Distribution of dividend: appropriation by crediting shareholders' accounts creates an enforceable distribution, triggering statutory tax consequence.

A board's declaration of an interim dividend followed by appropriation evidenced by crediting shareholders' accounts under mercantile accounting creates an enforceable obligation and, for statutory purposes, constitutes a distribution of dividend under the Finance Act, 1956; consequence: the distribution attracts the statutory adjustment to rebate and the decision ran against the assessee in favour of the Revenue. The note clarifies that while a board may reconsider an interim declaration before appropriation or payment, once amounts are appropriated and acknowledged as liabilities in the accounting period the company becomes debtor and the dividend is treated as distributed.

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Issues: Whether the interim dividend of Rs. 42,500 credited to shareholders' accounts by the board of directors amounted to a distribution of dividend within the meaning of the Finance Act, 1956.

Analysis: The company adopted mercantile accounting and the board of directors resolved to pay an interim dividend which was followed by crediting each shareholder's account with the proportionate amount. Under the company articles the board is empowered to declare interim dividends. Authorities establish that upon declaration and appropriation (including crediting shareholders' accounts) a company becomes debtor to its shareholders and a right to sue for payment is created. Prior decisions indicate the board may reconsider an interim declaration before appropriation or payment, but where credits and an acknowledged liability are made in the accounting period, the position differs. The Finance Act, 1956 imposes a reduction of rebate where a company "has distributed to its shareholders" dividends in excess of a statutory percentage; the statutory phrase must be read to include distributions effected by declaration followed by appropriation/credit in the accounts creating an enforceable obligation.

Conclusion: The interim dividend of Rs. 42,500 credited to shareholders' accounts amounted to a distribution within the meaning of the Finance Act, 1956; the decision is against the assessee and in favour of the Revenue.

Ratio Decidendi: Where a board's declaration of an interim dividend is followed by appropriation evidenced by crediting shareholders' accounts and creation of an enforceable right to payment, such act constitutes a distribution of dividend for statutory purposes.

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