JUDGMENT
Sankar Prasad Mitra, J.
1. The assessment year, in this reference under Section 66 (1) of the Indian Income-tax Act, 1922 is 1961-62. The corresponding accounting year is R. N. 1961. The assessee is a shareholder of the North Bengal Sugar Mills Co. Ltd. The registered office of this company is in Calcutta but its mills are in East Pakistan. The company’s profits arise wholly in Pakistan. For the previous year relating to the assessment year 1960-61 the company is said to have declared dividend on the 6th October, 1960. The assessee’s share of such dividend should have amounted to Rs. 8,000/-.
2. Before the Income-tax Officer the assessee contended that the said sum of Rupees 8,000/- was not assessable in her hands since the company did not issue any dividend warrants and its declaration of dividend was subject to remittance from Pakistan. In fact, by consent of parties the company’s relevant resolutions have been placed before us. The resolutions run thus:
“A dividend aggregating Rs. 60,000/- be and is hereby declared to the preference shareholders subject to taxation and remittance from Pakistan.”
“A dividend aggregating Rs. 1,20,000/- be and is hereby declared to ordinary shareholders subject to taxation and remittance from Pakistan.”
3. The assessee’s contention before the Income-tax Officer was that the declaration was merely a conditional declaration and it had not given the shareholders any immediate rights to claim any dividends from the Company. The Income-tax Officer rejected this contention and included the said sum of Rs. 8,000/- in the assessee’s total income.
4. The Appellate Assistant Commissioner supported the Income-tax Officer. He said that under Section 12(1A) as amended by the Finance Act, 1959, the dividend declared by a company would be deemed to be the income of the previous year in which it was so declared and, as such, the Income-tax Officer, was correct in including the sum of Rs. 8,000/- as ‘deemed dividend’ in the assessee’s assessment,
5. The Tribunal also agreed with this view. The Tribunal held that whether the declaration was conditional or not would not affect its taxability. The inclusion of the aforesaid sum of Rs. 8,000/- was, therefore, upheld.
The following question has been referred to this Court:
Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that under Section 12(1A) of the Indian Income-tax Act, 1922, as amended by the Finance Act, 1959, the sum of Rs. 8,000 representing dividend in respect of the shares held by the assessee in M/s. North Bengal Sugar Mills Co. Private Ltd., was chargeable to tax as the income of the previous year in which it was so declared? Now, Section 12(1A) as amended by the Finance Act of 1959 is as follows:–
“Income from other sources shall include dividends, and any dividend declared by a Company or distributed or paid by it within the meaning of Sub-clause (a) or Sub-clause (b) or Sub-clause (c) or Sub-clause (d) or Sub-clause (e) of Clause (6A) of Section 2, shall be deemed to be the income of the previous year in which it is so declared, distributed or paid, as the case may be.”
We are not concerned in this reference with the words “distributed” or “paid” in the sense they have been used in Section 12(1A). We have to concentrate on dividend “declared” within the meaning of the Sub-section. A similar question arose in Income-tax Reference No. 27 of 1965 (Cal) (Sm. Chandra Jalan v. Commissioner of Income-tax (Central), Calcutta) and in Income-tax Reference No. 28 of 1965 (Cal), (S. B. Jalan and others legal heirs to the estate of late Chandra Moni Jalan v. Commr. of Income-tax, (Central) Calcutta) which was decided by a Bench consisting of Mr. Justice Chatterjee and myself on “the 4th July, 1968. At that time the assessee’s counsel made a casual statement that a declaration “subject to remittance from Pakistan” was not covered by the amended provisions of Section 12 (1-A); but he neither advanced any reasons for any arguments in support of this contention nor did he rely on any authorities. This Court took the view that as soon as the declaration was made the above provisions of Section 12 (1-A) were attracted. But on a subsequent occasion in Income-tax Reference No. 111 of 1965 (Cal) (Commr. of Income-tax (Central) Calcutta v. Sm. Panna Jalan) the same problem came up for consideration before a Bench comprised of my lord and myself. In his reference learned counsel for both the parties argued to some extent their respective points of view and I felt persuaded to change my previous view on the subject. I held that a declaration, subject to a condition precedent, was no declaration at all until the condition was fulfilled and, as there was no evidence that the condition was, in fact, fulfilled the inclusion of dividend income in the manner aforesaid could not be supported.
6. In this reference we have the privilege of hearing counsel for both the parties, once again, and they have also cited authorities in support of their respective contentions.
7. The Income-tax Act does not throw any light on what declaration of dividend is and its necessary implications. We have, therefore, to seek guidance from relevant provisions both in India and in England of the Companies Acts to appreciate the true nature of the problem under consideration. In J. Dalmia v. Commr. of Income-tax, the Supreme Court had to analyse the character and incidents of an “interim dividend” and in doing so their Lordships had to examine the difference between ‘declaration of dividend in a general meeting’ and ‘a directors’ declaration of an interim dividend’. At p. 87 (of ITR) = (at p. 1868 of AIR) Mr. Justice Shah, speaking for the Supreme Court, observes:–
“There is no doubt that a declaration of dividend by a company in general meeting gives rise to a debt. ‘When a company declares a dividend on its shares, a debt immediately becomes payable to each shareholder in respect of his dividend for which he can sue at law, and the statute of limitation immediately begins to run’: In re Severn and Wye and Severn Bridge Rly. Co., (1896) 1 Ch. 559. But this rule applies only in case of dividend declared by the company in general meeting. A final dividend in general may be sanctioned at an annual meeting when the accounts are presented to the members. But the power to pay interim dividend is usually vested by the Articles of Association in the directors. For paying interim dividend a resolution of the company is not required: if the directors are authorised by the Articles of Association they may pay such amount as they think proper, having regard to their estimate of the profits made by the Company. Interim dividend is therefore paid pursuant to the resolution of the directors on some day between the ordinary general meetings of the company. On payment, undoubtedly interim dividend becomes the property of the shareholder. But a mere resolution of the directors resolving to pay a certain amount as interim dividend does not create a debt enforceable against the company, for it is always open to the directors to rescind the resolution before payment of the dividend. In Lagunas Nitrate Co. Ltd. v. Henry Schroeder and Co., (1901) 17 ILR 625 the directors of a company passed a resolution declaring interim dividend payable on a future date, and requested the company’s bankers to set apart, out of the money of the company in their hands, into a special account entitled ‘Interim Dividend Account,’ a sum sufficient to cover the dividend, pending the company’s instructions. But before the date fixed for payment, the directors resolved that pending certain litigation to which the company was a party payment of dividend be postponed. It was held by the Court that the directors had the right even after resolving to pay interim dividend to rescind the resolution and no enforceable right arose in favour of the members of the company for the declaration of interim dividend.
In Halsbury’s Laws of England, third edition, volume 6, Page 402, Article 778, it has been stated: “a directors’ declaration of an interim dividend may be rescinded before payment has been made.
Therefore, a declaration by a company in a general meeting gives rise to an enforceable obligation, but a resolution of the board of directors resolving to pay interim dividend or even resolving to declare interim dividend pursuant to the authority conferred upon them by the Articles of Association gives rise to no enforceable obligation against the company, because the resolution is always capable of being rescinded. ………”
8. It is clear, therefore, that a declaration of dividend which does not create a debt immediately payable to each shareholder or does not give rise to an enforceable obligation of the company to pay dividend is no declaration of dividend at all. At any rate, it is not an effective declaration in law. In Gower’s “Modern Company Law”, 2nd Edn., at p. 330 also it is stated, relying on the case reported in (1896) 1 Ch. 559 and other authorities that once the dividend has been lawfully declared the amount due to each share-holder becomes a debt for which he can sue the company.
9. Bearing these principles in mind we have to scrutinise the resolutions which the company had passed in the instant case. It seems to us that a declaration of dividend “subject to remittance from Pakistan’ is not a declaration for which a shareholder is entitled to sue the company and as such, such a declaration cannot be brought within scope of Section 12 (1-A) quoted above.
10. Learned counsel for the Department has placed strong reliance on a judgment of the House of Lords as also a decision of the Madras High Court to support the view the Tribunal has taken in the instant reference. In Aramayo Francke Mines Ltd. v. Public Trustee, (1922) 2 AC 406, an English Company had certain alien enemy shareholders and some assets in Germany. The directors of the company as well as the company in general meeting, from time to time after the outbreak of the war with Germany, passed resolutions declaring interim and final dividends respectively, subject in each case to a condition that as regards members of the company resident in Germany, Austria and Turkey, the dividend should be payable only out of assets in Germany, and as regards members resident elsewhere out of assets in England. The Enemy Trading Amendment Act, 1914 by Section 2, Sub-section (1) provided that any sum which, had a state of war not existed, would have been payable to any enemy by way of dividends should be paid by the company to the custodian appointed by the Act, and Section 4, Sub-section (1), empowered the Court by order to vest enemy property in the custodian. By an order made on August 24, 1916, under Section 4, Sub-section (1), it was ordered that the right to transfer the shares held by alien enemies and to receive any dividend “now due and to accrue due thereon” vested in the custodian, and the shares were transferred into his name in due course. The House of Lords held that the resolutions, so far as they provided for payment only out of assets in Germany, were void as against the custodian, and that the company was liable out of any assets in its hands to pay him the amounts of dividents, whether declared before or after the vesting order. Lord Buckmaster at pages 409 and 410 observes:
“It is contended on behalf of the appellants that there is no right whatever in the custodian trustee to any part of either of these sums of money, because either the conditions that were attached to the resolutions for payment were good and they were at liberty to permit the enemy shareholders to satisfy the debt owing by the English company out of the foreign assets, or, if they were paid, the whole declaration of dividend was bad throughout, there consequently was never any declaration of dividend, and no debt is due from the company to the custodian trustee. I will not pause to consider what the ultimate effect might be upon the directors of the company if the latter branch of this argument found favour in your Lordships’ minds, because I think it is founded upon a mistaken view of these resolutions. In truth, the company did in plain terms declare a dividend, and it was that, and that only, that was within the competence either of the directors or of the company. The conditions which were attached except the one as to the date of payment, are conditions which there was no power whatever to make effective, but, although they have purported to make these conditions of the declaration of dividend, their addition has not affected the fact that the dividend was declared. It has merely attempted to impose upon the method by which the liability thereby created was to be discharged conditions on which it is impossible for the company to rely. It is, therefore, my clear opinion that all these dividends were actually declared, and it results that from their declaration at their various respective dates there were debts that arose from the company to the various shareholders, including those who may be referred to as the enemy shareholders.”
11. On the basis of this decision counsel for the Department contends that in the instant reference also the dividend was declared but the condition that was attached to it viz., “subject to remittance from Pakistan was not a condition which affected the enforceability of the dividend by the shareholders and, as such, it was of no effect.
12. There is a similar decision of the Madras High Court in C. Hariprasad v. Amalgamated Commercial Traders Pvt., Ltd., . Here, for the year ending December 30, 1959, the directors of the company reported to its shareholders that the commission earned during the year had not yet been received from the principals and concluded by saying:
“You will note that the disbursement of the proposed dividends to our shareholders will depend on our being able to collect out-standings from our principals.”
13. Then, at the general meeting of the company held on the 30th December, 1959, the following resolution relating to the declaration and payment of dividend was passed:–
“…… …… …… that a dividend of Rs. 100/- per share (taxable) on equity shares be paid to such shareholders as appear on the register of members as on date, payments to be effected when commission due from principals are realised.”
14. The Madras High Court has, inter alia, held that where the resolutions passed by a company in form and substance consisted of two separable parts, viz., the first part declaring dividend and the second part saying in contravention of Section 207 of the Companies Act, 1956 that payments will be effected when the commission due from the principals are realised, the original but separable resolution relating to the declaration of dividend being within the competence of the company to pass should alone be regarded as resolution actually passed. In that view, says the Madras High Court, the amount of dividend would become payable forthwith on such a declaration and if that amount is not paid there will be a valid debt on which the petition for winding up of the company could be founded.
15. It seems the Madras High Court’s reasonings are based primarily on Lord Ruckmaster’s judgment referred to above. But in both these cases, it should be noticed, that the conditions relating to declaration of dividends were conditions attaching to the method or manner of payment only. And the declarations themselves appear to be unequivocal and unconditional. In our case, the framing of the resolution presents a different picture. Reading the resolution as a whole our impression is that the condition viz., subject to remittances from Pakistan’ does not speak of the method or the manner which the company would adopt in making payments to shareholders, but it affects the declaration itself with the result that the declaration does not give rise to an obligation which a shareholder can enforce until remittances From Pakistan are actually made and such remittances are received by the company in India. In our view, on a declaration of this nature, no tax can be imposed under the provisions of Section 12 (1-A).
16, While discussing the judgment of the Madras High Court we have seen that the learned Judges of that Court had referred to Section 207 of the Companies Act, 1956. The provisions of this section should be set out fully in further support of the view we have taken as to the nature of a declaration of dividend. The section runs thus:–
“Section 207 — Penalty for failure to distribute dividends within forty-two days. –Where a dividend has been declared by a company but it has not been paid or the warrant in respect thereof has not been posted within forty-two days from the date of the declaration, to any shareholder entitled to the payment of the dividend, every director of the company; its managing agent or secretaries and treasurers; and where the managing agent is a firm or body corporate, every partner in the firm and every director of the body corporate; and where the secretaries and treasurers are a firm every partner in the firm and where they are a body corporate, every director thereof; shall, if he is knowingly a party to the default, be punishable with simple imprisonment for a term which may extend to seven days and shall also be liable to fine:–
Provided that no offence shall be deemed to have been committed within the meaning of the foregoing provisions in the following cases, viz.;–
(a) where the dividend could not be paid by reason of the operation of any law;
(b) where a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with;
(c) where there is dispute regarding the right to receive dividend;
(d) where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; or
(e) where, for any reason the failure to pay the dividend or to post the warrant within the period aforesaid was not due to any default on the part of the company.”
17. These provisions could not have been placed on the statute book if a declaration of dividend did not entail its immediate enforceability. When, therefore, a declaration is sought to be made “subject to remittances from Pakistan” it cannot be said to be a declaration envisaged by the Companies Act. Even Clause (e) of the proviso to Section 207 would not be attracted to a declaration of this nature because Clause (e) obviously contemplates absence of default on the part of the company after the declaration has been made. If on the date of declaration the company was not in a position to fulfil its obligations until permission for remittances was obtained from a foreign government and actual remittance was effected, it would be unreasonable to hold that the company had declared a dividend within the meaning of the Companies Act.
18. In this view of the matter our answer to the question referred to us is in the negative.
19. Each party will bear and pay its own costs. Sabyasachi Mukharji, J. 20. I agree.
