Broad construction of dividend exemption brought arrears of preference dividends within relief from tax deduction at source.

Dividends declared and paid in 1960 were treated as falling within the Finance Act, 1959 exemption because the phrase "in respect of" was construed broadly to include arrears of cumulative preference dividends attributable to earlier accounting years. The technical company-law rule that dividends are payable out of the profits of the year did not govern the Finance Act language. On that reading, dividends declared on or before 30 June 1960 and referable to prior assessment years were covered by section 19(4), so tax was not required to be deducted at source under section 18(3D) and (3E), and the payer was not liable to be treated as in default.

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Issues: Whether dividends declared and paid in 1960, though representing arrears of cumulative preference dividends for earlier accounting years, were dividends "in respect of" previous years relevant to assessment years prior to 1960-61 so as to fall within the exemption in section 19(4) of the Finance Act, 1959 and avoid liability to deduct tax at source under section 18(3D) and (3E) of the Income-tax Act, 1922.

Analysis: The exemption in section 19(4) applied where dividends were declared or payable on or before 30 June 1960 and were in respect of any previous year relevant to an assessment year prior to 1960-61. The Court held that the phrase "in respect of" was broad enough to cover payments made in 1960 towards arrears of preference dividends that had accrued for earlier years. Although company law treats dividend as payable out of profits of the year in which profits arise, the Court held that this technical company-law meaning could not control the language of the Finance Act. A narrow construction would make the exemption ineffective and would render a substantial part of the provision otiose.

Conclusion: The dividends were covered by section 19(4) of the Finance Act, 1959, and there was no obligation to deduct tax at source under section 18(3D) and (3E); the assessee was not liable to be treated as an assessee in default under section 18(7).

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