1983 (8) TMI 71 - AT - Income Tax

Summary

Issues:
1. Deductibility of liability for accumulated dividend on preference shares while computing capital employed under section 80J of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Deductibility of liability for accumulated dividend on preference shares
The case involved a dispute regarding the deductibility of the liability for accumulated dividend on preference shares while computing capital employed under section 80J of the Income-tax Act, 1961. The Assessing Officer had deducted the amount of liability in respect of accumulated dividend on preference shares for specific years, considering it as a debt owed by the company. However, the assessee contended that it was a contingent liability and not deductible from the capital employed. The Commissioner (Appeals) agreed with the assessee, stating that the liability in respect of dividend on preference shares could not be considered a liability until the company made profits and declared dividends. The revenue appealed this decision.

During the hearing, the revenue's counsel argued that, as the assessee followed the mercantile system of accounting and the preference shares were cumulative, the liability for dividend payment accrued annually regardless of actual payment. The counsel cited legal commentary and a relevant case to support this argument. On the other hand, the assessee's counsel emphasized that there was no liability until dividends were declared, citing a precedent from the Bombay High Court regarding the time of declaration of dividends.

The Tribunal analyzed the concept of debt in relation to dividend obligations, citing legal precedents and the Companies Act, 1956. It emphasized that a debt must give the creditor a right to claim and the debtor an obligation to pay. The Tribunal clarified that the right to claim dividends arises only when profits are ascertained and dividends are declared by the company. It noted that the accumulation of dividends for past years did not create a debt against the company, as it was a condition for future distributions. Referring to the Companies Act, the Tribunal highlighted that arrears of dividend on preference shares are only payable after the repayment of capital during winding up, indicating that such arrears cannot be considered a liability at the end of each accounting period.

Ultimately, the Tribunal upheld the Commissioner (Appeals)'s decision, dismissing the revenue's appeals and concluding that the liability for accumulated dividend on preference shares was not deductible while computing capital employed under section 80J of the Income-tax Act, 1961.