1970 (4) TMI 24 - SC - Income Tax

Income from dividends declared during the relevant previous years cannot be included in the total income of the company - no evidence to show that the dividends warrants were handed over to the assessee within the years of account - assessee was not liable to pay tax on dividends

Summary

Issues:
1. Inclusion of income from dividends in the total income of a company for assessment years 1956-57 and 1957-58.
2. Interpretation of section 16(2) of the Indian Income-tax Act regarding the inclusion of dividends in the total income of an assessee.

Analysis:
The Supreme Court heard appeals from a judgment of the Calcutta High Court regarding the inclusion of income from dividends in the total income of a company for assessment years 1956-57 and 1957-58. The central question was whether the mere declaration of dividends attracts the operation of section 16(2) of the Indian Income-tax Act. The Appellate Assistant Commissioner had included dividends declared by specific companies in the total income of the assessee for the respective assessment years based on the declaration dates. However, the Tribunal was in contention over whether dividends should be included in the relevant assessment years unless received by the assessee, given the cash system of accounting followed by the company.

The High Court referred to a Supreme Court decision stating that a mere declaration of dividend does not constitute payment under section 16(2) of the Income-tax Act. Section 16(2) deems any dividend to be income of the previous year in which it is paid, credited, or distributed to the assessee. The Supreme Court emphasized that the term "paid" in section 16(2) does not require actual receipt by the shareholder; rather, it refers to the company discharging its liability and making the dividend amount available to the entitled member. Previous court decisions, including T. Dalmia v. Commissioner of Income-tax, supported this interpretation.

In this case, the Tribunal had not found sufficient evidence to determine the point in time when the dividend warrants were handed over to the assessee. Following the precedent set in Benares State Bank Ltd. v. Commissioner of Income-tax, the Supreme Court directed the Tribunal to provide a supplementary statement clarifying the delivery dates of the dividend warrants. Without evidence of the warrants being delivered within the relevant accounting years, the Court held that the assessee could not be taxed on the dividends received. As the burden of proving taxable income lay with the department and the required information was lacking, the appeals were dismissed, and no costs were awarded.

In conclusion, the judgment clarified the interpretation of section 16(2) of the Income-tax Act regarding the inclusion of dividends in the total income of an assessee, emphasizing that mere declaration of dividends does not automatically trigger tax liability without evidence of actual payment or distribution within the specified period.