Contingent dividend payment was not taxable as paid; treaty relief applied to the Pakistan dividend portion.

A deferred moiety of dividend was not treated as paid under section 16(2) of the Indian Income-tax Act, 1922 because the company's liability to pay it was contingent on future remittances becoming available, so it was not includible in total income for that previous year. The Pakistan portion of the dividend was treated as part of the assessee's total income for the year, and relief under the Indo-Pakistan Agreement was allowed in respect of that portion, following the earlier governing decision. The governing principle is that a dividend is taxed as paid only when the shareholder's right to receive it has accrued unconditionally.

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Issues: (i) whether the deferred moiety of dividend declared by the company was paid within the meaning of section 16(2) of the Indian Income-tax Act, 1922 and includible in the assessee's total income for the relevant previous year; (ii) whether the Pakistan portion of the dividend formed part of the assessee's total income for that previous year; (iii) whether the assessee was entitled to relief under the Indo-Pakistan Agreement in respect of that Pakistan portion.

Issue (i): Whether the deferred moiety of dividend declared by the company was paid within the meaning of section 16(2) of the Indian Income-tax Act, 1922 and includible in the assessee's total income for the relevant previous year.

Analysis: Section 16(2) treats dividend as income of the previous year in which it is paid, credited or distributed. The dividend resolution did not create an immediate and unconditional liability to pay the second moiety; payment was postponed until remittances from Pakistan became free and the monies were actually received. The right to receive that moiety was therefore contingent and might never mature. On those facts, the deferred amount could not be equated with a dividend that had been paid in the relevant previous year.

Conclusion: The deferred moiety was not paid in the relevant previous year and was not includible in the assessee's total income for that year.

Issue (ii): Whether the Pakistan portion of the dividend formed part of the assessee's total income for that previous year.

Analysis: The answer to this question was governed by the reasoning adopted in the connected decision relied upon by the Court. The Court accepted that the Pakistan portion required separate consideration under the applicable income-tax framework and the agreement governing cross-border relief.

Conclusion: The Pakistan portion was held to form part of the assessee's total income for the relevant previous year.

Issue (iii): Whether the assessee was entitled to relief under the Indo-Pakistan Agreement in respect of that Pakistan portion.

Analysis: The Court applied the earlier decision dealing with relief under the Indo-Pakistan Agreement and adopted the same result for the present reference.

Conclusion: The assessee was held entitled to relief under the Indo-Pakistan Agreement in respect of the Pakistan portion.

Final Conclusion: The reference was answered by holding that the deferred dividend was not taxable as paid in the relevant previous year, while the Pakistan-related dividend question and corresponding treaty relief were decided against and in favour of the assessee respectively, on the basis of the governing earlier decision.

Ratio Decidendi: A dividend is taxable as paid under section 16(2) only when an unconditional liability to pay exists and the shareholder's right to receive it has accrued; a contingent, postponed dividend dependent on an uncertain future event is not treated as paid in the relevant previous year.

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