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TMI Blog1971 (9) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... eal No. 1344 of 1971 is by special leave from a judgment of the Bombay High Court in an income-tax reference. The other appeal was brought by certificate against the same judgment. But the certificate being defective for want of reasons, the same had to be revoked. The assessee is a public limited company which was incorporated on March 25, 1955. Part of its paid up capital consisted of 60,000 six per cent. (free of tax) cumulative preference shares of Rs. 100 each. As the company did not make profits out of which it could distribute dividend no dividend was declared on the preference shares during the years of account ended on June 30, 1956, June 30, 1957, and June 30, 1958. During the account year ended on June 30, 1960, the company ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 1959), which was brought into force with effect from April 1, 1959. However, an exemption was provided from the operation of the provisions of the amended sections under certain circumstances by section 19(4) of the Finance Act, 1959 (12 of 1959). That provision, as amended retrospectively by the Finance Act, 1960, was in the following terms : " Notwithstanding anything contained in sub-section (2) or sub-section (3), in relation to dividends declared or payable by a company on or before the 30th day of June, 1960, in respect of any previous year relevant to any assessment year prior to the assessment year 1960-61, the Income-tax Act shall have effect as if the amendments contained in section 5, section 7, section 9, section 10, secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Finance Act, 1959 (as amended by the Finance Act, 1960), 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 ?" The High Court answered the question in favour of the assessee and against the revenue. The whole controversy centres on the true interpretation of section 19(4) of the Finance Act, 1959 (12 of 1959), as amended by the Finance Act of 1960. The assessee claimed that that section was enacted to give exemptions with regard to such dividends which were in respect of the earlier years and which were declared between the dates April 1, 1959, when the ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... une 30, 1958. The argument on behalf of the revenue, however, has been that under the provisions of the company law, dividend can be declared and paid only out of profits of a particular year. As there were no profits during the three years in question it could not be said that the dividends declared by means of the resolutions passed on February 9, 1960, and May 30, 1960, and paid were in respect of the years which had ended on June 30, 1956, June 30, 1957, and June 30, 1958. In the eye of law, the dividends, which were declared and paid in the year of account 1959-60, could only be dividends in respect of that year and they could not be dividends in respect of any earlier years in which the preference shareholders were entitled to the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e paid out of the proper fund, viz., the profits before the ordinary share comes into receipt. ' Arrears of dividend' and 'back dividends' are inaccurate expressions." In Palmer's Company Law, seventeenth edition, it is stated that the term "cumulative preferential dividend" meant a dividend payable out of the profits generally in priority to the subordinate class or classes of shares so that if the profits of one year are not sufficient to pay the dividend for that year, the deficiency accumulates as against subsequent profits and has to be paid before any dividend can be paid on the subordinate class or classes. There can be no manner of doubt that so far as company law is concerned the correct position is the one suggested on behal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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