Full Judgment Text
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PETITIONER:
KISHINCHAND CHELLARAM
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX,CENTRAL BOMBAY
DATE OF JUDGMENT:
19/04/1962
BENCH:
SHAH, J.C.
BENCH:
SHAH, J.C.
DAS, S.K.
HIDAYATULLAH, M.
CITATION:
1963 AIR 390 1963 SCR (2) 268
CITATOR INFO :
D 1967 SC 767 (3)
R 1972 SC 397 (5)
ACT:
Income Tax- Dividend declared by company inadvertently
without providing for taxation--Can the character of
dividend be altered to a loan by a subsequent resolution-
Indian Income-Tax Act, 1922 (11 of 1922), 8. 16 (2).
HEADNOTE:
Chellsons Ltd., a private Ltd. Company, declared dividends
without taking into account the company’s liability for
taxation, including Extra Profits Tax. The dividends so
declared were credited in the books of the company to the
accounts of each of the share-holders. Share-holders in
their return for the relevant assessment year included the
amounts credited to them in the company’s books of account.
Payment of dividends otherwise than out of profits of the
year, or other undistributed profits was at the material
time prohibited, by Art. 97 of Table A of the Indian
Companies Act, 1913, as amended by Act XXXII of 1936 read
with s. 17 (2) of the Act; therefore such payment could not
be regarded as lawful, the company having failed to provide
for payment of tax before declaring dividend. On
discovering its mistake at an Extra Ordinary General Meeting
another revolution purporting to reverse the earlier
resolutions declaring the dividends was moved, and the
shareholders unanimously resolved inter alia that all the
shareholders having been fully apprised of the bonafide
mistake, the dividends inadvertently paid be considered as
loans to such individual shareholders. Before the Income
Tax Officer the assessee who was a shareholder did not file
a revised return, nor did he claim that the amount received
by him was not liable to tax. But on appeal before the
Appellate Assistant Commissioner the assessee contended that
amount credited by the company to his account was not in
view of the subsequent resolution, liable to be taxed as
dividend income. The plea was rejected. Before the
Tribunal the assessee contended that the dividends were
declared out of capital and such declaration was invalid
under the Companies Act.
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The tribunal held that what was paid and received as
dividend could not by a subsequent resolution of the company
be treated as paid otherwise than as dividend. The High
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Court agreed with the Tribunal observing that assessment for
each year is self-contained and subsequent events cannot
justify modification of the assessment.
The assessee came up in appeal to the Supreme Court.
Held, that if the directors of the company have deliberately
paid or negligently been instrumental in paying dividends
out of capital they may have, in an action by the company or
if the company is being wound up at the instance of the
liquidator, to compensate the company for loss occasioned by
their wrongful or negligent conduct.
In Matter of The Union Bank, Allahabad Ltd. (1925) I.L. R.
47 All. 669 approved.
Held, further, in ascertaining whether liability to pay
income tax on dividend arose, a resolution of the company
whereby payments made to the shareholders as dividends are
to be treated as loans cannot retrospectively alter the
character of the payment and thereby exempt it from
liability which has already attached thereto.
Held, also, the payment made as dividend by a company to its
share holders does not lose the character, of dividend
merely because it is paid out of capital. Under the Income
Tax Act, liability to pay tax attaches as soon as dividend
is paid, credited or distributed or is declared. The Act
does not contemplate an enquiry whether the dividend is
properly paid, credited or distributed before liability to
pay tax attaches thereto.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Nos. 462 to 465 of 1960.
Appeals from the judgment and order dated September 26,1955,
of the Bombay High Court I. T. R. No. 22 of 1955.
K. N. Rajagopal Sastri, J. K. Hiranandi and N.H. Hingorani
for the appellants.
N. D. Karkhanis and D. Gupta for the respondents.
1962. April 19. The Judgment of the Court was delivered by
270
SHAH, J.-This is a group of appeals against orders passed by
the High Court of Bombay in Income Tax Reference under s.
66(1) of the Indian Income Tax Act.
Chellsons Ltd. a Private Company was incorporated in April
1941. The shareholders of the company at the material time
were Kishinchand Chellaram holding 6 shares and Shewakram
Kishinchand, Lokumal Kishinchand and Murli Tabilram each
holding three shares. Kishinchand, Shewakram and Lokumal
were directors of the company. At a General meeting of the
shareholders of the company held on July 10, 1943, it was
resolved to declare dividend at "60 per cent on the shares"
of the company and for the purpose of that of declaration
the profits of the year 1941-43 were included in the profit
of the year 1942-43. Pursuant to this resolution, Rs.
46,000/- were credited in the books of the company to the
account of Kishinchand Chellaram on March 31, 1944 and Rs.
23,000/- were credited to each of the other three
shareholders. Another meeting of the shareholders was held
on July 15, 1944, and it was resolved to declare dividend at
"60 per cent on the shares" out of the profit of the company
for 1943-44. Pursuant to this resolution, on September 29,
1944, Rs. 30,000/- were credited in the company’s books of
account to Kishinchand and Rs. 15 000/- were credited to the
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accounts of each of the other there shareholders.
In their respective returns for the assessment year 1945-46,
Kishinchand, Showakram, Lokumal and Murli-who will
hereinafter be collectively called the assessees-included
the amounts credited to them in the company’s books of
account as dividends for the three years 1941-42 to 1943-44.
On December 4,1947, at an Extraordinary General Meeting
another resolution purporting to’ reverse the earlier
resolutions dated July 10, 1943 and July
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15, 1944, was passed by the company. The resolution read as
follows:-
"The notice dated 25th November, 1947 calling
the Extraordinary General Body Meeting for
today, was placed on the table.
" Whereas the sum of Rs. 1,90,000 paid to the
shareholders during the year 1944-45 as per
details given below viz-
1941-42 1942-43 1943-44
Total
Mr. inch and
Chellaram 10,000 36,000 30,000
76,000
Mr. Shewakram
Kishinchand 5,000 18,000 15,000
38,000
Mr. Lokumal
Kishinchand 5,000 18,000 15,000
38,000
Mr. Murli
Tahilram 5,000 18,000 15,000
38,000
Total 25,000 90,000 75,000
190,000
was sanctioned by the General Body inadver-
tently without taking into consideration the
Company’s liability for taxation, including E.
P. T. and all the shareholders having been
fully apprised of the bona fide mistake it is
hereby unanimously resolved that such dividend
inadvertently paid be considered as loan to
such individual shareholders’ and be paid back
to the Company forthwith, and the con-
sideration of any dividend to the shareholder
be deferred to the next Annual General Meet-
ing. The adjustment in this regard will not
272
be made in the books of the Company as on 6th
April, 1947."
Even though this resolution was passed, and the proceedings
for assessment before the Income Tax Officer were not
disposed of the assessees did not file revised returns
excluding the amounts credited as dividend, nor did they
claim before the Income Tax Officer that those amounts not
being income were not liable to tax.
By his order dated January 1, 1950, the Income Tax Officer
brought the income returned by the assessees including the
amounts credited to them as dividends, for the three years
to tax. In appeals to the Appellate. Assistant
Commissioner, the assessees contended that the amounts
credited by the Company to their accounts in respect of the
years 1941-42, 1942-43 and 1943-44 were not, in view of the
subsequent resolution, liable to be taxed as dividend
income. ’The Appellate Assistant Commissioner rejected this
plea. The assessees then appealed to the Appellate Tribunal
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and contended that the dividends for the three years in
question were declared out of capital and such declaration
of dividend being under the Indian,Companies Act invalid, in
the assessment the amounts, credited to their accounts as
dividend should be excluded. The Income Tax Appellate
Tribunal held that the dividends in respect of the years
1941-42 and 1942-43, having been received before the year of
account relevant to the year of assessment 1945-46, were not
liable to be taxed in that year. But the Tribunal confirmed
the orders of assessment as to the dividend for the year
1943-44, because, in their view, the resolution declaring
dividend could not be reversed by a resolution at a
subsequent General Meeting after the dividends had been
paid. At the instance of
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the assessees the Appellate Tribunal referred in each of the
four cases the following two questions:-
(1) Whether the shareholders of the company
at the meeting held on December 4, 1947 could
reverse the resolutions passed on July 10,
1943 and July 15, 1944 ?
(2) Whether the sum of Rs...............
received by the assessee............... as
dividend in the account year 1944-45 relevant
for the assessment year 1945-46 has been
lawfully taxed in the assessment year 1945-46?
If not, could only the dividends that could
have been paid out of the profits or a part
thereof be taxed in the assessment year 1945-
46 ?
(In each set of questions the appropriate
amount received and the name of the assessee
was incorporated in the second question).
The Tribunal observed in the order of reference that the
Income Tax Department challenged the correctness of the
claim made by the shareholders that dividend was paid
without making provision for payment of tax, but they did
not desire to go into accounts to ascertain whether
provision for tax was made, as "the parties at the time of
the hearing of the appeals proceeded on the footing that no
such provision was made. Even if provision was made, it
makes no difference in so far as the Department is
concerned. The question is whether any divident has been
declared out of capital and that question will have to be
examined at the time of passing the order under Section 66
(5) of the Act, in view of question No. 2."
The High Court declined to answer the first question because
in their view it was unnecessary, and ’answered the first
part of the second
274
question in the affirmative, and hold that the second part
did not on that view arise for decision. Against the order
of the High Court these four appeals have been preferred by
the assessees.
The only question material to these appeals which was argued
by the assessees before the Tribunal was whether it was
competent to the company by a subsequent resolution to
reverse an earlier resolution declaring the dividend. The
Tribunal held that the earlier resolution could not be
reversed by a subsequent resolution, and therefore what was
paid and received as dividend could not by a subsequent
resolution of the company be treated as paid otherwise than
as dividend. The High Court held that the assessments were
properly made by the Income Tax Officer. They observed that
the assessment of an assessee for each year is self-
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contained and subsequent events cannot justify modification
of the assessment.
Section 16(2) provided (in so far as it is material) that
"for the purposes of inclusion in the total income of an
assessee any dividend shall be deemed to be income of the
previous year in which it is paid, credited or distributed
or deemed to have been paid, credited or distributed to
him.. x x x". It is common ground that on July 15, 1944
dividend was declared by a resolution of the company and the
amounts payable to the assessees were, in fact, credited on
September 29, 1944, in the accounts maintained by the
company, to each of the shareholders as dividend. The
amounts were therefore declared as dividend, treated as
dividend and received by the assessees as dividend. The
assessees included the dividends so credited to their
accounts in the returns. It may be assumed that the company
failed to provide for payment of tax before declaring
dividend and that after providing for payment of tax the net
profits of company may not have
275
been sufficient to justify declaration of dividend at 60% of
the value of the shares. On that assumption it may be
inferred that the dividend or a part thereof was in truth
paid out of the capital of the company. Payment of dividend
otherwise than out of profits of the year, or other
undistributed profits was at the material time prohibited by
Art. 97 of Table A- of the Indian Companies Act, 1913 as
amended by Act. XXXII of 1936 read with s. 17(2) of the
Act; and therefore such payment may be regarded as unlawful.
If the Directors of a company have deliberately paid or
negligently been instrumental in paying dividend out of
capital they may have, in an action by the company-or if the
company is being wound up at the instance of the Liquidator-
to compensate the company for loss occasioned by their
wrongful or negligent conduct. (In’ the matter of The Union
Bank Allahabad Ltd. (1). In this case we are not concerned
with the validity of the distribution of dividend, ’or the
liability of the directors arising out of improper
distribution of dividend. We are concerned with the true
character of the payment made on September 29, 1944, to the
assessees. If dividend is declared and the amount is
credited or paid to the share-holders as dividend can the
character of the credit or payment be altered by a
subsequent resolution so as to alter the incidence of tax
which attaches to that amount?
By virtue of s. 16(2) the liability to pay tax attaches as
soon as dividend is paid, credited or distributed or deemed
to have been paid, credited or distributed to the
shareholders and the Income Tax Act contains no provision
for altering the incidence of liability to pay tax on the
dividend, merely because it is found that in declaring
dividend and paying it the company violated a prohibition
(1) (1925) I.L.R. 47 All. 669.
276
relating to payment of dividend in the Indian Companies Act.
It is not necessary to consider in this case whether the
shareholders may be compelled by the company to refund the
amount improperly paid as dividend out of capital. Even if
the shareholders agree to refund the amounts received by
them as dividend the original character of the receipt as
dividend is not thereby altered. In ascertaining’ whether
liability to pay Income-tax on dividend arose, a resolution
of the company whereby payments made to the shareholders as
dividend are to be treated as loans cannot retrospectively
alter the character of the payment and thereby exempt it
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from liability which has already attached thereto.
Before this Court two contentions were raised by counsel for
the assesses : (1) that on the amount received by each of
the asseseees tax was not eligible because it was not
dividend at all, and (2) that what was declared and paid as
dividend ceased to be such by virtue of the subsequent
resolution. The first plea was not raised before the
Tribunal, and on the question as framed it did not arise for
decision on a reference under s. 66 of the Indian Income Tax
Act. The jurisdiction of the High Court under s. 66 being
advisory, they were concerned to give their opinion on
questions which fairly arose out of the order of the
Tribunal, and were in fact raised and referred. The
question whether the payment made by the Company was not in
the nature of dividend not having fairly arisen out of the
order of the Tribunal, it cannot be raised in this Court as
it could not in the High Court. In any event, we are of the
opinion that payment made as dividend by a company to its
shareholders does not lose that character merely because it
is paid out of capital. Under the Income Tax Act, liability
to pay tax attaches as soon as dividend is paid, credited or
distributed or is so
277
declared. The Act does not contemplate an enquiry whether
the dividend is properly paid credited or distributed before
liability to pay Tax attaches thereto. The answer to the
second contention for reasons already set out by us must be
in the negative.
The appeals therefore fail and are dismissed. In the
circumstances of the case there will be no order as to
costs.
Appeals dissmissed.