62 to 465 of 1960
Appeals from the judgment and order dated September 261955 of the Bombay High Court I T R No 22 of 1955
K N Rajagopal Sastri J K Hiranandi and NH Hingorani for the appellants
N D Karkhanis and D Gupta for the respondents
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 section 661 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 46000 were credited in the books of the company to the account of Kishinchand Chellaram on March 31 1944 and Rs 23000 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 30000 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
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 41947 at an Extraordinary General Meeting another resolution purporting to  reverse the earlier resolutions dated July 10 1943 and July 271 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 190000 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 10000 36000 30000 76000 Mr Shewakram Kishinchand 5000 18000 15000 38000 Mr Lokumal Kishinchand 5000 18000 15000 38000 Mr Murli Tahilram 5000 18000 15000 38000 Total 25000 90000 75000 190000 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 and contended that the dividends for the three years in question were declared out of capital and such declaration of dividend being under the IndianCompanies 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 273 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 contained and subsequent events cannot justify modification of the assessment
Section 162 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 article 97 of Table A of the Indian Companies Act 1913 as amended by Act
XXXII of 1936 read with section 172 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 section 162 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 All
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 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 section 66 of the Indian Income Tax Act
The jurisdiction of the High Court under section 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


Summary:
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 article 97 of Table A of the Indian Companies Act 1913 as amended by Act XXXII of 1936 read with section 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
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 269 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 IL 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