1964 (4) TMI 43 - SC - Income Tax

Whether on a true interpretation of article 95 of the First Schedule to the Indian Companies Act, 1913, the dividend of ₹ 4,12,500 was liable to be included in the assessment year 1952-53? Held that - If the mere declaration of dividend in general meeting of the company is not to be regarded as payment within the meaning of section 16(2), much less can it be said that a resolution declaring interim dividend -which is capable of being rescinded by directors operates as payment before the company has actually parted with the amount of dividend or discharged its obligation by some other act. The High Court was, therefore, right in recording an affirmative answer to the question propounded for the consideration of the court. Appeal dismissed.

Summary

Issues Involved:
1. Taxability of interim dividend.
2. Interpretation of Article 74 of the Articles of Association of Govan Bros.
3. Application of Section 16(2) of the Indian Income-tax Act.

Issue-wise Detailed Analysis:

1. Taxability of Interim Dividend:
The appellant, a Hindu undivided family, was the registered holder of 1,500 shares of Govan Bros. (Rampur) Ltd. and received an interim dividend warrant dated December 28, 1950, for Rs. 4,12,500. The revenue authorities included this amount in the assessment year 1952-53, rejecting the appellant's contention that it should be taxed in the assessment year 1951-52. The core issue was whether the dividend should be taxed in the year it was declared or the year it was paid.

2. Interpretation of Article 74 of the Articles of Association of Govan Bros.:
The High Court interpreted Article 74 of Govan Bros.' Articles of Association, which authorized the directors to declare interim dividends. The appellant argued that the declaration of the interim dividend on August 30, 1950, created a debt due to the appellant, making it taxable in the assessment year 1951-52. However, the Commissioner of Income-tax contended that the dividend became taxable only when paid, credited, or distributed, as per Section 16(2) of the Indian Income-tax Act.

3. Application of Section 16(2) of the Indian Income-tax Act:
Section 16(2) of the Indian Income-tax Act stipulated that dividends are deemed income of the previous year in which they are paid, credited, or distributed. The court held that a mere resolution to pay interim dividends does not create an enforceable obligation, as directors can rescind such resolutions before payment. The court cited Lagunas Nitrate Company (Limited) v. Henry Schroeder and Company, where it was held that directors could rescind a resolution declaring interim dividends before payment, and no enforceable right arose from such a declaration.

Conclusion:
The court concluded that the interim dividend declared by the directors on August 30, 1950, did not create an enforceable obligation until it was paid on December 28, 1950. Therefore, the dividend was taxable in the assessment year 1952-53, as per Section 16(2) of the Indian Income-tax Act. The appeal was dismissed with costs, affirming the High Court's decision.