Case: Commissioner Of Income-Tax, Bombay City-1 Vs. Godavari Sugar Mills Ltd

The respondent-Godavari Sugar Mills Ltd.-is a Public limited company. The assessment year in this case is 1949-50. The relevant accounting year ended on May 31, 1948, The Annual General Meeting of the respondent was held on December 30, 1948. At that meeting a sum of Rs. 3,68,433 was declared as the dividend. Since the dividend fell short of the requisite percentage under S. 23A of the Income-tax (hereinafter called the Act) the Income-tax Officer passed an order, on March 11, 1955 under the provisions of S. 23A of the Act that the undistributed portion of the assessable income of the respondent of the previous year as computed for income-tax purposes and reduced by the amount of income-tax and super tax payable by the company in respect thereof shall be deemed to have been distributed as dividend amongst the shareholders as at the date of the General Meeting. Section, 23A of the Act. as it stood at the material time. stated as follows:"23A. Power to assess individual members of certain companies.-(1) Where the Income-tax is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company up to the end of the sixth month after its accounts for that previous year are laid before the company in general meeting are less than sixty per cent of the assessable income of the company of that previous year. as reduced by the amount if income-tax and super tax payable by the company in respect thereof he shall unless he is satisfied that having regard to losses incurred by the company in earlier years or to the smallness of the profits made the payment of a dividend or a larger dividend than that declared would be unreasonable make with the previous approval of the Inspecting Assistant Commissioner an order in writing that the undistributed portion of the assessable income of the company of that previous year as computed for income-tax purposes and reduced by the amount of income-tax and super tax payable by the company in respect thereof shall be deemed to have been distributed as dividends amongst the shareholders as at the date of the general meeting aforesaid and thereupon the proportionate share thereof of each shareholder shall be included in the total income of such shareholder for the purpose of assessing his total income"2. The respondent raised an objection that it was not legally possible for it to declare a higher dividend than that declared in view of Ss. 3 and 12 of the Public Companies (Limitation of Dividends) Ordinance No. XXIX of 1948 (hereinafter referred to as the Ordinance) which was promulgated on October 29, 1948. Section 3 of the Ordinance provided:"No company shall, after the commencement of this Ordinance distribute as dividend during any financial year, any sum which exceeds, which when taken with any sum already distributed as dividend during the same year whether before or after the commencement of this Ordinance will exceed:(a) six percent of the paid up capital of the company as on the last date of the period in respect of which the dividend is distributed after deducting from such capital all amounts attributable to the capitalisation on or after the first day of April 1946 of one or more of the following. namely, reserves profits and appreciation of assets, or(b) the average annual dividend of the company determined in the manner specified in Ss. 5 to 7,whichever is higher."Section 12 provided:Any Director Managing Agent Manager or other Officer or employee of a company who contravenes or attempts to contravene or abets the contravention of or attempt to contravene any of the provisions relating to the distribution of dividend or the issue of preference shares, contained in this Ordinance or in any rule notification or order issued thereunder shall be punishable with imprisonment for a term which may extend to two years, or with fine, or with both"Sections 2 (b) of the Ordinance defines a Company" to mean A public company as defined in Cl. (13-A) of S. 2 of the Companies Act." It is not disputed by the parties that the respondent-company was a company within the meaning of the Ordinance and that the provisions of the Ordinance applied to it. It was also admitted that the dividend declared by the respondent complied with the requirements of the Ordinance. It was contended by the respondent that the Ordinance prohibited it from declaring any larger amount as dividend than that already declared by it. The contention was rejected by the Income-tax Officer. The order of the Income-tax Officer, dated March 11, 1955. was confirmed by the Appellate Assistant Commissioner in appeal and, on further appeal, by the Tribunal. At the instance of the respondent the Tribunal referred the following question of law for the determination of the High Court:"Whether on the facts of this case, an order under S. 23A for the assessment year 1949-50 was validly made in the case of this company to which the provisions of the Public Companies (Limitation of Dividends) Ordinance, 1948, applied on the date of the Annual General Meeting but to which the Act replacing the Ordinance ceased to apply within the period of 6 months referred to in S. 23A (1)?"By its judgment. September 27, 1962. the High Court answered the question of law in favour of the respondent.

Court's reasoning:
It is not, in our opinion, necessary to express any concluded opinion on this aspect of the case, because we consider that, in any event, in view of the fact that the Ordinance was in force on the date of the holding of the Annual General Meeting of the respondent thex Officer had no power to pass any order under S. 23A of the Act. The Ordinance was in force on December 30, 1948 on which date the Annual General Meeting of the respondent took place and a sum of Rs. 3,68,433 was declared as dividend. Section 23A provides that on the fulfilment of certain conditions set out therein thex Officer shall make an order in writing that the undistributed portion of the assessable income of the respondent of the previous year as computed for income tax purposes and reduced by the amount ofx and super tax "shall be deemed to have been distributed as dividend amongst the shareholders as at the date of the General Meeting aforesaid." It is clear therefore that the order which the Income tax Officer is empowered to make under S. 23A of the Act is that the undistributed income shall be deemed to have been distributed amongst the shareholders "as at the date of the Annual General Meeting". Now the question is whether it was legally permissible for thex Officer to make the order which he has made on March 11, 1955 in the present case. The legal fiction as enacted under S. 23A of the Act is that the undistributed portion of the assessable income is deemed to have been distributed as dividend amongst the shareholders as at the date of the Annual General Meeting. In other words, the notional distribution is not by thex Officer but is by the Company itself at its Annual General Meeting. Since the provisions of the Ordinance imposed the restriction on the declaration of dividend beyond a particular limit that restriction will equally be binding for thex Officer; and if the respondent prevented from declaring a higher dividend than that declared on the date of the Annual General Meeting, thex Officer would be likewise prohibited by the Ordinance from passing an order that a higher dividend than that actually declared shall be deemed to have been declared at the date of the respondents Annual General Meeting. To put it differently, if in actuality a higher dividend could not lawfully have been declared by the respondent, thex Officer could not pass an order that such higher dividend should be deemed to have been declared, for the deemed declaration will suffer from the same legal restrictions which an actual declaration is subject to. In our opinion, the prohibition imposed by S. 3 of the Ordinance applies not only to the actual dividend declared but also to notional dividend deemed to have been declared under Section 23A of the Act. There is a manifest repugnancy between the provisions of the Ordinance and of S. 23A of the Act and it must be taken that there is an implied repeal of S. 23A of the Act to the extent of that repugnancy created by S. 3 of the Ordinance and so long as the Ordinance remains in force. In view of the provisions of Ss. 3 and 12 of the Ordinance the fiction created by S. 23A cannot, therefore, be brought into existence and thex Officer cannot pass an order under the provisions of that SectionIt is, indeed, true that as a result of the order of thex Officer there is no factual distribution of dividend but it is only a fictional or notional distribution of dividend which was not, in fact, received by the shareholders. The Section merely enacts that notional dividend is deemed to have been distributed as at the date of the Annual General Meeting. but even for bringing into existence that legal fiction there must be no statutory prohibition as the Ordinance in the present caseWe are unable to accept this argument as correct. In the first place, the repeal of the Ordinance under S. 13 of the 1949 Act is immaterial for, as we have already stated, Section 23A has created a fiction of distribution of the undistributed income as dividend and the Section further states that it would be deemed as if it was distributed on the date of the Annual General Meeting. Since the notional distribution contemplated by Section 23A of the Act is as if the notional distribution took place at the date of the Annual General Meeting it is the law which prevailed as on the date of the Annual General Meeting which has to be taken into account in considering the issue as to the legal validity of the order made by thex Officer. In the second place, Mr. S. T. Desai is not right in his contention that the effect of S. 13 of the 1949 Act is to obliterate the Ordinance completely from the Statute Book Section 6 of the General Clauses Act (Act 10 of 1897)