by counsel for the assesses : (1) that on the amount received by each of the
asseseees tax was not eligible because it was not dividend at all, and (2) that
what was declared and paid as dividend ceased to be such by virtue of the
subsequent resolution. The first plea was not raised before the Tribunal, and
on the question as framed it did not arise for decision on a reference under s.
66 of the Indian Income Tax Act. The jurisdiction of the High Court under s. 66
being advisory, they were concerned to give their opinion on questions which
fairly arose out of the order of the Tribunal, and were in fact raised and
referred. The question whether the payment made by the Company was not in the
nature of dividend not having fairly arisen out of the order of the Tribunal,
it cannot be raised in this Court as it could not in the High Court. In any
event, we are of the opinion that payment made as dividend by a company to its
shareholders does not lose that character merely because it is paid out of
capital. Under the Income Tax Act, liability to pay tax attaches as soon as
dividend is paid, credited or distributed or is so 277 declared. The Act does
not contemplate an enquiry whether the dividend is properly paid credited or
distributed before liability to pay Tax attaches thereto. The answer to the
second contention for reasons already set out by us must be in the negative.
The appeals therefore fail and are dismissed.
In the circumstances of the case there will be no order as to costs.