http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 3  

PETITIONER: BENARAS STATE BANK LTD.

       Vs.

RESPONDENT: COMMISSIONER  OF INCOME-TAX, LUCKNOW

DATE OF JUDGMENT: 25/07/1969

BENCH: SHAH, J.C. (CJ) BENCH: SHAH, J.C. (CJ) RAMASWAMI, V. GROVER, A.N.

CITATION:  1970 AIR  281            1970 SCR  (1) 669  1969 SCC  (2) 316

ACT:       Indian  Income-tax  Act  (11 of  1922),  ss.  2(14-4), 14(2)(c)   and   16(2)  and  Adaptation   of   Laws   Order, 1950--Dividend  income  accruing in  Indian  State--Received within taxable territories--Liability to tax.

HEADNOTE:       The appellant-Bank (assessee) was a share-holder in  a company  which  declared a dividend on July 25,  1949.   The State of Benares in which the Bank had its registered office merged with the Indian  Union on December 1, 1949.   Cheques far the amount of dividend were encashed by the assessee  on December  31, 1949.  The assessee’s year of account was  the calendar year. ’The. dividend was sought to be taxed in  the assessment  year  1950-51, but the assessee contended  that: (1)  the  dividend  income  was exempt  from  tax  under  s. 14(2)(c),  as  it stood in the year of assessment;  and  (2) that it must be deemed to have been received by the assessee even on July 25, 1949, on which date the assessee was a non- resident.       HELD: (1) On December 1, 1949, by merger, the State of Benares became part of the taxable territories as defined in s. 2(14-A) of the Act. Hence, though the dividend might have accrued in an Indian State, it was received by the  assessee in the taxable territories on December 31, 1949, and, by the express words in s. 14(2)(c), as modified by the  Adaptation of Laws Order, 1950, the dividend income was not exempt from tax liability. [671 C--E]       (2) Dividend income is deemed to have been received by an assessee, under s. 16(2), only when it is paid,  credited or  distributed,  or,  is deemed to  be  paid,  credited  or distributed.   Though  paid  does  not  contemplate  ’actual receipt’  the dividend can only said to be  paid, not   when it   is  declared,  but  when  the  company  discharges  its liability ’and makes the amount of dividend  unconditionally available  to the member  entitled thereto.  In the  present case,  there was no evidence that before December 31,  1949, the dividend income was paid, credited or distributed to the assessee within the meaning or s. 16(2). [671 E-G; 672 A--B]       J.  Dalmia  v.C.I.T.  Delhi,  53  I.T:R.  83   (S.C.).

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 3  

followed.

JUDGMENT:       CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1033 of 1966.       Appeal  by special leave from the judgment  and  order dated  September 21, 1964 of the Allahabad. High,  Court  in Income-tax Misc. Case No. 121 of 1956.       S.T.  Desai, A.K. Verma and Y.B. Dadachanji,  for  the appellant.       Jagdish  Swarup, Solicitor-General, S.K.  Aiyar,  R.N. Sachthey and B.D. Sharma, for the respondent. 670     The Judgment of the Court was delivered by     Shah,  Ag.  C.J.   By order dated August  23,  1968,  we called for a supplementary statement on the  issue   whether dividend  warrants were delivered by he Glass Works to   the Bank   on  August  3, 1949.  The  Tribunal  has  submitted’a statement  of the case that the only relevant  facts  proved are that the dividend was declared on July 25, 1949 and  the Bank  encashed the dividend warrants on December  31,  1949. The appeal must therefore be decided on the footing that the dividend warrants  were handed over to the Bank by the Glass Works on August 3, 1949, is not proved.     The material facts which have a bearing on the point  in issue  are  these. The year of account of  the  Bank.is  the calendar  year. The State of Benaras in which the  Bank  had its  registered  office  merged with  the  Indian  Union  on December  1, 1949. The Glass Works declared a dividend at  a General  Meeting on July  25, 1949. Cheques for  Rs.  69,000 issued  by the Glass Works in favour of the Bank in  payment of  the dividend were encashed by the Bank on  December  31, 1949.     The  dividend received by the Bank has .been brought  to tax  in  the assessment year 1950-51. Counsel for  the  Bank urged that the Bank cannot be assessed to. tax in respect of dividend  accruing to it at a time when the Bank was a  non- resident. It is urged that by virtue of s. 14(2) (c) of  the Income-tax Act, 1922, as then in force, the income  received by the Bank was not liable to be taxed. At the relevant time s. 14(2)(c) read as follows:                   "(2)  The tax shall not be payable  by  an               assessee--                    (c)  in respect of any  income,   profits               ’or gains accruing or arising to him within an               Indian  State, unless such income, profits  or               gains are received or deemed to ’be.  received               in or ’are brought into  British  India in the               previous   year  by  or  on  .behalf  of   the               assessee, or are assessable under section  12B               or section 42." By the Adaptation of Laws Order, 1950, the words "an  Indian State"  were substituted by the words "a Part B State",  and the  words  "British India" were substituted by  the   words "taxable  territories".   Section 2(14A)--(which  was   also incorporated  by  the Adaptation of Laws Order,  1950,  with effect from April 1950) insofar as it is material provides:         "taxable territories’ means         (a) .......................         (b) as respects any period after the 14th day of August, 1947, and before the 26th day of January 671    1950, the territories for the time being comprised in the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 3  

Provinces  of India, but excluding the merged  territory  of Cooch-Behar,     Provided that the taxable territories shall be deemed to include--    (a) the merged territories--    (i) as respects any period after the  31st day of  March, 1949,. for any of the purposes of this Act, and    The  State  of Benaras after merger on December  1,  1949 with the Dominion of India formed part of the State of Uttar Pradesh  and  was  on  that  account  part  of  the  taxable territories  by  virtue of the definition  contained  in  s. 2(14A)  of  the  Indian Income-tax Act.  Assuming  that  the dividend accrued within an Indian State, it was received  by the  Bank in the taxable territories on December  31,  1949, and  by the express words contained in s. 14(2)(c)   of  the Indian  Income-tax Act, 1922, before it was omitted  by  the Taxation  Laws (Extension to Jammu & Kashmir) Act, 1954,  it was not exempt from liability to payment of tax, even if the right thereto had accrued to the Bank in an Indian State.     It  was then urged that the dividend must be  deemed  to have been received by the Bank on July 25, 1949--the day  on which it was declared and on that date the Bank being a non- resident it could not be brought to tax. But under s.  16(2) of the Indian Income-tax Act, 1922, the dividend income  was taxable  only in the year in which it was paid, credited  or distributed,   or  was  deemed  to  be  paid,  credited   or distributed.   This   Court   observed  in  J.   Dalmia   v. Commissioner  of  Income-tax, Delhi(1) that  the  expression "paid"  in s. 16(2)  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.  It  was  also held that the  Act  does  ’not  make dividend income taxable in the year in which it becomes due: it is taxable only in the year in which it is paid, credited or  distributed.  The Court overruled the  decision  of  the Bombay High Court in Commissioner of Income-tax v. Laxmidas. s  Mulraj Khatau(2) in which it Was held that when  dividend is declared, 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 (1) 53 I.T,R. 83 (S.C.)               (2) 16 I.T.R. 248. 672 or arises to him, and that the fact that the actual  payment of the income is deferred is immaterial and irrelevant.    In  the  present case there is no  evidence  that  before December   31,   1949,  dividend  was  paid,   credited   or distributed  to  the Bank. By virtue of s.  4(1)(a)  of  the Income-tax  Act, 1922, the income was held properly  taxable in   the  assessment  year  1950-51.   It   is   unnecessary therefore  to consider whether even if the Bank was  a  non- resident  on July 25, 1959, by virtue of s.  4(1)(b)(ii)  it was liable to be taxed in respect of the dividend income  in the year of assessment 1950-51.     The  appeal fails and is dismissed with costs  including the  costs of the hearing at which the order calling  for  a supplementary statement was made. V.P.S.                                     Appeal dismissed. 673