1969 (6) TMI 19 - HC - Income Tax

Dividend declared subject to taxation and remittance from Pakistan - whether it amounts to declaration of dividend and whether it is liable to Indian Income-tax

Issues Involved:
1. Taxability of dividend declared by a company subject to remittance from a foreign country.
2. Interpretation of "declared" dividend under section 12(1A) of the Indian Income-tax Act, 1922.
3. Enforceability of conditional dividend declarations under company law.

Issue-Wise Detailed Analysis:

1. Taxability of Dividend Declared by a Company Subject to Remittance from a Foreign Country:
The primary issue was whether a dividend declared by a company, subject to remittance from Pakistan, could be taxed under section 12(1A) of the Indian Income-tax Act, 1922. The assessee argued that the Rs. 8,000 dividend was not assessable as the declaration was conditional, and no dividend warrants were issued. The Income-tax Officer, Appellate Assistant Commissioner, and Tribunal all rejected this contention, holding that the dividend was taxable as "deemed dividend" for the year it was declared.

2. Interpretation of "Declared" Dividend under Section 12(1A) of the Indian Income-tax Act, 1922:
Section 12(1A) states that any dividend declared by a company shall be deemed to be the income of the previous year in which it is declared. The court had to determine whether a conditional declaration of dividend falls within the ambit of this section. The court referred to previous cases, including Smt. Chandra Jalan v. Commissioner of Income-tax and Commissioner of Income-tax v. Smt. Panna Jalan, which dealt with similar issues. The court concluded that a declaration subject to a condition precedent, such as remittance from Pakistan, does not constitute a declaration under section 12(1A) until the condition is fulfilled.

3. Enforceability of Conditional Dividend Declarations under Company Law:
The court examined the nature of a dividend declaration under company law, referencing Supreme Court judgments and legal texts. It was established that a declaration of dividend creates an immediate debt payable to shareholders, enforceable by law. However, a conditional declaration, such as one subject to remittance from Pakistan, does not create an enforceable obligation until the condition is met. This was supported by the Supreme Court's analysis in J. Dalmia v. Commissioner of Income-tax and other authorities, which distinguished between final and interim dividends and their enforceability.

Supporting Judgments and Legal Provisions:
The court considered the House of Lords' decision in Aramayo Francke Mines Ltd. v. Public Trustee and the Madras High Court's decision in C. Hariprasad v. Amalgamated Commercial Traders Pvt. Ltd., which dealt with similar issues of conditional dividend declarations. However, the court noted that in those cases, the conditions related to the method of payment rather than the declaration itself. In contrast, the resolution in the current case affected the declaration itself, making it conditional on remittance from Pakistan.

The court also referred to section 207 of the Companies Act, 1956, which imposes penalties for failure to distribute dividends within forty-two days of declaration. This provision underscores the immediate enforceability of a declared dividend, further supporting the view that a conditional declaration does not constitute a valid declaration under company law.

Conclusion:
The court concluded that a declaration of dividend subject to remittance from Pakistan does not create an enforceable obligation and, therefore, cannot be taxed under section 12(1A) of the Indian Income-tax Act, 1922. The question referred to the court was answered in the negative, with each party bearing its own costs.

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