1962 (4) TMI 7 - SC - Income Tax

Whether it was competent to the company by a subsequent resolution to reverse an earlier resolution declaring the dividend? Held that - Payment made as dividend by a company to its shareholders does not lose that character merely because it is paid out of capital. Under the Income-tax Act liability to pay tax attaches as soon as dividend is paid credited or distributed or is so declared. The Act does not contemplate an enquiry whether the dividend is properly paid credited or distributed before liability to pay the tax attaches thereto. The answer to the contention for reasons already set out by us must be in the negative. Appeal dismissed.

Summary

Issues:
- Reversal of dividend declaration by subsequent resolution
- Tax liability on dividends declared out of capital
- Jurisdiction of High Court under section 66 of the Indian Income-tax Act

Analysis:
The case involved a group of appeals against orders passed by the High Court of Bombay in income-tax references under section 66(1) of the Indian Income-tax Act. The dispute centered around the declaration of dividends by a private company and subsequent attempts to reverse these declarations. The shareholders included the credited amounts as dividends in their returns for the assessment year 1945-46. A resolution was passed by the company to reverse the earlier dividend declarations, treating the amounts as loans to be repaid. However, the shareholders did not file revised returns or contest the tax liability before the Income-tax Officer.

The Appellate Tribunal initially held that dividends for certain years were not liable to be taxed but confirmed the tax liability for the year 1943-44. The Tribunal referred questions regarding the reversal of dividend declarations and the taxability of the amounts to the High Court. The High Court declined to answer the first question and affirmed the tax liability on the dividends declared out of capital, leading to the appeals to the Supreme Court.

The Supreme Court analyzed the provisions of section 16(2) of the Income-tax Act, emphasizing that the liability to pay tax on dividends arises when they are paid, credited, or distributed to shareholders. The Court held that subsequent resolutions cannot alter the tax liability attached to dividends, even if they were initially paid out of the company's capital. The Court dismissed the appeals, stating that the character of payments made as dividends cannot be retrospectively altered by subsequent resolutions.

The Court rejected the argument that the amounts received were not dividends and emphasized that tax liability on dividends arises upon payment, irrespective of how they were funded. The Court clarified that the Income-tax Act does not require an inquiry into the propriety of dividend payments before tax liability attaches. Ultimately, the Court upheld the tax liability on the dividends and dismissed the appeals, with no order as to costs.