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PETITIONER: COMMISSIONER OF INCOME TAX, BOMBAY

       Vs.

RESPONDENT: WEST COAST PAPER MILLS LTD.

DATE OF JUDGMENT17/09/1971

BENCH: GROVER, A.N. BENCH: 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

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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 undischarged liabilities in respect of those previous years. [784 H, 785 B-C]

JUDGMENT: 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

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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 Incometax 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

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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".

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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  non payment 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. -L3Sup.C.I./72 786