Civil Appeal No 1033 of 1966
Appeal by special leave from the judgment and order dated September 21 1964 of the Allahabad
High Court in Income tax Misc
Case No 121 of 1956
ST Desai AK Verma and YB Dadachanji for the appellant
Jagdish Swarup Solicitor General SK Aiyar RN Sachthey and BD Sharma for the respondent
By order dated August 23 1968 we called for a supplementary statement on the issue whether dividend warrants were delivered by he Glass Works to the Bank on August 3 1949
The Tribunal has submitted a statement of the case that the only relevant facts proved are that the dividend was declared on July 25 1949 and the Bank encashed the dividend warrants on December 31 1949
The appeal must therefore be decided on the footing that the dividend warrants were handed over to the Bank by the Glass Works on August 3 1949 is not proved
The material facts which have a bearing on the point in issue are these
The year of account of the Bankis the calendar year
The State of Benaras in which the Bank had its registered office merged with the Indian Union on December 1 1949
The Glass Works declared a dividend at a General Meeting on July 25 1949
Cheques for Rs 69000 issued by the Glass Works in favour of the Bank in payment of the dividend were encashed by the Bank on December 31 1949
The dividend received by the Bank has been brought to tax in the assessment year 1950 51
Counsel for the Bank urged that the Bank cannot be assessed to
tax in respect of dividend accruing to it at a time when the Bank was a non resident
It is urged that by virtue of section 142 c of the Income tax Act 1922 as then in force the income received by the Bank was not liable to be taxed
At the relevant time section 142c read as follows 2 The tax shall not be payable by an assessee c in respect of any income profits or gains accruing or arising to him within an Indian State unless such income profits or gains are received or deemed to be
received in or are brought into British India in the previous year by or on behalf of the assessee or are assessable under section 12B or section 42
 By the Adaptation of Laws Order 1950 the words an Indian State were substituted by the words a Part B State and the words British India were substituted by the words taxable territories
Section 214A which was also incorporated by the Adaptation of Laws Order 1950 with effect from April 1950 insofar as it is material provides taxable territories  means a      b as respects any period after the 14th day of August 1947 and before the 26th day of January 671 1950 the territories for the time being comprised in the Provinces of India but excluding the merged territory of Cooch Behar Provided that the taxable territories shall be deemed to include a the merged territories i as respects any period after the 31st day of March 1949
for any of the purposes of this Act and The State of Benaras after merger on December 1 1949 with the Dominion of India formed part of the State of Uttar Pradesh and was on that account part of the taxable territories by virtue of the definition contained in section 214A of the Indian Income tax Act
Assuming that the dividend accrued within an Indian State it was received by the Bank in the taxable territories on December 31 1949 and by the express words contained in section 142c of the Indian Income tax Act 1922 before it was omitted by the Taxation Laws Extension to Jammu  Kashmir Act 1954 it was not exempt from liability to payment of tax even if the right thereto had accrued to the Bank in an Indian State
It was then urged that the dividend must be deemed to have been received by the Bank on July 25 1949 the day on which it was declared and on that date the Bank being a non resident it could not be brought to tax
But under section 162 of the Indian Income tax Act 1922 the dividend income was taxable only in the year in which it was paid credited or distributed or was deemed to be paid credited or distributed
This Court observed in J Dalmia vs Commissioner of Income tax Delhi1 that the expression paid in section 162 does  not contemplate actual receipt of the dividend by the member in general dividend may be said to be paid within the meaning of section 16 2 when the Company discharges its liability and makes the amount of dividend unconditionally available to the member entitled thereto
It was also held that the Act does not make dividend income taxable in the year in which it becomes due it is taxable only in the year in which it is paid credited or distributed
The Court overruled the decision of the Bombay High Court in Commissioner of Income tax vs Laxmidas
s Mulraj Khatau2 in which it Was held that when dividend is declared liability arises on the part of the Company to make that payment to the shareholder and with regard to the shareholder when the income represented by that dividend accrues 1 2 672 or arises to him and that the fact that the actual payment of the income is deferred is immaterial and irrelevant
In the present case there is no evidence that before December 31 1949 dividend was paid credited or distributed to the Bank
By virtue of section 41a of the Income tax Act 1922 the income was held properly taxable in the assessment year 1950 51
It is unnecessary therefore to consider whether even if the Bank was a non resident on July 25 1959 by virtue of section 41bii it was liable to be taxed in respect of the dividend income in the year of assessment 1950 51
The appeal fails and is dismissed with costs including the costs of the hearing at which the order calling for a supplementary statement was made
VPS Appeal dismissed


Summary:
The appellant Bank assessee was a share holder in a company which declared a dividend on July 25 1949
The State of Benares in which the Bank had its registered office merged with the Indian Union on December 1 1949
Cheques far the amount of dividend were encashed by the assessee on December 31 1949
The assessee s year of account was the calendar year The dividend was sought to be taxed in the assessment year 1950 51 but the assessee contended that 1 the dividend income was exempt from tax under section 142c as it stood in the year of assessment and 2 that it must be deemed to have been received by the assessee even on July 25 1949 on which date the assessee was a non resident
HELD 1 On December 1 1949 by merger the State of Benares became part of the taxable territories as defined in section 214 A of the Act
Hence though the dividend might have accrued in an Indian State it was received by the assessee in the taxable territories on December 31 1949 and by the express words in section 142c as modified by the Adaptation of Laws Order 1950 the dividend income was not exempt from tax liability
671 C E 2 Dividend income is deemed to have been received by an assessee under section 162 only when it is paid credited or distributed or is deemed to be paid credited or distributed
Though paid does not contemplate actual receipt  the dividend can only said to be paid not when it is declared but when the company discharges its liability and makes the amount of dividend unconditionally available to the member entitled thereto
In the present case there was no evidence that before December 31 1949 the dividend income was paid credited or distributed to the assessee within the meaning or section 162
671 E G 672 A B J Dalmia vs
CIT Delhi followed