J. Dalmia Vs. Commissioner of
Income-Tax, New Delhi [1964] INSC 106 (1 April 1964)
01/04/1964 SHAH, J.C.
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 Law-Resolution of Board of
Directors-interim dividend-If creates a debt enforceable against the company Income
Tax-Payable on the dividend in the year in which it was actually paid,
credited, or distributed or deemed to be paid-"Paid"-Meaning
of-Indian Companies Act, 1913 (7 of -1913), s. 17(2), Art. 95 Sch. I-Income-tax
Act, 1922 (11 of 1922), s. 16 (2).
HEADNOTE:
The appellant held shares in a company the
Board of Directors of which by a resolution dated August 30, 1950 declared
interim dividends. The appellant received a dividend -warrant dated December
28, 1950 for a certain amount being the interim dividend in respect of its
share holdings in the company. The appellant's year of accounting had ended on
September 30, 1950. The revenue authorities brought to tax the amount so
received with other income of the appellant in the assessment year 1952-53
after rejecting the objection of the appellant that it represented income for
the assessment year 1951-52. In a reference made under s. 66(1) of the Indian
Income-tax Act, 1922, the High Court agreed with the Revenue authority that the
dividend was in view of Art. 95 of the First Schedule to Indian Companies Act,
1913, liable to be included in the assessment year 1952-53.
Held: A declaration of dividend by a company
in a general meeting gives rise to a debt.
In re Severn and Wile and Severn Bridge
Railway Co. (1896) 1 Ch. 559, referred to.
But a mere resolution of the Directors
resolving to pay a certain amount as interim dividend does not create a debt
enforceable against the company for it is always open to the Directors to
rescind the resolution before payment of the dividend.
The Lagunas Nitrate Company (Ltd.) v. J.
Henry Schroeder and Company, 17 Times Law Reports 625, referred to.
Commissioner of Income-tax, Bombay v.
Laxmidas Mutraj Khatau, 16 I.T.R. 248, distinguished.
(ii) The test applied by Chagla C. J. (in
C.I.T., Bombay v. Laxmidas Mulraj Khatau, 16 I.T.R. 248) that because the
,dividend becomes due to the assessee who has the right to deal with or dispose
of the same in any manner he likes, it is taxable in the year in which it is
declared cannot be regarded as correct.
(iii) Dividend may he said to be paid within
the meaning of s. 16(2) of the Indian Income-tax Act, 1922 when the company
discharges its liability and makes the amount thereof unconditionally available
to the member entitled thereto.
Purshottamdas Thakurdas v. C.I.T., Bombay, 34
I.T.R, 204, referred to.
I P(1)) 1 S.C.I17 (a) 580 (iv) The
declaration of interim dividend capable of being rescinded by the directors
does not operate as a payment under s. 16(2) of the Income-tax Act before the
company has parted 'with the amount of dividend or discharged its obligation by
some other act.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 505 of 1963.
Appeal from the judgment and order dated
March 6, 1961 of the Punjab High Court (Circuit Bench) at Delhi in I.T.R. No. 16
of 1959.
S. K. Kapur and B. P. Maheshwari, for the
appellant.
C. K. Daphtary, Attorney-General, K. N.
Rajagopal' Sastri and R. N. Sachthey, for the respondent.
April 1, 1964. The judgment of the Court was
delivered by.
SHAH, J.-The appellant which is a Hindu
undivided family was the registered holder of 1,500 shares of M/s Govan Bros.
(Rampur) Ltd. in the year of account October
1, 1950 to September 30, 1951. Pursuant to a resolution passed by the board of
directors of M/s Govan Bros. (Rampur) Ltd.hereinafter called 'Govan Bros.'-at a
meeting held on August 30, 1950, the appellant received a dividend warrant
dated December 28, 1950 for Rs. 4,12,500/being interim dividend in respect of
its shareholding in Govan Bros. This amount was brought to tax with the other
income of the appellant in the assessment year 1952-53 by the Revenue
authorities. after rejecting the objection of the appellant that it represented
income for the assessment year 1951-52.
At the instance of the appellant the
Appellate Tribunal drew up a statement of the case and referred the question
set out herein below to the High Court of Punjab under s. 66(1) of the Indian
Income-tax Act:
"Whether on a true interpretation of
Article 95 of the First Schedule to the Indian Companies Act, 1913, the
dividend of Rs.
4,12,500/was liable to be included in the assessment
year 1952-53." The High Court recorded an answer to the question in the
affirmative. Against the order of the High Court, this appeal is preferred by
the appellant with certificate granted by the High Court.
Even though the question was framed a;-, if
article 95 of the First Schedule to the Indian Companies Act, 1913, applies to
Govan Bros, it is common ground that the company 581 was registered under the
Companies Act of the former Rampur State, and it had adopted special Articles
of Association in supersession of Table A of the Companies Act. The relevant
articles of Govan Bros. dealing with declaration or payment of final and
interim dividends were articles 73 and 74. The High Court therefore proceeded
to deal with the question on the footing that it was, by the question referred,
called upon to interpret article 74 of the Articles of Association of Govan
Bros. It is common ground between the appellant and the Revenue that the
provisions of the Companies Act of the former Rampur State were in terms
identical with the provisions of the Indian Companies Act, 1913.
The appellant contend that the directors of
Govan Bros. had in exercise of authority expressly conferred upon them by
article 74 declared dividend in their meeting dated August 30, 1950 and on such
declaration the dividend became a debt due to the appellant and under the
Indian Income-tax Act it became taxable in the year of assessment 1951-52, for
the previous year of the appellant had ended on September 30, 1951. The
Commissioner of Income-tax says that the directors of Govan Bros. had paid by
warrant issued on December 28, 1950 pursuant to a resolution dated August 30,
1950, interim dividend and it was only on payment the dividend became taxable
under s. 16(2) of the Indian Income tax Act. It is said by the Commissioner
that dividend final or interim is taxable not in the year in which it is
declared but only in the year in which it is paid, credited or distributed, or
deemed to be paid, credited or distributed, and that in any event a resolution
by the Board of Directors to pay interim dividend does not create an
enforceable obligation, for it is always open to the directors to rescind the
resolution for payment of dividend even if it is one in form declaring
dividend.
The Indian Companies Act, 1913 contains no
provision for declaration of dividend either interim or final: it does not say
as to who shall declare the dividend, nor does it say that dividend may be
declared in a general meeting of the company. But s. 17(2) provides that the
company may adopt all or any of the regulations contained in Table A in the
First Schedule to the Companies Act as its articles of association, and shall
in any event be deemed to contain regulations identical with or to the same
effect, amongst others, as regulation 95 and regulation 97 contained in that
Table. Regulation 95 of Table A provides that the company in general meeting
may declare dividends, but no dividends shall exceeded the amount recommended
by the directors, and regulation 97 states that no dividends shall be paid
otherwise than out of profits of the year or any other undistributed profits.
Regulation 96, which is not an obligatory article, provides that the 582
directors may from time to time pay to the members such interim dividends as appear
to the directors to be justified by the profits of the company. Govan Bros. had
in their Articles of Association made the following provision with regard to
dividends:
"Art. 73. The Company in general meeting
may declare a dividend to be paid to the members according to their rights and
interests in the profits.
Art. 74. When in their opinion the profits of
the company permit, the directors may declare an interim dividend.
Art. 77. No dividend shall be payable, except
out of the net profits arising from the business of the company, and no larger
dividends shall be declared than is recommended by the directors." By Art.
80 it was provided that unless otherwise directed by the company in general
meeting any dividends may be paid by cheque or warrant sent through the post to
the registered address of the member entitled to the same. In Art. 74 relating
to payment of interim dividend. there was a slight departure from the
regulation under Table A of the First Schedule to the Companies Act. Whereas
under regulation 96 Table A the directors are authorised to pay to the members
interim dividends, by Art. 74 of the Articles of Association of Govan Bros. the
directors are authorised to declare interim dividend. It may be noticed that
under s. 17, adoption of an article in form identical with, or to the same
effect as regulation 96 of Table A, is not made obligatory.
The material part of s. 16(2) of the
Income-tax Act as it stood before it was deleted by s. 7 of the Finance Act,
1959 with effect from April 1, 1960, read as follows:
"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 The clause in terms made dividend the
income of the year in which it was paid, credited or distributed or was deemed
to have been paid, credited or distributed. In the present case dividend was
paid to the appellant on December 28, 1950. It is not the case of the appellant
that the amount was either credited in the books of account of Govan Bros.
to the appellant or was distributed or deemed
to have been paid, credited or distributed to the appellant before the close of
the appellant's year of account ending September 30, 1950. But Mr. Kapur
contends that under the law governing companies 583 on declaration, dividend
interim or final becomes due, and it must be regarded for the purpose of the
Income-tax Act as paid to the member on the date on which it is declared.
There is no doubt that a declaration of
dividend by a company in general meeting gives rise to a debt. "When a
company declares a dividend on its shares, a debt immediately becomes payable
to each shareholder in respect of his dividend for which he can sue at law, and
the Statute of limitation immediately begins to run": In re Severn and We
and Severn Bridge Railway Company(1). But this rule applies only in case of
dividend declared by the company in general meeting. A final dividend in general
may be sanctioned at an annual meeting when the accounts are presented to the
members. But power to pay interim dividend is usually vested, by the articles
of association, in the directors.
For paying interim dividend a resolution of
the company is not required: if the directors are authorised by the articles of
association they may pay such amount as they think proper, having regard to
their estimate of the profits made by the company. Interim dividend is
therefore paid pursuant to the resolution of the directors on some day between
the ordinary general meetings of the company. On payment, undoubtedly interim
dividend becomes the property of the shareholder. But a mere resolution of the
directors resolving to pay a certain amount as interim dividend does not create
a debt enforceable against the company, for it is always open to the directors
to rescind the resolution before payment of the dividend. In The Lagunas
Nitrate Company (Limited) v. J. Henry Schroeder and Company (2) the directors
of a company passed a resolution declaring interim dividend payable on a future
date, and requested the company's bankers to set apart, out of the money of the
company in their hand, into a special account entitled "interim Dividend
Account", a sum sufficient to cover the dividend, pending the company's
instructions. But before the date fixed for payment, the directors resolved
that pending certain litigation to which the company was a party, payment of
dividend be postponed. it was held by the Court that the directors had the
right even after resolving to pay interim dividend to rescind the resolution
and no enforceable right arose in favour of the members of the company by the
declaration of interim dividend.
In Halsbury's Laws of England, III Edn., Vol.
6 p. 402, Art. 778, it has been stated:
"A directors' declaration of an interim
dividend may be rescinded before payment has been made." (1) (1896) 1 Ch.
559.
(1)17 Times Law Reports 625.
584 Therefore a declaration by a company in
general meeting gives rise to an enforceable obligation, but a resolution of
the Board of Directors resolving to pay interim dividend or even resolving to
declare interim dividend pursuant to the authority conferred upon them by the
articles of association gives rise to no enforceable obligation against the
company, because the resolution is always capable of being rescinded.
Therefore departure in the text of Art. 74 of
the Articles of Association of Govan Bros. from the statutory version under
Table A of the power in respect of interim dividend which may be entrusted to
the directors, makes no real difference in the true character of the right
arising in favour of the members of the company on execution of the power. The
directors by the Articles of Association are entrusted with the administration
of the affairs of a company; it is open to them if so authorised to declare
interim dividend. They may, but are not bound to, pay interim dividend, even if
the finances of the company justify such payment, even if the directors have
resolved to pay interim dividend, they may before payment rescind the
resolution.
Counsel for the appellant does not rely upon
any evidence of actual payment or upon any credit given to the appellant in the
books of account of the company nor upon any distribution. Even the resolution
of the directors of August 30, 1950 is not on the record, and there is no
evidence that it was resolved to pay the dividend on any date before it was
actually paid, and the company had taken any step to implement the resolution
within the year of account corresponding to the assessment year 1951-52. There
is no statutory provision which gives rise to a fiction that on declaration of
interim dividend, it should be deemend to be paid, credited or distributed.
In support of the plea that interim dividend
was taxable in the year of assessment 1951-52, the appellant relies upon two
facts only-the power vested in the directors to declare interim dividend, and
the passing of a resolution by the directors relating to interim dividend on
August 30, 1950 followed by the drawing of dividend warrants dated December 28,
1950. But for reasons already stated a resolution of the board of directors
declaring interim dividend, until it is implemented by some step taken by the
company, creates no enforceable right in the shareholders. The judgment of the
Bombay High Court in Commissioner of Income-tax, Bombay v. Laxmidas Mulraj
Khatau(1) on which counsel for the appellant relies, does not assist him
either. In that case the company declared a dividend out of its profits, and
made it payable a few days later. The dividend was paid on the (1) 16 I.T.R.
248.
585 date on which it was made payable by the
resolution of the company. The Income-tax Officer treated the amount received
by the member as dividend income for the assessment year in which it was
actually received. The High Court of Bombay in a reference under s. 66 observed
that a;-, soon as the dividend was declared it became the income of the
assessee which income the assessee could deal with or dispose of in any manner
he liked. Chagla C. J., speaking for the Court enunciated the law as follows:
"It is impossible to give a literal
construction to the expression "paid" used in this sub-section
(sub-s. (2) of s. 16). If a literal construction were to be given, then it
would amount to this that "until the dividend warrant was actually cashed
and the dividend amount was actually realised it cannot be stated that the
dividend was paid to the shareholder. * * * * * I think the proper construction
to give to that word is when the dividend is declared then a liability arises
on the part of the company to make that payment to the shareholder and with
regard to the shareholder when the income represented by that dividend accrues
or arises to him.
The mere fact that the actual payment of the
income is deferred is immaterial and irrelevant." But whether
dividend-interim or fixed-is income taxable in a particular year of assessment
must be determined in the light of s. 16(2) of the Indian Income-tax Act. The
Legislature had not made dividend income taxable in the year in which it
becomes due: by express words of the statute, it is taxable only in the year in
which it is paid, credited or distributed or is deemed to be paid, credited or
distributed. The Legislature has made distinct provisions relating to the year
in which different heads of income become taxable. Salary becomes taxable by s.
7 when it is allowed to the employee or becomes due to him, whether it is
actually paid to him or not. Interest on securities under s. 8 is taxable when
it is received by the assessee. Under s. 9 tax on property becomes payable not
on any actual receipt of income from the property but on a purely national
computation in the year of account of a bona fide annual value of the property,
subject to the adjustments provided in that section. Profits and gains of
business, profession or vocation carried on by an assessee are computed in
accordance with the method of accounting regularly employed by the assessee,
unless the Income-tax Officer being of the opinion that profits or gains cannot
properly be deduced there from, directs otherwise. Other sources of income-and
dividends are included in this residuary class-become taxable in the year in
which they 586 are received or accrue or arise or are deemed to be received,
accrued or arise, according to the nature of the particular income. The year in
which a particular class of income becomes taxable must therefore be
determined, in the light of its true character, and subject to the special provision,
if any, applicable thereto. The Legislature has enacted an express provision
making dividend income taxable in the year in which it is paid, credited or
distributed or is to be deemed, so paid, credited or distributed. The test
applied by Chagla C. J., that because the dividend becomes due to the assessee
who has the right to deal with or dispose of the same in any manner he likes,
it is taxable in the year in which it is declared, cannot be regarded as
correct. The expression "paid" in s. 16(2) it is true does not
contemplate actual receipt of the dividend by the member. In general, dividend
may be said to be paid within the meaning of s. 16(2) when the company
discharges its liability and makes the amount of dividend unconditionally
available to the member entitled thereto. Chagla C. J., has himself in
Purshotamdas Thakurdas v. Commissioner of Income tax, Bombay City'(2) expressed
a different view. The learned Chief Justice in delivering the judgment of the
court referred to Laxmidas Mulraj Khatau's case (3) and observed that the
principle of that case applied only to those cases where in facts the dividend
was paid to the shareholder and not to cases where a contingent liability was
undertaken and no payment was made. He observed:
"* * * one thing is clear from the
language used by the Legislature that it did not intend to equate
"paid" with "declared" in every case. Therefore, it is open
to us to consider, notwithstanding the Khatau Mills' case, whether on the facts
of this case, it could be said that dividend has been paid, which although it
may have been declared may never be payable and in fact has not been
paid." If the mere declaration of dividend in general meeting of the
company is not to be regarded as payment within the meaning of s. 16(2), much
less can it be said that a resolution declaring interim dividend-which is
capable of being rescinded by directors-operates as payment before the company
has actually parted with the amount of dividend or discharged obligation by
some other act. The High Court was therefore right in recording an affirmative
answer to the question propounded for the consideration of the Court.
The appeal fails and is dismissed with costs.
Appeal dismissed.
(1) 34 I.T.R. 204.
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