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SUPREME COURT OF INDIA
19th April, 1962
S.K. DAS, M. HIDAYATULLAH AND J.C. SHAH, JJ.
Kishinchand Chellaram etc., Appellants
Versus
The Commissioner of Income-tax, (Central) Bombay (In all the Appeals), Respondent.
Civil Appeals Nos. 462 to465 of 1960.
Advocates appeared
Mr. K. N. Rajagopal Sastri, Senior Advocate (M/S J. K. Hiranandani and N. M. Hingorani, Advocates with him), for Appellants (In all the Appeals ); M/s. N. D. Karkhanis and D. Gupta. Advocates, for respondent (In all the Appeals).
INCOME TAX - Dividend - Payment out of capital - Subsequent resolution treating dividend as loan - Whether dividend loses its character - Whether liability to pay tax is altered - Indian Income-tax Act (11 of 1922), S. 16(2).
Fact of the Case:
The assessee company declared dividend at 60% on the shares of the company for the years 1941-42, 1942-43 and 1943-44. The amounts were credited to the accounts of the shareholders as dividend. Subsequently, the company passed a resolution reversing the earlier resolutions and treating the dividend as a loan to the shareholders. The assessee included the dividend in their returns for the assessment year 1945-46. 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. The Appellate Assistant Commissioner and the Appellate Tribunal confirmed the orders of assessment.
Finding of the Court:
The court held that the dividend declared and paid to the shareholders did not lose its character as dividend merely because it was paid out of capital. The liability to pay tax attached as soon as the dividend was paid, credited or distributed, and the Income-tax Act did not contemplate an enquiry whether the dividend was properly paid, credited or distributed before liability to pay the tax attached thereto. The subsequent resolution treating the dividend as a loan could not retrospectively alter the character of the payments and thereby exempt it from liability to pay tax.
Issues: Whether the payment made by the Company was not in the nature of dividend.
Ratio Decidendi: The court held that the 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 declared. The Act does not contemplate an enquiry whether the dividend is properly paid, credited or distributed before liability to pay the tax attached thereto.
Final Decision: The appeals were dismissed.
Judgment
SHAH, J. : This is a group of appeals against order passed by the High Court of Bombay in Income Tax References under S. 66(1) of the Indian Income tax Act.
2. 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 Tahilram each holding three shares. Kishan-chand, 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 % on the shares" of the company and for the purpose of that declaration the profits of the year 1941-42 were included in the profits 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 % 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 three share holders.
3. 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 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 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 -
For
1941-42 1942-43 1943-44 Total
Mr. Kishinchand
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 1,90,000
was sanctioned by the General Body inadvertently without taking into consideration the Companys liability for taxation, included 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 dividend to the shareholders be deferred to the next Annual General Meeting. The adjustment in this regard will now 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 in come were not liable to tax.
4. 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 and contended that the dividends for the three years in questio
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