1962 (2) TMI 1 - HC - Income Tax

Whether interim dividend credited in the accounts of the shareholders of the company was a distribution of dividend as contemplated by the Finance Act of 1956

Issues Involved:
1. Whether the interim dividend of Rs. 42,500 credited in the accounts of the shareholders was a distribution of dividend as contemplated by the Finance Act of 1956.

Issue-wise Detailed Analysis:

1. Interim Dividend Credited as Distribution:
The central issue is whether the interim dividend of Rs. 42,500 credited in the accounts of the shareholders constitutes a "distribution of dividend" under the Finance Act of 1956. The assessee, a private limited company, declared a total dividend of Rs. 1,02,000, which included an interim dividend of Rs. 42,500 resolved by the board of directors on 28th December 1955. This interim dividend was credited to the shareholders' accounts but was paid after the accounting year ended on 31st December 1955. The Income-tax Officer applied the provisions of the Finance Act of 1956, reducing the rebate due to the excess dividend distribution. The assessee contended that there was no distribution within the accounting year, thus the interim dividend should not be considered in computing the tax liability. The Appellate Assistant Commissioner upheld the Income-tax Officer's view, but the Tribunal disagreed, stating that mere credit entries do not amount to distribution.

2. Interpretation of "Distributed to its Shareholders":
The interpretation of the phrase "distributed to its shareholders" under the Finance Act of 1956 is crucial. The Finance Act of 1956 stipulates that if a company distributes dividends in excess of 6% of its paid-up capital, the rebate is reduced. The relevant part of the provision reads: "the amount of the rebate... shall be reduced... in the case of a company... which has distributed to its shareholders, during the previous year dividends in excess of 6 per cent. of its paid-up capital..." The court examined whether the credited interim dividend amounts to distribution.

3. Legal Precedents and Mercantile System:
The court considered various legal precedents and the mercantile system of accounting adopted by the company. The assessee accepted that crediting the dividend to shareholders' accounts acknowledged the company's liability. However, they argued that the interim dividend declaration does not create an enforceable debt, as it can be rescinded by the general body. The Commissioner argued that the board's declaration, followed by credit entries, amounted to distribution, conferring a right on shareholders to recover the amount.

4. Company Law and Articles of Association:
The company adopted Table A in the Schedule to the Companies Act of 1913, allowing the board to declare interim dividends justified by profits. The board resolved to pay the interim dividend and credited the shareholders' accounts, which prima facie appears to be a distribution. The assessee contended that the board's action is provisional and revocable by the general body, thus not constituting distribution.

5. Case Law Analysis:
The court referenced several cases:
- *In re Severn and Wye and Severn Bridge Railway Company*: Declared dividends credited to shareholders' accounts constituted debts due to shareholders.
- *Lagunas Nitrate Co. Ltd. v. Schroedar and Co. and Schmidi*: Directors could reconsider the payment of interim dividends, but once credited, it creates a debt.
- *Dalmia v. Commissioner of Income-tax*: Interim dividends declared and warrants issued within the accounting period are assessable in that period.
- *Commissioner of Income-tax v. Laxmidas Mulraj Khatau*: Declared dividends become assessable income from the date of declaration.

6. Conclusion and Judgment:
The court concluded that the interim dividend declaration on 28th December 1955, followed by crediting shareholders' accounts, amounted to distribution. The company's acceptance of liability and shareholders' right to sue for the amount indicated distribution. The Finance Act of 1956 applied, justifying the rebate reduction. The question was answered in favor of the department, and costs were awarded to the department.

Summary:
The court determined that the interim dividend of Rs. 42,500 credited to shareholders' accounts constituted a distribution of dividend under the Finance Act of 1956, leading to a reduction in the rebate. The court's interpretation was based on legal precedents, the company's accounting system, and the Articles of Association, concluding that the credited interim dividend created an enforceable right for shareholders.

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