Case: Commissioner of Income Tax Vs. Express Newspapers Limited

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 there may be distribution 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of Directors, and not the Company in general meeting, decides to pay interim dividend in which case the rebate will be withdrawn in the year of distribution of the interim dividend, there being no declaration by the Company for the payment thereof. 10. The difference in the nature of interim dividend and the dividend declared by the company in its general meeting is clearly brought out in a decision of this Court in the case of J. Dalmia v. CIT. In that case the Board of Directors had declared an interim dividend in its meeting held on 30-8-1950 and payment was made to the shareholders by dividend warrants issued on 28-12-1950. The accounting year of the assessee ended on 30-9-1950, 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 ITR pp. 87-88) 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 : Severn and Wye and Severn Bridge Rly. Co., In re ( 1896 (1) Ch 559 : 65 LJ(Ch) 400). 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 a 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 Co. Ltd. v. Henry Schroeder and Co. ( 1901 (17) TLR 625) the directors of a company passed a resolution declaring interim dividend payable on a future date, and requested the companys 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 companys 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 dividendTherefore, 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 against the company, because the resolution is always capable of being rescinded. Therefore, departure in the text of Article 74 of the articles of association of Govan Bros. from 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." 11. 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 accrues to the shareholders. This being so, if the Company in general meeting had declared a dividend on 6-12-1962 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 6-12-1962 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.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]7. On a careful 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 its 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 year8. In our opinion, the High Court committed an error in proceeding on the assumption that the resolution passed by the Board of Directors on 6-12-1962 amounted to a declaration of dividend. Under Section 205 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 specifically refer to the distribution of interim dividendThe perusal of a aforesaid clauses 85 and 86 clearly brings out the distinction in the power of the Company and the Board of Directors. It is a Company which in general meeting is empowered to declare dividend. Clause 86 does not give the Board of Directors power 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 there may be distribution 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 thereof11. 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 accrues to the shareholders. This being so, if the Company in general meeting had declared a dividend on 6-12-1962 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 6-12-1962 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