KISHINCHAND CHELLARAM versus COMMISSIONER OF INCOME-TAX CENTRAL BOMBAY

SHAH, J.-This is a. group of appeals a.gs.inst orders pa.seed by the High Court of Bombay in Income Tax Reference under s. 66( l) of the Indian Income Ta.x Act.

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Chellsons Ltd. a Private Company wa.s incorporated in April 1941. The shareholders or the company a.t the ma.teria.I time were Kishinchand Chellaram holding 6 shares and Shewakram Kishinchand, Lokumal Kishinchand and i\Iurli Ta.hilram 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 19-12-43. 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/- Wflre credited to each of the other three ahoreholders. 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 accounts of each of the other there shareholders.

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In their respective returns· for the assessment year 1945-46, Kishinchand, Shewakram, Lokumal and Murli-who will hereinafter be collectively called the assessees-included the amounts credited to them in the company's books of account a.s divi· dends for the three years 1941-42 to 1943-44. On December 4, 1947, at a.n Extraordinary Ge.aeral Meeting another resolution purporting to reverse tho earlier .resolutions dated July 10, 1943 and Jul:v

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1944, w&e passed by the company. The resolution read as follows:-

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' "The notice dated 25th November, 1947 calling the Extraordinary General Body Meeting for today, was placed on the table.

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"Whereas the sum of Rs. 1,90,000 paid to the shareholders during the year 1944-45 as per details given below viz- --I For' I

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I , I

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1941-42 1942-43 1943-44 Total iltr. Kishinchand Chellaram 10,000 36,000 30,000 76,000 Kr. Shewakram Kishincliand 5,000 18,000 15,000 38,000

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Lokumal Kishincband 5,000 18,000 15,000 38,000

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Murli Tahilram 5,000 18,000 15,000 38,000

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Total 25,000 90,000 75,000 190,000 was sanctioned by the General Body inadvertently 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 consideration of any div~dend to the shareholder be deferred to ,the ne:xt Annual General-Meeting. The adjustment in this regard will not· be made in the books of the Company on

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6th April, 1947." Even though this resolution was p&BBed, and the proceedings for IM!SCssment before the Income Tax Offi "Jer weore not diRposed of the a.ssesseeR did not file revised returns excluding the amounts credited as dividend, nor did they claim before the Income Tax Officer that th•JSe amounts not being income were not liable t-0 tax.

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By his order dated January I, 1950, the Income Tax Officer brought the income returned by the asso88ees including the amounts credited to t.hem as <lividends for the three years to tax. In appeals to the Appollate Assistant CommiBSioner, the assessee~ contend<'d 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 pica. The assessees then appealed to the Appellate Tribunal and contended that the dividends for the three years in question were declared 0ut of capital and such declaration of dividend being .under the Indian Companies Act invalid, in the &88eSSment the amount.P credited to their accounts as dividepd should be excluded. The Income Tax Appellate Tribunal held that the dividends in pect of the yea.rs 1941-42 and 1942-43, having been received before the year of account relevant to the year of assessment 1945-46, wore 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 Genera.I Meeting after the dividenda had been paid. At the instanoe of 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 pa8sed on

pp. 272–273

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 1945-4 6 ? If not, could onlJ 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 incorpo-

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rated 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."

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The High , Court declined to answer the first question because in their view it was unnecessary, and answered the first pa.rt· of the second question in the affirmative, and beld that the second part did not on that view a.rise for de<Jision. Against the order of the High Court these four appeals have been preferred by tho a.aseaaeee .

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The only question m"terial to these appeals which was argued by the assessees before the Tribunal was whether it waB competent to the company by subsequent resolution to reverse an earlier resolution declaring the dividend. The Tribunal held that the earlier resolution could not be rev1irsed by subsequent resolution, and t.herefore what was paid and received as dividend could not by subllllquent resolution of the company be treated as paid otherwise than as dividend. The High Court held that the a.sseBBments were properly made by the Income Tax Officer. Tney observed that the assessment of an asseBBee for each year is self-contained and subsequent events cannot justify modification of the assessment.

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Section 16(2) provided (in so far as it is material) that "for the purposes of inclusion in the total income of an a.sseBBee 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, l!J44 dividend was declared by a resolution of the company and the amounts payable to the aBBessees were, in fact, credited on September 29, 1944, in the accounts maintained by the company, to oaoh of the shareholders as dividend. The a.mounts were therefore declared as dividend, treated a.a dividend and received by the a.ssessees as dividend. The assessees included the dividends so credited to their a.ooounts in the returns: It may be a.ssnmed that the company failed to provide for payment of tax before declaring dividend and that a.fter providing for payment of ta.I, the net profi'8 of the company may not havo 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 $ruth. paid out of the capital of the compa.ny. Payment of dividend otherwise than out of profiltfl 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 ca.pita! they may have, in an action by the company-or if the company is being wound up at the instance of the Liquidator-to com· pensa.te the company for Joss occasioned by their wrongful or negligent conduct. (In the matter of The Union Bank Allahabad Ltd. ('). 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 aBSeB!lees. If dividend is declared and the amount is credited or paid to the share-holders as dividend oa.n the character of the credit or payment be altered by a subsequent resolution so as to alter the incidence of ta.x which attaches to that amount?

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By virtue of s .. 16(2) the liability to pay ta:i: attaches as soon as dividend is paid, credited or dititributed or deemed to have been paid, credited or distributed to the shareholders and the Income Tax Act <ionta.ins no provision for altering the incidence or liability to pay ta.x on the dividend, merely

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because it is found that in declaring dividend and \. paying it the company violated a. prohibition relating to payment of dividend in the Indian Com-

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panies Act. · Kis~Vuhan.J. --

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It is not: necessary to consider in this case whether the shareholders may be compelled by the

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company to refund the amount improperly paid as C~nCrol 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

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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.ehareholders as dividend 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.

p. 276

Before this Court two contentions were raised by counsel for the assesses· i (I) that on the amount received by each of the assessees · tax was not exigible 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. Tho 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

p. 276

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, cndited or distributed or is so 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 negai;ive.

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The appeals therefore fail and are . dismissed. In the circumstances of the case there will be no order as to costs.

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AppeaJ,s dismiased. THE COLLECTOR OF CUSTOM8, MADRAS

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v.

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K. SETTY (B. P. 0. J .• P. B. K. N.

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N . and

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' T. L. JJ.)

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High, Oourt--Decision of Otl8toms A.utlwritits-Oonatruction of entiries in tariff Schedt1k-Jt1risdiction interfere- "Feed oats" feed-Whether falls withi,. "folder" or "grain"-lmport Trade Control Schedule, Part JV.Item Nos. 32 and 42-Specific Relief 1877 of 1877). •.

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Item of Part IV of the Import Trade Control Schedule -permitted "fodder ..... " to be imported'Without a special import licence from a soft Currency area ... Item of the same Schedule related to "grain .... "and included oats;· and a licence was necessary for importing goods covered this item. The respondent imported from Australia, without a liccncc,.goods described as "feed·oats" for feeding race horses. He claimed that the goods were covered Item 42 and could imported without a licence. The customs authorities held that the goods were "grains" within the meaning of Item which could not be imported without a licence, confiscated the goods and im; posed a penalty lieu of confiscation. The . respondent moved the High Court for the issue of a writ of mandamus under s, 45 specific Relief Act. The High Court held that the

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