1971 (9) TMI 4 - SC - Income Tax

Dividends were declared out of profits for the year ending on 30th June, 1960 - Whether, in view of section 19(4) of the Finance Act, 1959, there was any, obligation to deduct tax under section 18(3D) and (3E) from the dividends declared on February 9, 1960, and May 30, 1960, so as to justify the order under section 18(7) of the Income-tax Act, 1922, on failure to do so - question is answered in favour of assessee

Summary

Issues:
Interpretation of section 19(4) of the Finance Act, 1959 regarding the obligation to deduct tax from dividends declared in specific years.
Determining whether dividends declared and paid by a company were in respect of previous years relevant to specific assessment years.

Analysis:
The judgment delivered by the Supreme Court involved a case where the assessee, a public limited company, declared dividends on preference shares for specific years when no profits were made. The issue revolved around the interpretation of section 19(4) of the Finance Act, 1959, concerning the obligation to deduct tax from dividends declared in certain years. The company declared dividends on preference shares in 1960 for previous years when no profits were generated. The Income-tax Officer held the company liable for not deducting tax from these dividends, amounting to Rs. 2,32,748.70. The company contended that under section 19(4) of the Finance Act, 1959, there was no obligation to deduct tax from dividends declared for those specific years. The High Court ruled in favor of the assessee, emphasizing the exemption provided under section 19(4) for dividends declared or payable in respect of previous years.

The controversy centered on whether the dividends declared and paid by the company for specific years were indeed in respect of those previous years. The Tribunal and revenue argued that dividends should only be paid out of profits for the particular year, suggesting that the dividends declared in 1960 were merely payments of arrears due to preference shareholders. The court examined the company law principles regarding dividend payments and the significance of cumulative preference dividends. It was highlighted that while company law dictates dividends be paid out of profits for the year, the Finance Act imposed an obligation on companies to deduct tax on dividends, with an exemption provided under section 19(4).

The court emphasized that the language of section 19(4) of the Finance Act, 1959, was unambiguous and intended to exempt dividends declared or payable before a specific date in respect of previous years from tax deduction obligations. The court rejected the revenue's interpretation, stating that giving "dividend" a technical meaning based on company law would render the exemption meaningless. The court affirmed the High Court's decision, concluding that the dividends declared by the company were related to undischarged liabilities from previous years, thus exempt from tax deduction obligations. Consequently, the appeals were dismissed, upholding the ruling in favor of the assessee.