Case: Commissioner of Income Tax Vs. Express Newspapers Limited

1. The respondent is a Public Limited Company which is running a well-known newspaper The Indian Express and we are concerned in this case with income tax for Assessment year 1964-652. On 6-12-1962 the Board of Directors of the respondent-Company passed a resolution whereby it decided that interim dividend should be distributed amongst the shareholders. The resolution further provided that this dividend would be payable on 16-1-1963. It may here be noticed that the accounting year of the respondent-Company is the calendar year. The resolution which was passed on 6-12-1962, therefore, was in the previous year relevant to the Assessment Year 1963-64 whereby the payment was made to the shareholders in the following year relevant to the Assessment Year 1964-653. In determining the amount of tax which was payable by the Company for the Assessment Year 1964-65 the Income Tax Officer came to the conclusion that the rebate which was available to the Company under the Finance Act, 1964 had to be reduced to the extent of the interim dividend paid to its shareholders in January 1963. The claim of the respondent, in the appeal filed by it, was that the Board of Directors had declared the dividend on 6-12-1962, i.e., before the start of the relevant previous year and the payment was made in the subsequent previous year and, therefore, by virtue of Explanation 3 to the first proviso of the Finance Act, 1964 the rebate could not be reduced. Having failed to get any relief from the appellate authorities, a question of law with regard to this aspect was referred to the High Court by the Tribunal. Two other questions were also referred but we are not concerned with those in the present case and answers to them stand concluded by the judgment of the High Court4. The High Court reframed the relevant question of law as follows"Whether on the facts and in the circumstances of the case the sum (of Rs. 3, 39, 000 declared as dividend on 6-12-1962, by the Board of Directors, but payable only on 16-1-1963, could be taken into account in withdrawing the rebate admissible under the first proviso to the Finance Act of 1964 by reference to sub-clause (c) of clause (i) of the second proviso to the same Act read with Explanation 3 to the same Act." *5. The High Court came to the conclusion that the Company, acting through its Directors, had declared the interim dividend on behalf of the Company and when the payment was made not in the same previous year but was made in the subsequent year, Explanation 3 became applicable and the rebate could not be reduced.

Reasoning: 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