Case: Benaras State Bank Ltd Vs. Commissioner Of Income-Tax, Lucknow

The year of account of the bank is the calendar year. The State of Benaras in which the Bank had its registered office merged with the Indian Union on December 1, 1949. The Glass Works declared a dividend at a General Meeting on July 25, 1949. Cheque for Rs. 69,000 issued by the Glass Works in favour of the Bank in payment of the dividend were encashed by the Bank on December 31, 1949.3. The dividend received by the Bank has been brought to tax in the assessment year

Court's reasoning:
4. The State of Benaras after merger on December 1, 1949 with the Dominion of India formed part of the State of Uttar Pradesh and was on that account part of the taxable territories by virtue of the definition contained in Section 2 (14A) of the Indian Income-tax Act. Assuming that the dividend accrued within an Indian State, it was received by the Bank in the taxable territories on December 31, 1949, and by the express words contained in Section 14 (2) (c) of the Indian Income-tax Act, 1922, before it was omitted bythe Taxation Laws (Extension to Jammu and Kashmir) Act, 1954, it was not exempt from liability to payment of tax even if the right thereto had accrued to the Bank in an Indian State.In the present case there is no evidence that before December 31, 1949 dividend was paid, credited or distributed to the Bank. By virtue of S. 4 (1) (a) of the Income-tax Act, 1922, the income was held properly taxable in the assessment year 1950-51.It is unnecessary therefore to consider whether even if the Bank was a non-resident on July 25, 1949, by virtue of Section 4 (1) (b) (ii) it was liable to be taxed in respect of the dividend income in the year of assessmentunder Section 16 (2) of the IndianAct, 1922, the dividend income was taxable only in the year in which it was paid, credited or distributed or was deemed to be paid, credited or distributed.This Court observed in J. Dalmia v. Commissioner ofDelhi, 53 ITR 83  = (AIR 1964 SC 1866 ) that the expression "paid" in Section 16 (2) does not contemplate actual receipt of the dividend by the member in general, dividend may be said to be paid within the meaning of Section 16 (2) when the Company discharges its liability and makes the amount of dividend unconditionally available to the member entitled thereto. It was also held that the Act does not make dividend income taxable in the year in which it becomes due: it is taxable only in the year in which it is paid, credited or distributed.The Court overruled the decision of the Bombay High Court in Commissioner ofv. Laxmidas Mulrai Khatau, 16 ITR 248  = (AIR 1948 Bom 404 ) in which it was held that when dividend is declared, liability arises on the part of the Company to make that payment to the shareholder and with regard to the shareholder when the income represented by that dividend accrues or arises to him, and that the fact that the actual payment of the income is deferred in immaterial and irrelevant.