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TMI Blog1962 (4) TMI 129X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 72,000 Proposed ordinary dividend ... ₹ 2,40,000. It is common ground that the directors of the company made a recommendation to the General body that the dividends should be paid as mentioned above in their report dated the 26th November, 1956, and that the General body at its meeting, held on 29th December, 1956, approved the balance sheet and the directors' report and sanctioned the payment of the dividends proposed. The Income Tax Officer refused to allow the deduction of these sums as deductions properly allowable in the computation of the net wealth, and the appeal to the Appellate Assistant Commissioner also failed that authority taking the view that these sums did not represent debts owed by the assessee on the valuation date. This view was concurred in by the Appellate Tribunal, the Tribunal holding that unless and until there is a declaration of dividend by the company in General body meeting, no debt can be created in favour of a shareholder. Thereafter, on the application of the assessee, the Tribunal referred the following questions for the determination of this Court: Whether the sum of ₹ 72,000 being the proposed dividend on preference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment year 1959-60. 5. The question common to all the four tax cases is shortly whether, on the making of a provision in the balance sheet by the directors for the payment of dividends to the share-holders, the balance sheet being prepared as on the relevant valuation date, that amount so set apart on the recommendation of the directors, is liable to be excluded from the computation of the wealth of the assessee. The further question relates only to the assessee in T. C. No. 210 of 1959 and the only material difference therein is whether the provision for the payment of dividends to preference share-holders stands on a footing different from that of payment of dividends to ordinary share-holders. 6. Section 3 of the Wealth Tax Act of 1957 lays the charges. It provides that subject to the other provisions contained in the Act, there shall be a charge for every financial year commencing on and from the 1st day of April, 1957, a tax in respect of the net wealth on the corresponding valuation date of every individual ......... and company at the rate or rates specified in the schedule . 7. The charge is upon the net wealth of the company on the correspondin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shown as liabilities and deducting this total, the balance was shown as the profit as per the profit and loss account. This should mean, according to the learned counsel that the dividends were part of the current liabilities. He also points out that under the heading current liabilities the two sums are indicated against the sub-heading of sundry creditors . It seems to be the contention that if regard is to be had to the balance sheet as on the valuation date, it should be taken that these two amounts of proposed dividends became accepted current liabilities, and that, therefore, they would fall within the scope of the expression debts owed by the assessee on the valuation date . The argument appears to be that the balance sheet should be taken as it is for the purpose of determining the net value of the assets of the business. This argument does not give due weight to the powers given to the Wealth Tax Officer to make such adjustments in the balance sheet as the circumstances of the case may require. It seems to us that it is open to the Wealth Tax Officer to examine the balance sheet and to determine whether in that balance sheet any amount is shown as liability which are n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Board . Article 146: The Board may from time to time pay to the members such interim dividends as appears to it to be justified by the profits of the company . It may be taken that the provisions relating to the payment of dividend in the case of the other companies are not different from the above. While it is well recognised that the Board of directors is competent to pay interim dividends without reference to the general body under certain circumstances, where such power is not exercised by the Board of directors, it is only the general body that can declare final dividends. The general body is competent to overrule the recommendation made by the Board of directors and to decide even against the payment of any dividend. Even in the case of an interim dividend which the directors have authority to declare the general body can rescind the declaration before the payment has been made: See Laguram Nitrate Co. Ltd. v. Shrorder and Co. and Schmidt, (1901) 85 LT 22. According to Palmer's Company Law, the declaration of dividend by the company in general meeting is part of the ordinary business of the annual general meeting. The company in general ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion being an allotment of British Transport Stock. The Company had to distribute this stock to its ordinary shareholders. The distribution was described in the resolution as being a special profits dividend payable out of the profits realised by the company in the sale of part of their undertaking. After the issue of the notice referred to but before the date of the meeting, a shareholder died. Under his will, his stock formed part of a settled fund and the question arose, whether, though the distribution of the special profits dividend was not made before his death, the payment must be regarded as part of his property so as to form part of the capital of the fund settled or as income of the residuary estate. It was held that the payment must be regarded as income that had accrued due before he had died, and though at the time of his death he had only a contingent or future right to the British Transport Stocks, it was nevertheless part of his property and when the payment was received it became capital of the fund and not only part of the income of the residuary Trust fund. The decision to our minds proceeded on the footing that every person who was a stock-holder on a specified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the dividend declared by the general body is a debt, a liability of the company, as on the valuation date. It seems difficult to see what assistance the above decision can give in this connection. It is true that for finalising the accounts of the company, the company may debit the dividend declared as on the valuation date when the accounts are finally passed by the general body. But that hardly answers the question whether there was a legal liability on the part of the company to pay that amount on the valuation date. 14. There are no doubt decisions where certain items of expenditure or income, though they are expended or received subsequently, have been included in the accounts of a prior year. Calcutta Co. Ltd. v. Commr. of Income Tax West Bengal [1959]37ITR1(SC) decided that on the mercantile system of accounting, an estimate of an accrued liability to be discharged at a later date, could be an allowable item of expenditure under Section 10(2)(XV). That was clearly a case where a legal liability to expend that amount had arisen, though the expenditure was actually incurred subsequently. Again in the Commr. of Income Tax Delhi v. Nagiri Mills Co. Ltd. [1958]33ITR681(B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring in the Madras Agriculturists Relief Act in Narayanan Chettiar v. Annamalai Chettiar AIR1961Mad313 . They say, In the dictionary of English Law by Earl Jowitt, the meaning of the word payable is thus rendered: 'A sum of money is said to be payable when a person is under an obligation to pay it. Payable may, therefore, signify an obligation to pay at a future time but when used without qualification payable means that the debt is payable at once as opposed to owing . 18. In our view, no obligation rested upon the assessee companies in the present cases to pay any amount as dividend as on the valuation date, no liability fastened on the company to pay any amount as dividend on that date and no shareholder acquired a right to demand payment of any amount by way of dividend on those dates. Both the right on the part of the shareholder and the liability on the part of the company, arose only on and after the declaration of the dividend by the general body. 19. In Halsbury's Laws of England, Volume 7, in paragraph 799, it is stated, Upon the declaration of a dividend, the sums due for dividend become debts due from the company to the sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be paid, he will deduct its value from the assets. Similarly, in the case of 'provisions for taxation' a buyer in the open market will deduct it from the assets, because this is a liability and he will doubtlessly consider that the amount of taxation will have to be paid, and will eventually come out of the assets. In other words, a buyer in the open market will not make a valuation of notional assets but of real assets. That which is earmarked to be paid out, or which must be paid out because there is a legal liability, will never be considered by him as an asset for the purpose of calculating the value he is prepared to pay for buying a share............... 22. We are therefore unable to accept the argument that the provision for proposed dividends made by the directors in the balance sheet on the respective valuation dates operates as an accrued liability or that the dividends assume the character of debts owed by the company. It follows that those amounts cannot be deducted in assessing the net wealth of the company. 23. The next question relates to the proposed payment of dividend on preference shares. This is relevant to T. C. No. 210 of 1959. It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uces an element of discretion on their part . 24. The Articles of Association of Kothari Textiles provide in Article 5 (c): The holders of preference shares shall be entitled to be paid out of the profits which the board shall determine to distribute by way of dividend a fixed cumulative preferential dividend at the rate of six per cent tax-free per annum and to a right on a winding up to be paid all arrears of preferential dividend whether earned or declared or not upto the date of commencement of the winding up............in priority to any payment in respect of ordinary shares . 25. Article 147 also provides that no dividend shall be payable except out of the profits of the year or any other undistributed profits except as provided by Sections 205 and 208. It is obvious that the dividend payable to holders of preference shares must necessarily depend upon there being distributable profits and in terms of the relevant article, what the preference shareholders get is only a priority to payment over the equity shareholders. That they are entitled to certain special rights on the winding up of the company does not make any difference. Whether or not there ..... X X X X Extracts X X X X X X X X Extracts X X X X
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