1964 (4) TMI 43

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....epresented income for the assessment year 1951-52. At the instance of the appellant the Appellate Tribunal drew up a statement of the case and referred the question set out hereinbelow to the High Court of Punjab under section 66(1) of the Indian Income-tax Act: "Whether on a true interpretation of article 95 of the First Schedule to the Indian Companies Act, 1913, the dividend of Rs. 4,12,500 was liable to be included in the assessment year 1952-53." The High Court recorded an answer to the question in the affirmative. Against the order of the High Court, this appeal is preferred by the appellant with certificate granted by the High Court. Even though the question was framed as if article 95 of the First Schedule to the Indian Companies Act, 1913, applies to Govan Bros., it is common ground that the company was registered under the Companies Act of the former Rampur State, and it had adopted special articles of association in supersession of Table A of the Companies Act. The relevant article of Govan Bros. dealing with declaration or payment of final and interim dividends were articles 73 and 74. The High Court therefore proceeded to deal with the question on the footi....

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.... other undistributed profits. Regulation 96, which is not an obligatory article, provides that the directors may from time to time pay to the members such interim dividends as appear to the directors to be justified by the profits of the company. Govan Bros, had in their articles of association made the following provision with regard to dividends: "Article 73. The company in general meeting may declare a dividend to be paid to the members according to their rights and interests in the profits. Article 74. When in their opinion the profits of the company permit, the directors may declare an interim dividend. Article 77. No dividend shall be payable, except out of the net profits arising from the business of the company, and no larger dividends shall be declared than is recommended by the directors." By article 80 it was provided that unless otherwise directed by the company in general meeting any dividends may be paid by cheque or warrant sent through the post to the registered address of the member en titled to the same. In article 74 relating to payment of interim dividend, there was a slight departure from the regulation under Table A of the First Schedule to the Com....

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....s are authorised by the articles of association they may pay such amount as they think proper, having regard to their estimate of the profits made by the company. Interim dividend is therefore paid pursuant to the resolution of the directors on some day between the ordinary general meetings of the company. On payment, undoubtedly interim dividend becomes the property of the shareholder. But a mere resolution of the directors resolving to pay a certain amount as interim dividend does not create a debt enforceable against the company, for it is always open to the directors to rescind the resolution before payment of the dividend. In Lagunas Nitrate Company (Limited) v. Henry Schroeder and Company [1901] 17 T.L.R. 625 the directors of a company passed a resolution declaring interim dividend payable on a future date, and requested the company's bankers to set apart, out of the money of the company in their hands, into a special account entitled "Interim Dividend Account", a sum sufficient to cover the dividend, pending the company's instructions. But before the date fixed for payment, the directors resolved that pending certain litigation to which the company was a party payment of div....

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....essment 1951-52, the appellant relies upon two facts only-the power vested in the directors to declare interim dividend, and the passing of a resolution by the directors relating to interim dividend on August 30, 1950, followed by the drawing of dividend warrants dated December 28, 1950. But for reasons already, stated a resolution of the board of directors declaring interim dividend, until it is implemented by some step taken by the company, creates no enforceable right in the shareholders. The judgment of the Bombay High Court in Commissioner of Income-tax v. Laxmidas Mulraj Khatau [1948] 16 ITR 248, 251 on which counsel for the appellant relies does not assist him either. In that case the company declared a dividend out of its profits, and made it payable a few days later. The dividend was paid on the date on which it was made payable by the resolution of the company. The Income-tax Officer treated the amount received by the member as dividend income for the assessment year in which it was actually received. The High Court of Bombay in a reference under section 66 observed that as soon as the dividend was declared it became the income of the assessee which income the assessee co....

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....ording to the nature of the particular income. The year in which a particular class of income becomes taxable must, therefore, be determined, in the light of its true character, and subject to the special provision, if any, applicable thereto. The legislature has enacted an express provision making dividend income taxable in the year in which it is paid, credited or distributed or is to be deemed, so paid, credited or distributed. The test applied by Chagla C.J. that because the dividend becomes due to the assessee who has the right to deal with or dispose of the same in any manner he likes, it is taxable in the year in which it is declared, cannot be regarded as correct. The expression "paid" in section 16(2) it is true does not contemplate actual receipt of the dividend by the member. In general, dividend may be said to be paid within the meaning of section 16(2) when the company discharges its liability and makes the amount of dividend unconditionally available to the member entitled thereto. Chagla C.J. has himself in Purskotamdas Thakurdas v. Commissioner of Income-tax [1958] 34 ITR 204, 211 expressed a different view. The learned Chief Justice in delivering the judgment of th....