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Issues Involved:
1. Definition of "dividend declared" under the Indian Finance Act, 1949. 2. Whether the dividend declared includes the amount of tax deducted or only the net amount paid to shareholders. Detailed Analysis: Issue 1: Definition of "dividend declared" under the Indian Finance Act, 1949 The core issue in this case is the interpretation of the term "dividend declared" as used in the proviso (i) to clause B of Part I of the Third Schedule to the Indian Finance Act, 1949. The question is whether this term refers to the net amount paid to shareholders after deducting income tax or the gross amount before such deduction. The court noted that the company, Angus Company Limited, declared a dividend of 6% less income tax on its preference shares, resulting in a net payment of Rs. 1,54,687 instead of the gross amount of Rs. 2,25,000. The company argued that for the purposes of computing the rebate under the Finance Act, only the net amount paid should be considered as the "dividend declared." Issue 2: Whether the dividend declared includes the amount of tax deducted or only the net amount paid to shareholders The court examined the incidents of a dividend declaration from both company law and tax perspectives. A dividend is the share of a company's profits allocated to shareholders, and the company must decide whether to pay this dividend tax-free or less tax. A tax-free dividend means the full percentage declared is paid to shareholders without any deduction, whereas a dividend less tax means the company deducts tax before paying the shareholders. The court emphasized that the declaration of a dividend is a matter between the company and its shareholders. The company's tax liability remains unaffected by whether the dividend is declared tax-free or less tax. The tax deducted from the dividend paid to shareholders is deemed to be paid by the shareholders under sections 16(2), 18(5), and 49B of the Income Tax Act, but this does not alter the fact that the company pays the tax as part of its own liability. The court referred to the case of Attorney-General v. Ashton Gas Company, where it was held that a company must treat the tax paid on behalf of preference shareholders as part of their dividend. However, this case was distinguished as it was not a tax case and did not decide that the tax part was a part of the dividend. Ultimately, the court concluded that the term "dividend declared" in the context of the Finance Act should be interpreted to mean the net amount paid to the shareholders, not the gross amount before tax deduction. The court reasoned that the company's funds are depleted only by the net amount actually distributed as dividends, and the tax paid is a separate obligation not directly tied to the dividend declaration. Conclusion The court held that the expression "dividend declared" means the net amount of the dividend paid to the shareholders, which in this case is Rs. 1,54,687. The company's argument was accepted, and the reference was answered in favor of the assessee. The assessee was awarded the costs of the reference, certified for two counsel. S.C. Lahiri, J. concurred with the judgment.
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