Case: Kishinchand Chellaram &amp; Others Vs. Commissioner of Income Tax, Central Bombay

did not on that view arise for decision. Against the order of the High Court these four appeals have been preferred by the assessees.6. 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 divided 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 assess meet.7. Section 16(2) 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............." 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 he 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 the company may not have 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 company. Payment of dividend otherwise than out of profits of the wear, or other undistributed profits was at the material time prohibited by Art. 97 of Table A of the 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 capital they may have, in an action by the company - or if the company is being would up at the instance of the Liquidator - to compensate the company for loss occasioned by their wrongful or negligent conduct. (In re Union Bank of Allahabad I. L.R. 47 All. 669: (AIR 1925 All 519). 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 shareholders 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?8. By virtue of S.16(2) 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 relating to payment of dividend in the Indian Companies Act.9. 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 nor thereby altered. In ascertaining whether liability to pay Income-tax on dividend arose, a resolution of company whereby payments made to the share-holders as dividend are to be treated as loans cannot retrospectively alter the character of the payments and thereby exempt it from liability which has already attached thereto.10. Before this Court two contentions were raised by counsel for the assessees: (1) 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. The jurisdiction of the High Court under S. 66 being advisory, they were concerned to give their opinion on questions which fairly arisen out of the order of the Tribunal and were in fact raised and referred. The questions 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 even, 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 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. The answer to the second contention for reasons already set out by us must be in the negative.

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

Explanation:
0[ds]7. Section 16(2) 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............." 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 he 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 the company may not have 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 company. Payment of dividend otherwise than out of profits of the wear, or other undistributed profits was at the material time prohibited by Art. 97 of Table A of the 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 capital they may have, in an action by the company - or if the company is being would up at the instance of the Liquidator - to compensate the company for loss occasioned by their wrongful or negligent conduct. (In re Union Bank of Allahabad I. L.R. 47 All. 669: (AIR 1925 All 519). 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 shareholders 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?8. By virtue of S.16(2) 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 relating to payment of dividend in the Indian Companies Act.9. 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 nor thereby altered. In ascertaining whether liability to pay Income-tax on dividend arose, a resolution of company whereby payments made to the share-holders as dividend are to be treated as loans cannot retrospectively alter the character of the payments and thereby exempt it from liability which has already attachedany even, 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 declared. The Act does not contemplate an enquiry whether the dividend is properly paid, credited or distributed before liability to pay the tax attachedanswer to the second contention for reasons already set out by us must be in the negative.