PETITIONER: THE COMMISSIONER OF INCOME TAX Vs. RESPONDENT: M/S. EXPRESS NEWS PAPERS LTD. DATE OF JUDGMENT: 21/01/1998 BENCH: B.N. KIRPAL, S.P. KURDUKAR ACT: HEADNOTE: JUDGMENT:
THE 21ST DAY OF JANUARY, 1998.
Present:
Hon’ble Mr. Justice B. N. Kirpal
Hon’ble Mr. Justice S. P. Kurdukar
S. Rajappa, B.K. Prasad, Advs. for the appellant
Manoj Arora, N. B. Joshi, P. H. Parekh and S. Bhartari,
Advs. for the Respondent
O R D E R
The following Order of the Court was delivered:
The respondent is a Public Limited Company which is
running a well known newspaper. The Indian Express and we
are concerned in this case with Income Tax for assessment
year 1964-65.
On 6th December, 1962 the Board of Directors of the
respondent-company passed a resolution whereby it decided
that interim dividend should be distributed amongst the
Shareholders. The resolution further provided that this
dividend would be payable on 16th January, 1963. it may here
be noticed that the accounting year of the respondent-
Company is the calendar year. The resolution which was
passed on 6th December, 1962, therefore, was in the previous
year relevant to the assessment year 1963-64 whereby the
payment was made to the shareholders in the following year
relevant to the assessment year 1964-65.
In determining the amount of tax which was payable by
the Company for the assessment year 1964-65 the Income Tax
Officer came to the conclusion that the rebate which was
available to the Company under the Act, 1964 had to be
reduced to the extent of the prim dividend paid to its
shareholders in January 1963. The claim of the respondent,
in the appeal filed by it, was that the Board of Directors
had declared the dividend on 6.12.1962, i.e. before the
start of the relevant previous year and the payment was made
in the subsequent previous year and, therefore, by virtue of
Explanation 3 to the First proviso of the Financial Act,
1964 the rebate could not be reduced. Having failed to get
any relief from the appellate authorities, a question of law
with regard to this aspect was referred to the High Court by
the Tribunal. Two others questions were also referred but we
are not concerned with those in the present case and answer
to them stand concluded by the judgment of the High Court.
The High Court reformed the relevant question of law as
follows:-
” Whether on the facts and the in
the circumstance of the case the
sum of Rs. 3,39,000/- declared as
dividends on 6th December, 1962, by
the Board of Directors, but payable
only on 16th January, 1963, could
be taken into account in
withdrawing the rebate admissible
under the first proviso to the
Finance Act of 1964 by reference to
sub-clause (c) of Clause (i) of the
second proviso to the same Act read
with Explanation 3 to the same
Act.”
The High Court came to the conclusion that the company,
acting through its Directors, had declared the interim
dividend on behalf of the Company and when the payment was
made not in the same previous year but was made in the
subsequent year, Explanation 3 became applicable and the
rebate could not be reduced. In this appeal it has been
contained by the learned counsel for the appellant that the
High Court erred in coming to the conclusion that there was
any declaration of any dividend, as understood under the
companies Act, by the Company. According to the learned
counsel, the resolution of the Board of Directors dated 6th
December, 1962 cannot be regarded as a declaration of
dividend by the Company and therefore what was relevant is
to see the date when the interim dividend was distributed
and as the distribution took place in the previous year
relevant to the assessment year 1964-65 therefore the rebate
to that extent was rightly withdrawn. On behalf of the
respondent, however, it was submitted that the judgment of
the High Court called for no interference as the
distribution of the dividend took place pursuant to the
declaration by the Board of Directors.
In order to appreciate the point in issue, it will be
appropriate to refer to the relevant provision. The Finance
Act, 1964, like all other Finance Acts, inter-alia, provides
for the rate at which Income-tax and Super tax is levied.
According to this Act the rate of Super tax of the whole of
the total income was 55% , as per paragraph D of Part (ii)
of the Finance Act, 1964. The first proviso to this contains
the rebate which is allowed in computation of the tax. This
rebate is, however, reduced wherever the provisions of the
second proviso become applicable. In the present case,
second proviso clause 1 (i) (c), inter-alia, provides that
the amount of rebate shall be reduced where the Company has
“declared or distributed to its shareholders during the
previous year any dividend….” The rate of reduction, as
per this sub-clause is 7.5 with the whole of the amount of
dividend which is declared. Explanation 3, on which reliance
is placed by the respondent, to this provision reads as
follows:”
“Explanation 3. – For the removal
of doubts it is hereby declared
that where any dividends were
declared by the company before the
commencement of the previous year
and are distributed by it during
that year, no reduction in the
rebate shall be made under sub-
clause (c) of clause (i) of the
second proviso in respect of such
dividends.”
On a carefully examination of the aforesaid provision,
it appears to us that the rebate given by the first proviso
can be reduced if dividend has been declared or distributed
by the Company to this shareholders. Two expressions are
used, namely, “declared” and “distributed”. Learned counsel
for the respondent is right in construing Explanation 3 to
mean that if the declaration of the dividend is in the year
prior to the commencement of the relevant previous year but
the distribution is in the relevant previous year then no
rebate would be reduced in which distribution takes place.
In other words, the rebate, as far as Explanation 3 is
concerned, can be reduced only if the declaration and the
distribution is in the same previous year.
In our opinion, the High Court committed an error in
proceeding on the assumption hat the resolution passed by
the Board of Directors on 6th December, 1962 amounted to a
declaration of dividend. Under Sec. 20 of the Companies Act,
dividend is distributed on a resolution being passed by the
company in general meeting. The Companies Act, as such, does
not specifical refer to the distribution of interim
dividend. Table A, however, provides for payment of interim
dividends. Two clauses of Table A to the Companies Act,
namely, Clause 85 and 86 read as follows:-
” 85. The Company in general
meeting may declare dividends, but
no dividend shall exceed the amount
recommended by the Board.
86. The Board may from time to time
pay to the members such interim
dividends as appear to it to be
justified by the profits of the
Company.
Unfortunately, the Articles of Association of the
respondent-company are not on record but normally, as is
expected, the Articles of Association would be in consonance
with the provisions of Table A. The perusal of aforesaid
Clauses 85 and 86 clearly brings out the distinction in the
power of the Company and the Board of the Directors . It is
a Company which in general meeting is empowered to declare
dividend. Clause 86 does not give the Board of Directors per
to declare any dividend but only enables it to pay interim
dividend to the members of the Company from time to time. It
is because there is a difference in the power which is
exercised by the Company in general meeting, vis-a-vis, the
one exercised by the Board of Directors while deciding to
pay an interim dividend, that in clause (c) of the Second
proviso in the Finance Act, the expression used is “declared
or distributed to its shareholders”. This clearly postulates
a situation where they may be distributed of dividend
without its declaration. This can be where the Board of
Directors, and not the Company in general meeting, decides
to pay interim dividend in which case the rebate will be
withdrawn in the year of distribution of the interim
dividend, there being no declaration by the Company for the
Payment thereof.
The difference in the nature of interim dividend and
the dividend declared by the company general meeting is
clearly brought out in a decision of this Court in the case
of J. Dalmia V. Commissioner of Income Tax, Delhi 53 I.T.R.
83. In that case the Board of Directors had declared an
interim dividend in its meeting held on 30th August, 1950
and payment was made to the shareholders by dividend
warrants issued on 28th December, 1950. The accounting year
of the assesses ended on 30th September, 1950, relevant to
the assessment year 1951-52. The question arose whether the
interim dividend declared by the Board of Directors in the
previous year relevant to the assessment year 1951-52 was to
be taxed in that year or was the interim dividend liable to
be taxed in the assessment year 1952-53 because the payment
was made in that previous year. Dealing with the nature of
the interim dividend, this Court at page 87 observed as
follows:-
“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 Why and
Severn Bridge Railway Company. 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
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
Company (Limited) vs. Henry
Schroeder and Company 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 by the declaration of
interim dividend.
Therefore, a declaration by a
company in 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 rescinded. Therefore,
departure in the text of article 74
of the articles of association of
Govan Bros. form the statutory
version under Table A of the power
in respect of interim dividend,
dividend which may be entrusted to
the directors, makes no real
difference in the true character of
the right arising in favour of the
members of the company on the
execution of the power. The
directors, by the articles of
association, are entrusted with the
administration of the affairs of a
company’ it is open to them if so
authorised to declare interim
dividend. They may, but are not
bound to, pay interim dividend even
if the finances of the company
justify such payment. Even if the
directors have resolved to pay
interim dividend, they may before
payment rescind the resolution.”
The aforesaid observation clearly supports the view
which we have taken, namely, that the nature of the interim
dividend is such that it gives no right to the shareholders
to receive it merely on the passing of the resolution by the
Board of Directors whereas on a dividend being declared by
the Company in general meeting a vested right accuses to the
Shareholders. This being so, if the Company in general
meeting had declared a dividend on 6th December 1962 and the
same was distributed in January 1963 then the aforesaid
Explanation 3 would have been applicable. But in the present
case, the decision of the Board of Directors on 6th
December, 1962 to pay interim dividend cannot be construed
as meaning declaration of dividend by the company. This
being so what would be relevant is the distribution of the
dividend in January, 1963, thereby attracting the provisions
of Clause (c) of proviso 2(i) and the Income-tax authorities
were therefore right in reducing the rebate in the manner in
which they did for the assessment year 1964-65.
For the aforesaid reason, the appeals are allowed. The
judgment of the High Court is set aside. The question law,
as reframed by the High Court, is answered in the
affirmative and in favour of the revenue. There will be no
order as to costs.
