1998 (1) TMI 70 - SC - Income Tax

Whether the sum of Rs. 3,39,000 declared as dividends on December 6, 1962, by the board of directors, but payable only on January 16, 1963, could be taken into account in withdrawing the rebate admissible under the first proviso to the Finance Act of 1964 by reference to sub-clause (c) of clause (i) of the second proviso to the same Act read with Explanation 3 to the same Act ? Held that - 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 December 6, 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 December 6, 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 sub-clause (c) of clause (i) 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. For the aforesaid reason, the appeals are allowed. The judgment of the High Court is set aside. The question of law, as reframed by the High Court, is answered in the affirmative and in favour of the Revenue.

Summary

Issues:
1. Interpretation of provisions related to income tax rebate concerning the declaration and distribution of dividends by a company.
2. Determination of whether a resolution by the board of directors for interim dividend payment constitutes a declaration of dividend by the company.
3. Application of Explanation 3 to the Finance Act, 1964, regarding the reduction of rebate on dividends declared and distributed in different years.

Detailed Analysis:
1. The case involves the interpretation of income tax provisions concerning the rebate on dividends declared and distributed by a company. The Finance Act, 1964, provides for a rebate on income tax, which may be reduced if dividends are declared or distributed to shareholders during the previous year. The second proviso specifies conditions for reducing the rebate, including the declaration or distribution of dividends by the company.
2. The central issue revolves around whether a resolution by the board of directors for interim dividend payment constitutes a declaration of dividend by the company. The distinction between the power of the company in a general meeting to declare dividends and the board of directors' authority to pay interim dividends is crucial. The Companies Act and Table A differentiate between these powers, with the board authorized to pay interim dividends based on profit estimates.
3. The application of Explanation 3 to the Finance Act, 1964, is pivotal in determining the reduction of rebate on dividends declared and distributed in different years. The explanation clarifies that if dividends were declared before the commencement of the previous year but distributed during that year, no rebate reduction shall be made. The court analyzed the nature of interim dividends and the enforceable obligations arising from declarations by the company in general meetings versus resolutions by the board of directors.
4. The judgment emphasized that a resolution by the board of directors for interim dividend payment does not equate to a declaration of dividend by the company. The court cited previous case law to support the distinction between interim dividends and dividends declared in general meetings. It concluded that the distribution of interim dividends in a subsequent year does not warrant a reduction in rebate, as the declaration and distribution did not occur in the same previous year.
5. Ultimately, the court allowed the appeals, setting aside the High Court's judgment. The question of law, as reframed by the High Court, was answered in favor of the Revenue. The decision highlighted the importance of differentiating between declarations of dividends by the company in general meetings and resolutions by the board of directors for interim dividends to determine the applicability of rebate reduction under income tax laws.