Commissioner of Income Tax, Bombay Vs.
West Coast Paper Mills Ltd. [1971] INSC 252 (17 September 1971)
GROVER, A.N.
GROVER, A.N.
HEGDE, K.S.
CITATION: 1971 AIR 2406 1972 SCR (1) 780
ACT:
Finance Act, 1959 as amended by Finance Act
1960-Section 19(4)-Scope and effect-Whether a company declaring dividends for
previous years out of the profits of the accounting year in question, is exempt
from deducting tax at source under the section.
HEADNOTE:
The assessee, a public limited company paid
dividends for 3 earlier years to the preference share holders out of the
profits made in the accounting year ended on June 30, 1960.
The assessee did not deduct any tax at source
from the dividends already declared as paid. The assessee contended that the
dividends were declared in respect of previous years relevant to the assessment
year 1959-60 and the earlier years and under s. 19(4) of 1959-Act, the company
was exempt from deducting tax at source for those years.
The I.T.O. and the appellate authorities held
against the assessee but on a reference to the High Court, the High Court held
in favour of the assessee.
In appeal to this Court, it was contended by
the Revenue that under the provisions of the company law, dividend can be
declared and paid only out of profits of a particular year, that since there
was no profit during the three years in question it could not be said that the
dividend declared in 1959-60 was in respect of the previous 3 years in
question. In the eye of law, the dividend which were declared and paid in 1959-60
could only be dividend in respect of that year only, and could not be dividend
in respect of earlier years in which the preference share holders were entitled
to the same but were not paid.
Dismissing the appeal,
HELD : (1) The word 'dividend' as understood
in company law is not applicable in the present case because, a good part of s.
19(4) would become otiose if the word 'dividend' is given its technical meaning
in accordance with its signification in Company Law. [785 A-B] (ii)The language
of s. 19(4) is quite clear and unambiguous. In plain language, the legislature
had enacted that any dividend declared or payable before June 30, 1960 in
respect of any previous year etc. would be exempt from the operation of the
amendments contained in the sections by which the obligation was imposed on the
company to deduct the tax at source. The language used in s. 19(4) applied to
payments, the right to receive which had been acquired in the previous years on
account of the dividend of the preference shares and the said expression is
wide enough to include payments relating to the un-discharged liabilities in
respect of those previous years. [784 H, 785 B-C]
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 13144 of 1971 and 139 of 1969.
Appeals by special leave/certificate from the
judgment and order dated October 7, 9, 1967 of the Bombay High Court in
Income-tax Reference No. 105 of 1962.
781 S.Mitra, K. S. Suri, R. N. Sachthey, and
B. D. Sharma, for the appellant (in both the appeals).
M.C. Chagla, R. Panjwani, J. B. Dadachanji,
0. C. Mathur and Ravinder Narain, for the respondent (in both the appeals).
The Judgment of 'the Court was delivered by
Grover, J. Civil appeal No. 1344 of 1971 is by Special Leave from a Judgment of
the Bombay High Court in an incometax reference. The other appeal was brought
by certificate against the same Judgment. But the certificate being defective
for wants of reasons, the same had to be revoked.
The assessee is a public limited company
which was incorpor- ated on March 25, 1955. Part of its paid up capital
consisted of 60,,OOO six per cent (free of tax) cumulative preference shares of
Rs. 100/- each. As the company did not make profits out of which it could
distribute dividend no dividend was declared on the preference shares during
the years of account ended on June 30, 1956, June 30, 1957 and June 30, 1958.
During the account year ended on June 30, 1960, the company made profits. On
February 9, 1960 the Board of Directors of the company passed the following
resolution :- "That dividends on 60,000 Cumulative Preference shares of
Rs. 100/ each in respect of the years ended 30th June, 1956, and 1957 remaining
in arrears be paid at the rate of 6 % (free of tax) out of the profits of the
current year ending, 30th June, 1960." The dividends were distributed in
accordance with the resolution of April 25, 1960. On May 30, 1960. the Board of
Directors passed a similar resolution for distributing the dividends on the
preference shares in respect of the year ended on June 30, 1958. These dividends
were actually paid from June 24, 1960 onwards. Adjustments with regard to these
dividends were made in the balance-sheet prepared as at June 30, 1960.
The Finance Act, 1959 (Act 12 of 1959) made
certain changes in the scheme of taxation of a incorporated company and of its
share-holders. The main changes were (i) reduction in the rate of tax levied on
the company, (ii) taking away the credit given till then to the share-holder
for income-tax paid by the company on the dividends declared and (iii) imposition
of an obligation on the company to deduct tax at source on dividends declared
by the company which was to be remitted to the Government. The duty to deduct
tax was imposed by Section 18 (3D) and (3E) of the Income-tax Act, 1922
(hereinafter called the Act) which were introduced by Section 9 of Act 12 of
1959 which 782 was brought into force with effect from April 1, 1959.
However, an exemption was provided from the
operation of the provisions of the amended sections under certain circumstances
by Section 19(4) of Act 12 of 1959. That provision as amended retrospectively
by the Finance Act, 1960 was in the following terms:- "Notwithstanding
anything contained in sub- section (2) or sub-section (3), in relation to
dividend declared or payable by a company on or before the 30th day of June,
1960, in respect of any previous year relevant to any assessment year prior to
the assessment year 1960-61, the Income-tax Act shall have effect as if the
amendments contained in section 5, section 7, section 9, section 14, section
15, section 16, and section 18 had not been made." The assessee did not
deduct any tax from the dividends declared on February 9, 1960 and May 30, 1960
and paid from April 24, 1960 and June 24, 1960 onwards respectively. In the
course of the assessment for 1960-61 made on the company the Income tax Officer
called upon the assessee to show cause why it should not be treated as an
assessee in default under section 18 ( 7 ) of the Act in respect of the taxes
which according to him should have been deducted and paid but which were not
paid. The assessee submitted that the dividends were declared in respect of
previous years relevant to the assessment year 1959-60 and the earlier years
and that under section 19(4) of Act 12 of 1959 there was no obligation to
deduct tax from dividends declared in respect of those years. This objection
based on section 19(4) of Act 12 of 1959 was over-ruled by the Income-tax
Officer. He held that the assessee was liable under section 18 (7) of the Act
for payment of tax amounting to Rs.
2,32,748-70 P. The assessee appealed to the
Appellate Assistant Commissioner but that appeal failed. There was a further
appeal to the Appellate Tribunal. The Tribunal upheld the orders of the
departmental authorities. There- upon the assessee moved the Tribunal for
submitting, a Statement of the case and referring the following question of law
to the High Court :
"Whether in view of section 19 (4) of
the Finance Act, 1959 (as amended by the Finance Act, 1960) there was any
obligation to deduct tax under section 18 (3D) and (3E) from the dividends
declared on February 9, 1960 and May 30, 1960 so as to justify the order under
section 18(7) of the Income-tax Act, 1922, on failure to do so ?" the High
Court answered the question in favour of the assessee and against the Revenue.
783 The, whole controversy centres on the
true interpretation of section 19(4) of Act 12 of 1959 as amended by the
Finance Act of 1960. The assessee claimed that that section was enacted to give
exemptions with regard to such dividends which were in respect of the earlier
years and which were declared between the dates April 1, 1959 when the new
obligation of deducting a tax at the source was imposed and June 30, 1960.
According to the Tribunal,. the dividends declared on February 9, 1960 and May
30, 1960 were dividends in respect of the year 1959-60 and were in respect of
the previous year relevant to the assessment year 1960-61.
These dividends were not entitled to any
exemption under section 19(4) of Act 12 of 1959.
Section 19(4) lays down two conditions. The
first is that the dividend must be declared or payable by a company on or
before June 30, 1960. The second is that it should be in respect of any
previous year relevant to any assessment year prior to the assessment year
1960-61. The only dispute is confined even with regard to the above two
conditions to the meaning of the words "in respect of" in section
19(4). In other words the point for determination in the present case is
whether the dividends declared by the company on February 9, 1960 and on May
30, 1960 and paid out by it from April 25, 1960 and June 24, 1960 onwards were
dividends in respect of the previous years relevant to the assessment years
which were prior to the assessment year 1960-61. As has been observed by the
High Court the resolutions of the company, its annual report and accounts, the
notice of the annual general meeting setting out the agenda, all showed that
the dividends were referred to as the dividends paid on the preference shares
for the accounting years ended on June 30, 1956, June 30, 1957 and June 30,
1958. The argument on behalf of the Revenue, however, has been that under the
provisions of the company law, dividend can be declared and paid only out of
profits of a particular year. As there were no profits during the three years
in question it could not be said that the dividends declared by means of the
resolutions passed on February 9, 1960 and May 30, 1960 and paid were in
respect of the years which had ended on June 30, 1956, June 30, 1957 and June
30, 1958. In the eye of law, the dividends which were declared and paid in the
year of account 1959-60 could only be dividends in respect of that year and
they could not be dividends in respect of any earlier years in which the
preference share-holders were entitled to the same but were not paid. The
argument on behalf of the Revenue, in other words has been that the so called
dividends which were declared and paid for the three years in question were
payments only of such amounts as were due to the preference share-holders as
arrears. It is not disputed that a preference share-holder is entitled to the
payment of the dividend whenever the company has profits even though it 784 has
not earned profits in any earlier year when the dividend became due. But it is
contended when such a payment is made later it ceases to have the character of
a dividend and is just a bare payment of what had become due to the preference
shareholder. Our attention has been invited by the learned counsel for the Revenue
to the statement in Buckley on the Company Acts, Thirteenth Edition(1), to the
following effect ",In the absence of anything to the contrary in the
regulations, members are entitled to profits in proportion to their shares in
the undertaking. The company may, if it has or can acquire power so to do,
issue preference shares. Where it is intended that a deficiency in a fixed
preferential dividend in any one year shall be made good out of profits of a
subsequent year, it is commonly and conveniently expressed as a cumulative
preference dividend. But the words "preference dividend," without
adding "cumulative", bear, in the absence of anything to the
contrary, the same meaning. There is.
no magic in a year; a preference dividend is
a thing to be paid out of the proper fund, viz., the profits before the
ordinary share comes into receipts "Arrears of dividend" and
"back dividends" are inaccurate expressions".
In Palmers' Company Law, 17th edition, it is
stated that the ,term "cumulative preferential dividend" means a
dividend payable out of the profits generally in priority to the subordinate
class or classes of shares so that if the profits of one year are not
sufficient to pay the dividend for that year, the deficiency accumulates as
against subsequent profits and has to be paid before any dividend can be paid
on the subordinate class or classes.
There can be no manner of doubt that so far
as company law is concerned the correct position is the one suggested on behalf
of the Revenue and dividend would be payable only for the year in which profit
is made. That expression may not be appropriate for the deficiency which
accumulates on account of nonpayment of dividend in a particular year because
no profits have been made by the company. But we are not concerned with the
connotation of the expression "dividend" as it is understood in
company law. The Act 12 of 1959 introduced the changes which have already been
adverted to and an obligation was imposed upon the company to deduct tax on
dividends. Section 19(4) contains an exemption and the language appears to be
unambiguous. We apprehend that the exemption would be rendered meaningless and
nugatory if the interpretation sought to be placed by the Revenue were to be
accepted. In plain language the legislature has enacted that any dividend
declared or payable before June 30, 1960 in respect of 785 any previous year
etc. would be exempt from the, operation of the amendments contained in the
sections by which the obligation was imposed on the company to deduct the tax.
A good part of section 19(4) would become otiose if "dividend" is
given its technical meaning in accordance with its signification in the company
law. We invited the learned counsel for the Revenue to give us any illustration
of the actual operation of sub section 4 of section 19. He was unable to give
us any satisfactory or cogent illustration.
We entirely concur in the view of the High
Court that the language used in section 19(4) applies to payments, the right to
receive which had been acquired in the previous years on account of the
dividend of the preference shares and that the said expression is wide enough
to include payments relating to the " undischarged liabilities in respect
of those prior years". The answer returned by the High Court is affirmed.
In the result, the appeal by special leave
fails and it is dismissed with costs. As regards the appeal by certificate, the
same is dismissed for the reasons already stated. There will be no order as to
cost in that appeal.
S.C. Appeals dismissed.
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