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 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.I- 17 (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.
JUDGMENT:
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
hereinbelow 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, ap-
plies 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 exeed 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, adop-
tion 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 imme-
diately 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 Wye
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 divi-
dend 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 enun-
ciated 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
share-
holder. * * * * *
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
therefrom, 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 be comes 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.
587