Dividend accrual: declaration creates a present right and income accrues on declaration, not on later payment.

The note addresses whether a dividend declared on 18-10-1941 accrues as income in the relevant previous year under the mercantile (accrual) concept and interprets the phrase in Section 16(2) of the Income-tax Act, 1922. It reasons that declaration creates the company's liability and vests in shareholders a present right to the amount, so accrual occurs on declaration notwithstanding later payment dates; a literal requirement of actual payment is impractical. Operative effect: the dividend is taxable in the previous year in which it was declared, not when paid.

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Issues: Whether the dividend of Rs. 1,01,772 declared by Khatau Makanji Spinning & Weaving Co. Ltd. on 18-10-1941 and made payable on or after 3-11-1941 is dividend income of the assessment year 1942-43 (previous year ending 21-10-1941 to 8-11-1942) or of the assessment year 1943-44.

Analysis: The issue turns on the date when dividend income accrues to the shareholder under the mercantile/accrual concept of income and the meaning of the expressions in Section 16(2) of the Income-tax Act, 1922. The declaration of dividend on 18-10-1941 created a liability of the company to pay the declared amount and conferred on each shareholder a right to the dividend which he could deal with. The fact that payment was made payable or actually paid later does not defeat the accrual of income on declaration. A literal reading of the word "paid" in Section 16(2) as requiring actual realisation is impractical; the proper construction is that the dividend accrues when the company becomes liable to pay and the shareholder's right to the dividend arises on declaration.

Conclusion: The dividend declared on 18-10-1941 is dividend income of the assessee in the relevant previous year (assessment year 1942-43). The question referred under Section 66(1) is answered in the affirmative and in favour of the assessee.

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