1998 (1) TMI 405 - SC - Companies Law

Whether the interim dividend declared by the board of directors in the previous year relevant to the assessment year 1951 -52 was to be taxed in that year or was the interim dividend liable to be taxed in the assessment year 1952-53 because the payment was made in that previous year? Held that - Appeal allowed. The nature of the interim dividend is such that it gives no right to the shareholders to receive it merely on the passing of the resolution by the board of directors whereas on a dividend being declared by the company in general meeting a vested right accrues to the shareholders. This being so, if the company in general meeting had declared a dividend on 6-12-1962 and the same was distributed in January 1963, then the aforesaid Explanation 3 would have been applicable. But in the present case, the decision of the board of directors on 6-12-1962 to pay interim dividend cannot be construed as meaning declaration of dividend by the company. This being so what would be relevant is the distribution of the dividend in January 1963, thereby attracting the provisions of clause (i)( c) of the second proviso and the income-tax authorities were, therefore, right in reducing the rebate in the manner in which they did for the assessment year 1964-65.

Summary

Issues:
1. Interpretation of tax rebate provisions under the Finance Act, 1964 in relation to the declaration and distribution of dividends by a company.
2. Determination of whether a resolution by a company's board of directors for interim dividend payment constitutes a declaration of dividend under the Companies Act, 1956.
3. Application of Explanation 3 to the Finance Act, 1964 regarding the timing of dividend declaration and distribution for tax rebate purposes.

Analysis:
In this case, the Supreme Court considered the issue of tax rebate reduction concerning a public limited company running a newspaper for the assessment year 1964-65. The company's board of directors passed a resolution on 6-12-1962 to distribute interim dividends among shareholders, payable on 16-1-1963, affecting the tax liability. The Income Tax Officer (ITO) reduced the rebate available to the company based on this interim dividend payment. The company argued that the rebate should not be reduced as per Explanation 3 of the Finance Act, 1964, which protects dividends declared before the previous year and distributed during that year. The High Court framed the legal question on whether the interim dividend declared in December 1962 but paid in January 1963 could impact the tax rebate under the Finance Act, 1964.

The High Court concluded that the rebate should not be reduced as the company declared the dividend before the previous year, and distribution occurred in the subsequent year, invoking Explanation 3. However, the appellant contended that the resolution did not constitute a formal declaration of dividend under the Companies Act, 1956, and the rebate reduction was valid due to the distribution timing. The Court analyzed the relevant provisions of the Finance Act, 1964, emphasizing the distinction between 'declaration' and 'distribution' of dividends. It interpreted Explanation 3 to require both declaration and distribution within the same previous year for rebate reduction.

The Court highlighted the Companies Act's provisions on dividend declaration by the company in a general meeting and interim dividend payment by the board of directors. It noted that the power to declare dividends lies with the general meeting, while interim dividends can be paid by the board based on profit estimates, as per Table A of the Act. The Court referenced a previous case to distinguish between general meeting-declared dividends and board-declared interim dividends, emphasizing the enforceable obligation arising only from general meeting declarations. It clarified that interim dividends do not create a debt enforceable against the company until payment, allowing the board to rescind the resolution.

Ultimately, the Court held that the resolution by the board of directors for interim dividend payment did not equate to a formal declaration of dividend by the company. Therefore, the distribution of dividends in January 1963 triggered the rebate reduction provisions under the Finance Act, 1964. Consequently, the Court allowed the appeals, set aside the High Court's judgment, and answered the legal question in favor of the revenue authorities. No costs were awarded in the case.