1967 (10) TMI 7 - HC - Income Tax

Cumulative preference shares - dividend declared - obligation to deduction tax under sections 18(3D) and (3E) from the dividends declared

Summary

Issues Involved:
1. Whether the company was obligated to deduct tax under sections 18(3D) and 18(3E) from the dividends declared on February 9, 1960, and May 30, 1960.
2. Whether the dividends declared were in respect of the previous years relevant to any assessment year prior to the assessment year 1960-61.
3. The applicability of section 19(4) of the Finance Act, 1959, as amended by the Finance Act, 1960.

Issue-wise Detailed Analysis:

1. Obligation to Deduct Tax under Sections 18(3D) and 18(3E):
The company did not deduct taxes from the dividends declared on February 9, 1960, and May 30, 1960, believing they were exempt under section 19(4) of the Finance Act, 1959. However, the Income-tax Officer and the Appellate Assistant Commissioner held that the company was obligated to deduct tax, as the dividends were declared out of the profits of the previous year ended June 30, 1960, making them interim dividends for the assessment year 1961-62. The Tribunal upheld this view, relying on English case law, which stated that dividends on cumulative preference shares in arrears are considered dividends of the year they are declared.

2. Dividends in Respect of Previous Years:
The company argued that the dividends declared on February 9, 1960, and May 30, 1960, were in respect of the years ended June 30, 1956, June 30, 1957, and June 30, 1958. The Tribunal, however, concluded that these dividends were for the year 1959-60, based on English case law, which treats dividends declared in a later year as pertaining to that year, not earlier years.

3. Applicability of Section 19(4) of the Finance Act, 1959:
Section 19(4) of the Finance Act, 1959, provides an exemption from the obligation to deduct tax for dividends declared or payable on or before June 30, 1960, in respect of any previous year relevant to any assessment year prior to the assessment year 1960-61. The High Court examined whether the dividends declared in 1960 could be considered as in respect of earlier years. The court noted that section 19(4) contemplates the possibility of declaring dividends in respect of years prior to April 1, 1959, and concluded that the language of section 19(4) is broad enough to include payments referable to undischarged liabilities of prior years.

Conclusion:
The High Court held that the dividends declared on February 9, 1960, and May 30, 1960, were in respect of the prior years and thus qualified for the exemption under section 19(4) of the Finance Act, 1959. Consequently, there was no obligation on the company to deduct tax under sections 18(3D) and 18(3E), and the order under section 18(7) of the Indian Income-tax Act, 1922, was unjustified. The question referred to the court was answered in the negative, and the assessee was entitled to costs from the department.