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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

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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

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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

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             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

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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

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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

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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