Dividend exemption for arrears of preference shares extended to later payments referable to earlier years.

Dividends declared and paid on cumulative preference shares were treated as exempt under section 19(4) of the Finance Act, 1959, where the payments on or before 30 June 1960 related to arrears of earlier years. The article notes that, although company law may regard a later declaration as creating a debt in that year, the phrase "in respect of any previous year" was read broadly enough to include dividends referable to unpaid earlier-year amounts. On that basis, the exemption applied and no obligation arose to deduct tax under sections 18(3D) and 18(3E); the withholding order was therefore unsustainable.

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Issues: Whether dividends declared and paid in 1960 on cumulative preference shares, though referable to arrears of earlier years, attracted the obligation to deduct tax under sections 18(3D) and 18(3E) of the Indian Income-tax Act, 1922, or were exempt under section 19(4) of the Finance Act, 1959.

Analysis: The statutory exemption in section 19(4) applied to dividends declared or payable on or before 30 June 1960 in respect of any previous year relevant to an assessment year prior to 1960-61. Although company law treats a dividend declared in a later year as a debt arising in that later year, the Court held that the words "in respect of any previous year" were wide enough to cover payments referable to arrears of earlier years. The resolutions, accounts, and surrounding circumstances showed that the payments were made with reference to the unpaid preference dividends of the earlier years, and the mere fact that the declaration occurred in the year 1959-60 did not defeat the exemption.

Conclusion: The dividends were exempt under section 19(4) of the Finance Act, 1959, and there was no obligation to deduct tax under sections 18(3D) and 18(3E); the order under section 18(7) was unsustainable and the answer to the referred question was in the negative, in favour of the assessee.

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