Case: J. Dalmia Vs. Commissioner of Income Tax Delhi

1. The appellant which is a Hindu undivided family was the registered holder of 1500 shares of M/s Govan Bros. (Rampur) Ltd. in the year of account October 1, 1950 to September 30, 1951. Pursuant to a resolution passed by the board of directors of M/s. Govan Bros. (Rampur) Ltd. - hereinafter called Govan Bros. - at a meeting held on August 30, 1950, the appellant received a dividend warrant dated December 28, 1950 for Rs. 4,12,500/- being interim dividend in respect of its shareholding in Govan Bros. This amount was brought to tax with the other income of the appellant in the assessment year 1952-53 by the Revenue authorities, after rejecting the objection of the appellant that it represented income for the assessment year 1951-52.2. At the instance of the appellant the Appellate Tribunal drew up a statement of the case and referred the question set out herein below to the High Court of Punjab under S. 66 (1) of the Indian Income-taxon a true interpretation of Article 95 of the First Schedule to the Indian Companies Act, 1913, the dividend of Rs. 4,12,500/- was liable to be included in the assessment yearHigh Court recorded an answer to the question in the affirmative. Against the order of the High Court, this appeal is preferred by the appellant with certificate granted by the High Court.

Court's reasoning:
7. There is no doubt that a declaration of dividend by a company in general meeting gives rise to a debt. "When a company declares a dividend on its shares, a debt immediately becomes payable to each shareholder in respect of his dividend for which he can sue at law, and the Statute of Limitation immediately begins to run": In re Severn and Wye and Severn Bridge Rly. Co, 1896-1 Ch. 559. But this rule applies only in case of dividend declared by the company only in case of dividend declared by the company in general meeting. A final dividend in general may be sanctioned at an annual meeting when the accounts are presented to the members. But power to pay interim dividend is usually vested by the Articles of Association in the directors. For paying interim dividend a resolution of the company is not required: if the directors are authorised by the Article of Association they may pay such amount as they think proper, having regard to their estimate of the profits made by the company. Interim dividend is therefore paid pursuant to the resolution of the directors on some day between the ordinary general meetings of the company. On payment, undoubtedly interim dividend becomes the property of the directors resolving to pay a certain amount as interim dividend does not create a debt enforceable against the company, for it is always open to the directors to rescind the resolution before payment of theis no statutory provision which gives rise to a fiction that on declaration of interim dividend, it should be deemed to be paid, credited orthe mere declaration of dividend in general meeting of the company is not to be regarded as payment within meaning of S. 16(2), much less can it be said that a resolution declaring interim dividend - which is capable of being rescinded by directors - operates as payment before the company has actually parted with the amount of dividend or discharged its obligation by some other act. The High Court was therefore right in recording an affirmative answer to the question propounded for the consideration of thea declaration by a company in general meeting gives rise to an enforceable obligation, but a resolution of the Board of Directors resolving to pay interim dividend or even resolving to declare interim dividend pursuant to the authority conferred upon them by the Articles of Association gives rise to no enforceable obligation against the company, because the resolution is always capable of being rescinded. Therefore, departure in the text of Art. 74 of the Articles of Association of Govan Bros. from the statutory version under Table A of the power in respect of interim dividend, dividend which may be entrusted to the directors, makes no real difference in the true character of the right arising in favour of the members of the company on execution of the power. The directors by the Articles of Association are entrusted with the administration of the affairs of a company; it is open to them if so authorised to declare interim dividend. They may, but are not bound to, pay interim dividend even if the finances of the company justify such payment. Even if the directors have resolved to pay interim dividend, they may before payment rescind thend interim oris income taxable in a particular year of assessment must be determined in the light of S. 16 (2) of the Indiany becomes taxable by S. 7 when it is allowed to the employee or becomes due to him whether it is actually paid to him or not. Interest on securities under S. 8 is taxable when it is received by the assessee. Under S. 9 tax on property becomes payable not on any actual receipt of income from the property but on a purely notional computation in the year of account of a bona fide annual value of the property, subject to the adjustments provided in that section. Profits and gains of business, profession or vocation carried on by an assessee are computed in accordance with the method of accounting regularly employed by the assessee, unless theOfficer being of the opinion that profits or gains cannot properly be deduced therefrom, directs otherwise. Other sources of incomeand dividends are included in this residuary classbecome taxable in the year in which they are received or accrue or arise or are deemed to be received, accrued or arisen according to the nature of the particular income. The year in which a particular class of income becomes taxable must therefore be determined, in the light of its true character, and subject to the special provision, if any, applicablee mere declaration of dividend in general meeting of the company is not to be regarded as payment within meaning of S. 16(2), much less can it be said that a resolution declaring interim dividendwhich is capable of being rescinded by directorsoperates as payment before the company has actually parted with the amount of dividend or discharged its obligation by some other act.