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TMI Blog1967 (10) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... ith reference to those three years. In the next year thereafter, which was the year ended on the 30th June, 1960, the company made profits. During the course of this year, on 9th February, 1960, the board of directors of the company passed a resolution "that the dividend on the 60,000 cumulative preference shares of the company of Rs. 100 each in respect of the years ended 30th June, 1956, and 1957, remaining in arrears be paid at the rate of 6% free of tax out of the profits of the current year ending on 30th June, 1960". On 30th May, 1960, they passed a similar resolution for the payment of dividend on the cumulative preference shares which had remained in arrears in respect of the third year ended 30th June, 1958. In accordance with these resolutions, the dividends were actually paid from 25th April, 1960, and 24th June, 1960, respectively. Adjustments with reference to these dividends were made in the balance-sheet prepared as at 30th June, 1960, and in the said balance-sheet a sum of Rs. 7,56,000 was shown as preference share dividend for the three years ended 30th June, 1958. At the annual general meeting of the company, which was held on 28th March, 1961, the payments of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon the company to show cause why action under section 18(7) should not be taken against it and ultimately made an order under the said section to the extent of Rs. 2,32,748.70. According to the Income-tax Officer, since the dividends were declared out of the profits of the previous year ended 30th June, 1960, they were in the nature of interim dividends pertaining to the previous year relevant to the assessment year 1961-62 and, consequently, not entitled to exemption under section 19(4) of the Finance Act, which gave that exemption in relation to dividends declared in respect of any previous year, relevant to any assessment year prior to the assessment year 1960-61. The view taken by the Income-tax Officer was confirmed in appeal by the Appellate Assistant Commissioner, who observed that, as the dividend had been declared out of the income of the year for which the relevant assessment year was the year 1961-62, provisions of section 19(4) of the Finance Act were clearly inapplicable to the said dividends. In the further appeal to the Income-tax Appellate Tribunal, it was contended on behalf of the assessee that the view taken by the Income-tax Officer and the Appellate Assistan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Indian Income-tax Act against the company. The assessee applied under section 66(1) of the Income-tax Act for a reference to this court and on the said application the Tribunal has referred the following question to this court as arising out of its order : " Whether in view of section 19(4) of the Finance Act, 1959 (as amended by the Finance Act, 1960), there was any obligation to deduct tax under sections 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 ?" Sections 18(3D) and (3E), which were introduced by the Finance Act, 1959, so far as they are material for our purpose, run as follows: " 18. (3D) The principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends within India shall, before making any payment in cash, or before issuing any cheque or warrant in respect of any dividend or before making any distribution or payment to a shareholder of any dividend within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to the assessment year 1960-61. Now, the previous year relevant to the assessment year 1960-61 would be a year ending on or before March 31, 1960. Consequently, the previous year relevant to any assessment year prior to the assessment year 1960-61 would be the previous year ending on the 31st March, 1959, or an earlier previous year. In order to qualify for the exemption under section 19(4) of the Finance Act, therefore, the dividend declared or payable by the company between the dates April 1, 1959, and June 30, 1960, must be in respect of a previous year ending on the 31st March, 1959, or an earlier previous year. There is no doubt in the present case that the first of the two conditions specified in section 19(4) of the Finance Act, 1959, is clearly satisfied. The only question is whether the second condition is also satisfied, and that would depend upon whether the dividends declared by the company on February 9, 1960, and on May 30, 1960, and paid out by it on April 25, 1960, and June 24, 1960, are dividends "in respect of the previous year relevant to the assessment years, which are prior to the assessment year 1960-61" within the meaning of the provision. Now, if the resol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, is a contingent right and becomes an enforceable right on the contingencies having occurred, viz., that the company has made profits and has further determined to distribute the same. In other words, the right of a shareholder to the dividend is a right dependent upon the availability of profits and the determination of the company to distribute the same. In the case of a cumulative preference shareholder, therefore, although the shareholder is entitled to a dividend at a fixed rate for every year, the right again is subject to the same conditions, viz., that there must be profits made by the company and that there must be a determination to distribute the same. When, however, the company has profits and decides to distribute them, it would be obligatory on the part of the company to pay the cumulative preference shareholder not only the dividend at the fixed rate to which he is entitled in the year of distribution but, if he has not been paid in earlier years, to the payments which have remained in arrears. The payments, however, which were not made in the earlier years, could not be treated as arrears in the sense that they were due and payable but were passed over by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits are declared for distribution, although the amount is determined on the basis of the whole amount of the dividend unpaid. In the other case, the dividend paid by the company on cumulative preference shares for a number of years since 1939, was found to be deficient on challenge made to the method of computation of the dividend adopted by the company and the company decided to make up the deficient payment, and a question arose as to whether the aggregate amount should be distributed among the holders of those shares registered at the respective times when the deficient dividends were paid or should be paid wholly to those registered at the time of payment. It was held that the distribution would take the form of a dividend and, would be solely in respect of the year in which it was declared and consequently, persons entitled to the division would be those on the share register at the date of the declaration. It is no doubt true that, in both these cases, the view was taken that the dividend declared by a company would be in respect of the year in which it is declared and that will be so, even if the quantum of the dividend declared is determined with reference to the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that the right to the dividend would accrue and be acquired by the shareholder in that year and it could not be said to have accrued to him or acquired by him in respect of each of the years of arrears. Nevertheless, the dividend, paid in the subsequent year could still be regarded as paid with reference to all the years of arrears, inasmuch as the quantum paid is on the basis of the arrears for all the years. The expression "in respect of any previous year" in our opinion is quite capable of being interpreted as with reference to any previous year and it is possible to give the provision a construction that what it has intended is that, where dividends are declared within the dates specified, viz., 1st April, 1959, and 30th June, 1960, if the dividend declared has reference to the claim for dividends for any prior year, which is prior to the previous year relevant to the assessment year 1960-61, the obligation imposed on the company to deduct the taxes will not apply to that extent. The reason why we are inclined to take this view is that, in our opinion, the legislature having decided to impose an obligation on the company to deduct tax on dividends paid after April 1, 1959, ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d edition, volume 6, at para. 778, on page 402 of the said volume, where it has been stated as follows : " A final dividend can, as a general rule, only be sanctioned at the annual meeting, when the accounts are presented to it, and the articles usually contain a specific provision to this effect. A power to declare interim dividends is usually vested by the articles in the directors. An interim dividend is a dividend declared at some date between the ordinary general meetings. " According to the learned counsel, the directors of a company have no authority to declare a dividend in respect of a year, the annual general meeting in connection whereof has already taken place and the accounts closed in subsequent years, and has in that connection invited our attention to a decision of the Calcutta High Court in Raghunandan Neotia v. Swadeshi Cloth Dealers Ltd., in which it has been held as follows: " Where the accounts were closed at the annual general meeting, dividends cannot be declared retrospectively and with reference to the years accounts whereof were closed even if the directors remain the same. " In view of these principles, the learned counsel has argued that the divi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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