Case: Commissioner of Income Tax, Bombay Vs. West Coast Paper Mills Limited

2. The assessee is a public limited company which was incorporated on March 25, 1955. Part of its paid up capital consisted of 60,000 six per cent, (free of tax) cumulative preference shares of Rupees 100/each. As the company did not make profits out of which it could distribute dividend no dividend was declared on the preference shares during the years of account ended on June 30, 1956, June 30, 1957 and June 30, 1958. During the account year ended on June 30, 1960, the company made profits. On February 9, 1960 the Board of Directors of the Company passed the following resolutiondividends on 60,000 cumulative Preference shares of Rupees 100/- each in respect of the years ended 30th June, 1956 and 1957 remaining in arrears be paid at the rate of 6% (free of tax) * * * * out, of the profits of the current year ending 30th June, 1960.The dividends were distributed in accordance with the resolution of April 25, 1960. On May 30, 1960, the Board of Directors passed a similar resolution for distributing the dividends on the preference shares in respect of the year ended on June 30, 1958. These dividends were actually paid from June 24, 1960, onwards. Adjustments with regard to these dividends were made in the balance sheet prepared as at June 30, 1960.4. The Finance Act, 1959 (Act 12 of 1959) made certain changes in the scheme of taxation of an incorporated company and of its share-holders. The main changes were (i) reduction in the rate of tax levied on the company, (ii) taking away the credit given till then to the share-holder for income-tax paid by the company on the dividends declared and (iii) imposition of an obligation on the company to deduct tax at source on dividends declared by the company which was to be remitted to the Government. The duty to deduct tax was imposed by amendments to Section 18 (3D) and (3E) of the Income-tax Act, 1922, (hereinafter called the Act) which were introduced by Section 9 of the Act 12 of 1959 which was brought into force with effect from April 1, 1959. However, an exemption was provided from the operation of the provisions of the amended sections under certain circumstances by Section 19 (4) of Act 12 of 1959. That provision as amended retrospectively bythe Finance Act, 1960 was in the followinganything contained in sub-section (2) or sub-section (3), in relation to dividend declared or payable by a company on or before the 30th day of June, 1960, in respect of any previous year relevant to any assessment year prior to the assessment year 1960-61, the Income-tax Act shall have effect as if the amendments contained in section 5, section 7, section 9, section 14, section 15, section 16, and section 18 had not been made.The assessee did not deduct any tax from the dividends declared on February 9, 1960 and May 30, 1960 and paid from April 24, 1960 and June 24, 1960 onwards respectively. In the course of the assessment for 1960-61 made on the company the Income-tax Officer called upon the assessee to show cause why it should not be treated as an assessee in default under section 18 (7) of the Act in respect of the taxes which according to him should have been deducted and paid but which were not paid. The assessee submitted that the dividends were declared in respect of previous years relevant to the assessment year 1959-60 and the earlier years and that under S. 19 (4) of Act 12 of 1959 there was no obligation to deduct tax from dividends declared in respect of those years. This objection based on section 19 (4) of Act 12 of 1959 was overruled by the Income-tax Officer. He held that the assessee was liable under section 18 (7) of the Act for payment of tax amounting to Rs. 2,32,748-70 p. The assessee appealed to the Appellate Assistant Commissioner but that appeal failed. There was a further appeal to the Appellate Tribunal. The Tribunal upheld the orders of the departmental authorities. Thereupon the assessee moved the Tribunal for submitting a statement of the case and referring the following question of law to the Highin view of section 19 (4) of the Finance Act, 1959 (as amended bythe Finance Act, 1960) there was any obligation to deduct tax under section 18 (3D) and (3E) from the dividends declared on February 9, 1960 and May 30, 1960 so as to justify the order under section 18 (7) of the Income-tax Act, 1922, on failure to doThe High Court answered the question in favour of the assessee and against the Revenue.

Reasoning: 10. There can be no manner of doubt that so far as company law is concerned the correct position is the one suggested on behalf of the Revenue and dividend would be payable only for the year in which profit is made. That expression may not be appropriate for the deficiency which accumulates on account of non-payment of dividend in a particular year because no profits have been made by the company. But we are not concerned with the connotation of the expression "dividend" as it is understood in company law. The Act 12 of 1959 introduced the changes which have already been adverted to and an obligation was imposed upon the company to deduct tax on dividends. Section 19 (4) contains an exemption and the language appears to be unambiguous. We apprehend that the exemption would be rendered meaningless and nugatory if the interpretation sought to be placed by the Revenue were to be accepted. In plain language the legislature has enacted that any dividend declared or payable before June 30, 1960 in respect of any previous year etc. would be exempt from the operation of the amendments contained in the sections by which the obligation was imposed on the company to deduct the tax. A good part of section 19 (4) would become otiose if "dividend" is given its technical meaning in accordance with its signification in the company law. We invited the learned counsel for the Revenue to give us any illustration of the actual operation of sub-section (4) of Section 19. He was unable to give us any satisfactory or cogent illustration. We entirely concur in the view of the High Court that the language used in section 19 (4) applies to payments, the right to receive which had been acquired in the previous years on account of the divided of the preference shares and that the said expression is wide enough to include payments relating to the "undischarged liabilities in respect of those prior years". The answer returned by the High Court ishas been observed by the High Court the resolutions of the company, its annual report and accounts, the notice of the annual general meeting setting out the agenda, all showed that the dividends were referred to as the dividends paid on the preference shares for the accounting years ended on June 30, 1956, June 30, 1957 and June 30, 1958.Section 19 (4) lays down two conditions. The first is that the dividend must be declared or payable by a company on or before June 30, 1960. The second is that it should be in respect of any previous year relevant to any assessment year prior to the assessment yearthere were no profits during the three years in question it could not be said that the dividends declared by means of the resolutions passed on February 9, 1960 and May 30, 1960 and paid were in respect of the years which had ended on June 30, 1956, June 30, 1957 and June 30, 1958. In the eye of law, the dividends which were declared and paid in the year of accountcould only be dividends in respect of that year and they could not be dividends in respect of any earlier years in which the preferencewere entitled to the same but were notis not disputed that a preference shareholder is entitled to the payment of the dividend whenever the company has profits even though it has not earned profits in any earlier year when the dividend became due.