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Interpretation of tax law regarding the treatment of interim dividends for taxation purposes. Analysis: The case involved a limited liability company for the assessment year 1968-69, where the question was whether an interim dividend of Rs. 7,50,000 should be considered for levying tax at the rate of 7.5 per cent under the Finance Act, 1968, or not. The company declared a final dividend of Rs. 8,00,000 in June 1967 and an interim dividend of Rs. 7,50,000 in December 1967. The Income-tax Officer calculated the total dividend declared to be Rs. 15,50,000, leading to additional tax. However, the Appellate Assistant Commissioner determined the dividend declared to be Rs. 8,00,000, not Rs. 15,50,000. The Income-tax Appellate Tribunal concluded that the interim dividend could not be clubbed with the final dividend for tax purposes, as it was not considered declared by the company. The key issue revolved around the interpretation of the relevant provisions of the Finance Act, 1968, specifically Paragraph F, which outlined the rates of income tax for domestic companies. The dispute centered on whether the interim dividend should be included in the computation for additional tax at the rate of 7.5 per cent. The Tribunal's decision hinged on the understanding of the phrase "dividend declared or distributed by the company" in the tax law. The Revenue argued that this phrase encompassed the entirety of the dividend, justifying the additional tax. Conversely, the assessee contended that an interim dividend could not be considered as declared by the company for tax purposes. The judgment referenced the Supreme Court decision in J. Dalmia v. CIT [1964] 53 ITR 83, which clarified the nature of interim dividends. It highlighted that the power to pay an interim dividend is usually vested in the directors by the company's articles of association, and such dividends do not create an enforceable debt against the company until paid. The Court emphasized that an interim dividend declared by the board of directors does not fall under the category of dividend "declared by the company" for tax assessment purposes. Therefore, in this case, the interim dividend of Rs. 7,50,000 was not to be included in the computation for additional tax, as it was not considered a declared dividend by the company. In conclusion, the High Court ruled in favor of the assessee, holding that the interim dividend should not be taken into account for levying tax at the specified rate. The decision was based on the interpretation of tax laws and the distinction between final and interim dividends as per company practices and legal precedents. The Revenue was directed to pay the costs of the reference to the assessee.
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