7 S.C.R

SUPREME COURT REPORTS 569

COMMISSIONER OF INCOME-TAX, KERALA AND

COIMBATORE

L. W. RUSSEL

IK. SUBBA RAO, J. c. SHAH AND s. M. SIKRI, JJ.]

Income Tax-Scheme to effect a-policy of i.nsura.nce for the purpose of ensuring annuity to every employee on his attaini:ng age of superannuation or on happening of a specfied contingency-Contribution's to be made both by employer and employee-Whether amount paid b11 the employer towards premium payable by employee taxable under s. 7(1)-Meamng of perquisite-Indian Income-tax Act. 1922 (11 of 1922), s. 7(1),

The respondent is an employee of the English and Scottish Joint Co-operative Wholesale Society Ltd. incorporated in England. The Society established a superannuation scheme for the benefit of the male European members of its staff employed in India by means of deferred rnnuities. Under the terms of the scheme, the trustee has to effect a policy of insurance for the purpose of ensuring an annuity to every member of the Society on his attaining the age of superannuation or on the happening of a specific contingency. The Society contributed one-third of the premium payable by each empioyee. During the year 1956-57, the Society contributed Rs. 3333/- towards the premium payable by the respondent. an employee of the Society. The Income-tax Officer included the said amount in the taxable income of the respondent for the yeaT 1956-57 under s. 7(1), Explanatian 1, sub-cl. (v) of the Act. The appeals of the respondent were dismissed both by the Appellate Assistant Commissioner of Income-tax and the Income-tax Appellate Tribunal.

The Tribunal referred to the High Court the following three questions of law:-

(1) Whether the contribution paid by lhe employer to the assessee under the terms of a trust deed in respect of a contract for a deferred annuitv on the life of the assessee is a perquisite as conlernplated by s. 7(1) of the Income-tax Act?

(2) Whether the said contributions were allowed to, or due to the applicant by or from the employer in the accounting year'!

(3) Whether the deferred annuity aforesa'd is annuity hit by s. 7(1) and para (v) of Explanation 1 thereto.

The High Court held that the employer's contribution under the terms of the trust deed was not a perquisite as contemplated by s. 7(1).

The employer's contributions were not

allwed to or due t? the employee in the accounting year. The legislature not havmg used the word "deferred" with annuity m .s. 7(1) and the statute being a taxing one, the deferred annUity would not hit para (v) of Explanation 1 to s. 7-(1) of the Act. Against the decision of High Court. the appellant came to this Court by special leave. Dismissing the appeal,

19G~

April 1

Commissioner of

Income-tax, Kerala and

Coimbatore v.

L. W. Ruwr::l

Held: The answers to the questions of law as given by the High Court were correct. Unless a vested interest in the sum accrues to an employee, it is not taxable. In the present ccse, no interest in the sum contributed by the employer under the scheme vested in the employee, as it was only a contingent interest depending upon his reaching the age of superannuafon. lt is not a perqu.isite allowed to him by the employer or an amount due to him from the employer within the meaning of s. 7(1) of the Act. A perquisite is only that amount of money which is allowed to the employee by or is due to him from the employer or is paid to him to elfect an insurance en his life.

Smyth v. Stretton, (1904), 5 T.C. 36, and Edwards (H. M.

Inspector of Taxes) v. Roberts, (1935), 19 T.C. 618, referred to.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 220/

1963. Appeal by special leave from the judgment and order dated January 9, 1961 of the Kerala High Court in I.T.R.

Case No. 17 of 1959.

K. N. Rajagopal Sastri and R. N. Sachthey, for the appellant.

The respondent did not appear.

April I, 1964. The Judgment of the Court was delivered by

SuM, a R.,,,; J.

SuBBA RAO, J.-This appeal by special leave preferred against the judgment of the High Court of Kerala at Ernakulam raises the question of the interpretation of s. 7(1) of the Indian Income-tax Act, 1922 (Act No. XI of 1922), hereinafter called the Act.

The respondent, L. W. Russel, is an employee of the English and Scottish Joint Co-operative Wholesale Society Ltd., Kozhikodc, hereinafter called the Society, which was incorporated in England. The Society established a superannuation scheme for the benefit of the male European members of the Society's staff employed in India, Ceylon and Africa by means of deferred annuities.

The terms of such benefits were incorpcrated in a trust deed dated July 27,

1934. Every European employee of the Society shall become a 1i1e111ber of that scheme as a condition of employment.

Under the term of the scheme the trustee has to effect a policy of insurance for the purpose of ensuring an annuity to every member of the Society on his attaining the age of superannuation or on the happening of a specified contingency. The Society contributes I / 3 of the premium payable by such employee. During the year 1956-57 the Society contributed Rs. 3,333/- towards the premium payable by the respondent. The Income-tax Officer, Kozhikode Circle, included the said amount in the taxable income of the respondent for the year 1956-57 under s. 7(1), Explanation I Sub-cl.

(v) of the Act. The appeal preferred by the respondent against

the said inclusion to the Appellate Assistant Commissioner of Income-tax, Kozhikode, was dismissed. The further appeal preferred to the Income-tax Appellate . Tribunal received the same fate. The assessee threupon filed an application under s. 66(1) of the Act to the Income-tax Appellate Tribunal for stating a case to the High Court. By its order dated December 1, 1958, the Tribunal submitted a statement of case referring the following three questions of law to the High Court of Kerala at Ernakulam : -

(l) Whether the contributions paid by the employer to the assessee under the terms of a trust deed in respect of a contract for a deferred annuity on the life of the assessee is a 'perquisite' as contemplated by s. 7(1) of the Indian Income-tax Act?

(2) Whether the said contributions were allowed to or due to the applicant by or from the employer in the accounting year?

(3) Whether the deferred annuity aforesaid is an annuity hit by section 7(1) and para. (v) of Explanation 1 thereto?

On the first question the High Court held that the l(mployer's contribution under the terms of the trust deed was not a perquisite as contemplated by s. 7(1) of the Act. On the second question it came tothe conclusion that the employer's contributions were not allowed to or due to the employee in the accounting year. On the third question it expressed the opinion that the Legislature not having used the word

'deferred" with annuity in s. 7(1) and the statute being a taxing one, the deferred annuity would not be hit by para.

(v) of Explanation 1 to s. 7(1) of the Act. The Commissioner of Income-tax has preferred the present appeal to this Court questioning the correctness of the said answers.

The three questions formulated for the High Court's opinion are interdependent and the answers to them turn upon the true interpretation of the relevant part of s. 7(1) of the Act.

Mr. Rajagopala Sastri, learned counsel for the appellant, contends that the amount contributed by the Society under the scheme towards the insurance premium payable by the trustees for arranging a deferred annuity on the respondent's superannuation is a perquisite within the meaning of s. 7(1) of the Act and that the fact that the respondent may not have the benefit of the contributions on the happening of certain contingencies will not make the said contributions anytheless a perquisite. The employer's share of the contributions to the fund earmarked for paying prei_niums of the insurance policy, the argument proceeds, vests m the respondent as soon as

19G4

Co11nni1Jsicmer of Income-fax Kerala and

Coimbatore

L. W. Russel

Com.missionef' of

lncome-ta:r., Kerala and CoimbatGre

L. W. Russel

Subba RafJ, J,

it is paid to the trustee and the happening of a contingency only operates as a defeasance of the vested right. The respondent is ex-parte and .• therefore, the Court has not the benefit of the exposition of the contrary view.

Before we attempt to construe the scope of s. 7(1) of the Act it will be convenient at the outset to notice the provisions of the scheme, for . the scope of the respondent's right in the amounts representing the employer's contributions thereunder depends upon. it. The trust deed and the rules dated July 27, 1934, embody the superannuation scheme. The scheme is described as the English and Scottish Joint Co-operative Wholesale Society Limited Overseas European Employees' Superannuation Scheme, hereinafter called the Scheme. It is established for the benefit of the male European members of the Society's staff employed in India, Ceylon and Africa by means of deferred annuities. The Society itself is appointed thereunder as the first trustee. The trustees shall act as agents for and on behalf of the Society and the members respectively; they shall effect or cause to be effected such policy or policies as may be necessary to carry out the scheme and shall collect and arrange for the payment of the moneys payable under such policy or policies and shall hold such .moneys as trustees for and on behalf of the person or persons entitled thereto under the rules of the Scheme. The object of the Scheme is to provide for pensions by means of deferred annuities for the members upon retirement from employment on attaining certain age under the conditions mentioned therein, namely, every European employee of the Society shall be required as a condition of employment to apply to become a member of the Scheme from the date of his engagement by the Society and no member shall be entitled to relinquish his membership except on the termination of his employment with Society; the pension payable to a member shall be provided by means of a policy securing a deferred annuity upon the life of such member to be effected by the Trustees as agents for and on behalf of the Society and the members respectively with the Co-operative Insurance Society Limited securing the payment to the Trustees of an annuity equivalent to the pension to which such member shall be entitled under the Scheme and the Rules; the insurers shall agree that the Trustees shall be entitled to surrender such deferred annuity and that, on such deferred annuity being so surrendered, the insurers will pay to the Trustees the total amount of the premiums paid in respect thereof together with compound interest thereon; all moneys received by the Trustees from the insurers shall be held by them as Trustees for and on behalf of the person or persons entitled thereto under the Rules of the Scheme; any policy or policies issued by the insurers in connection with the

7 S.C.R. srPRE~IE COURT REPORTS 57::>

Scheme shall be deposited with the Trustees; the Society shall contribute one-third of the premium from time to time payable in respect of the policy securing the deferred annui ty in respect of each member as thereinbefore provided and the member shall contribute the remaining two-thirds; the age at which a member shall no1 mally retire from the service of the Society shall be the age of 55 years and on retirement at such age a member shall be entitled to receive a pension of the amount specified in Rule 6; a member may also, after following the prescribed procedure. commute the pension to which he is entitled for a payment in cash in accordance with the fourth column of tle Table in the Appendix annexed to the Rules; if a member shall leave or be dismissed from the service of the Society for any reason whatsoever or shall die whi:e in the service of the Society there shall be paid to him or his legal personal representatives the total amount of the portions of the premiums paid by such member and if he shall die \vhilst in the service of the Society there shall be

pad to him or his legal personal representatives the total amount of the portions of the premiums paid by such mem ber and if he shall die whilst in the service of the Society or , ha!I leave or be dismissed from the service of the Society on account of permanent breakdown in health (as: to the /Jona /ides of whi ; h the Trustees shall be satislied). such further proportion (if any) of the total amount of the portions of the premiums paid by the Society in respect of that memhr shaH be payable in iiccordance with Table C in the

Ap;:inch to the Rules; if the total amount of the pbrtions of ti1e premiums in respect of such member paid by the S iciety together with interest thereon as aforesaid shall not be paid c'J the Trustees to him or his legal personal representatives under sub-s. (I) of r. 15 then such proportion or the whole, as the case may be. of the Society's portion of such premiums and interest thereon as aforesaid as shall not be paid by the Trustees to such member or his legal personal rep; esentatives as aforesaid shall be paid by the Trustees to the SJciety; the rules may be altered, amended or rescinded and new rules may be made in accordance with the provisions of the Trust Deed but not otherwise.

We have given the relevant part of the Scheme and the Rules. The gist of the Scheme may be stated t)lus: The object of the Scheme is to provide for pensions to its employees. It is achieved by creating a trust. The Trustees ap!)ointed thereunder are the agents of the employer as well as of the employees and hold the mnneys received from the employer. the employee and the insurer in trust for and on behalf of the person or persons entitled thereto under the rules of the Scheme. The Trustees are en joined to take out policies of insurance securing a deferred annuity upon the

1!.Jtu

Com111i8si1; nr1 of

/nr<J111!'-f(l:r, K1r11laa11J1 Coirnfmlnr<'-

L. Tr. Ru.~8el

S11J; b11 Ran, J.

l!J6.J

(,'onimissioner of

lncomelax.

K1:r, tfc1 and

OrJimlmJIJTI~

L. IV. Ru, ssel

Su9b11. R11(J, .J.

574 SUPllEME COURT HEPORTS [1964]

life of each member, and funds are provided by contributions from the employer as well as from the employees. The Trustees realise the annuities and pay the pensions to the employees. Under certain contingencies mentioned above, an employee would be entitled to the pension only after superannuation. If the employee leave the service of the Society or is dismissed from service or dies in the service of the Society, he will be entltled only to get back the total amount of the portion of the premium paid by him, though the trustees in their discretion under certain circumstances may give him a proportion of the premiums paid by the Society. The entire amount representing the contributions made by the Society or part thereof, as the case may be, will then have to be paid by the Trustees to the Society. Under the scheme the employee has not acquired any vested right in the contributions made by the Society. Such a right vests in him only when he attains the age of superannuation. Till that date that amount vests in the Trustees to be administered in accordance with the rules; that is to say, in case the employee ceases to be a member of the Society by death or otherwise, the amount contributed by the employer with interest thereon, subject to the discretionary power exerciseable by the trustees, become payable to the Society. If he reaches the age of superannuation, the said contributions irrevocably become fixed as part of the funds yielding the pension. To put it in other words, till a member attains the age of superannuation the employer's share of the contributions towards the premiums does not vest in the employee. At best he has a contingent right therein.

In one contingency the said amount becomes payable to the employer and in another contingency, to the employee.

Now let us look at the provisions of s. 7(]) of the Act in order to ascertain whether such a contingent right is hit by the said provisions. The material part of the section reads:- Section 7(1)-The tax shall be payable by an assessee under the head "salaries" in respect of any salary or wages, any annuity, pension or gratuity, and any fees, commissions, perquisites or profits in lieu of. or in addition to, any salary or wages, which are allowed to him by or are due to him. whether paid or not, from, or are paid by or on behalf of, ............... a company ................... ".

Explanation I-For the purpose of this section perquisite includes-. * • • •

(v) any sum payable by the employer, whether directly <lr through a fund to which the pro visions of Chapters IX-A and JX-B do not

7 S.C.R.

SlTPREl\IE COURT REPORTS 575

apply, to effect an assurance on the life of the assessee or in respect of a contract of annuity on the life of the assessees.

This section imposes a tax on the remuneration of an employee. It presupposes the existence of the relationship of employer and employee.

The present case is sought to be brought under the head "perquisites in lieu of, or in addition to, any salary or wages, which are allowed to him by or are due to him, whether paid or not, from, Or are paid by or on behalf of a company". The expression "perquisites" is defined in the Oxford Dictionary as "casual emolument, fee or profit attached to an office or position in addition to salary or wages". Explanation I to s. 7(1) of the Act gives an inclusive definition. Clause (v) thereof includes within the meaning of "perquisites" any sum payable by the employer, whether directly or through a fund to which the provisions of Chs.

IX-A and IX-B do not apply, to effect an assurance on the life of the asscssee or in respect of a contract for an annuity on the life of the assessee. A combined reading of the substantive part of s. 7(1) and cl. (v) of Exp!. I thereto makes it clear that if a sum of money is allowed to the employee by or is due to him from or is paid to enable the latter to effect an insurance on his life, the said sum would be a perquisite within the meaning of s. 7(1) of the Act and, therefore, would be exigible to 'tax. But before such sum becomes so exigihle. it shall either be paid to the employee or allowed to him by or due to him from the employer. So far as the expression "paid" is concerned, there is no difficulty, for it takes in every receipt by the employee from the employer whether it was due to him or not. The expression "due" followed by the qualifying clause "whether paid or not" shows that there shall be an obligation on the part of the employer to pay that amount and a right on the employee to claim the same.

The expression "allowed", it is said, is of a wider connotation and any credit made in the employer's account is covered therehy. The \\:ord "al1o\ved'' v.r~s introluced in the sec~

tion by the Finance Act of 1955. The said expression in the legal terminology is equivalent to "fixed. taken into account, set apart, granted". It takes in perquisites given in cash or in kind or in money or money's worth and also emenilies which are not convertible into money. It implies that a light is conferred on the employee in respect of those perquisites.

One cann"Ot be said to allow a perquisite to an employee if the employee has no right to the same. It rnnnot apply to contingent payments to which the employee has no right till the contingency occurs. In short, the employee must have a vested right therein.

If that be the interpretation of s. 7(1) bf the Act; it is not possible to hold that the amounts paid by the Society

19(i4

Co1111nis8ioner of

Inrume-fax

K1ral11 o.ml Cuimfia.!ore

L. Jr.

Rn-~, el

1964 -- \ Commissioner of

Income-fax Kerf/.la and Coimbrdore

L.1V. Russel

576 SUPREME COUltT REPORTS (1964]

to the Trustees to be administered by them in accordance with the rules framed under the Scheme are perquisites allowed to the respondent or due to him. Till he reaches the age of superannuation, the amounts vest in the Trustees and the beneficiary under the trust can be ascertained only on the happening of one or other of the contingencies provided for under the trust deed. On the happening of one contingency, the employer becomes the beneficiary, and on the happening of another contingency, the employee becomes the beneficiary. Learned counsel for the appellant strongly relied upon the decision of the King's Bench Division in Smyth v.

Stretton('). There, one Stretton, one of the Assistant Masters of Dulwich College, was assessed to income-tax in the sum of £385 in respect of his emoluments as Assistant Master received from the Governors of Dulwich College for the year ended the 5th day of April, 1901. He objected to the assessment on the ground that it included £35 not liable to taxation, being amount placed to his credit by the Governors under the Provident Fund Scheme for the year I 900. Channell, J., with some hesitation, came to the conclusion that the said sum was taxable. That case was dealing with a scheme for the establishment of provident fund for the benefit of the Assistant Masters on the permanent staff of the Dulwich College. Under para. I of the scheme the salaries of Assistant Masters were increased. Clause (a) of para. 1 of the scheme provided that Assistant Masters having not less than five years, but Jess than fifteen years' service, would be allowed an increase of 5 per cent, in their salaries; under cl. (b) thereof, Assistant Masters having not Jess than 15 years' of service and over, would get an increase of 7!· per cent: in their salaries; under cl. (c) thereof, a further addition in their salaries, equal in amount to the above sums, should be granted from the same date to the Assistant Masters alluded to in (a) and (b), such addition being, however, subject to the conditions provided by para. 5. Paragraph 5 read: -

"That Assistant Masters having Jess than ten years' service who may resign their appointments, or from any other cause than i!I-health cease to belong to the Co1iege, shall be entitled to receive the total increase sanctioned by (al and the accumulations thereof, but shall not receive the additional increase sanctioned by (c), or the accumulations thereof. In the event of anv such Assistant Master retiring from ill-health the Governors, in addition to the increase sanctioned by (a), may grant him the further 5 per cent. sanctioned by (c), and the accumulations thereof. In the event of death of any such Assistant l\fa, ter whilst in

( ') (1904) 5 T. C. 36. 46.

the service of the College, the 5 per cent. due by

(c) as well as under (a), with the accumulations thereof, shall be paid to his legal representatives".

It was contended that the amount payable under cl. (c) of para. I was a contingent one without any vested character and, therefore, could not be described as income in any way.

The learned Judge construed the provisions of the scheme and rejected the contention. The main reason for his conclusion is stated thus: -

"The result seems to me to be that I must take that sum as a sum which really has been added to the salary and is taxable. and it is not the less added to the salary because there has been a binding obligation created between the Assistant Masters and Governors of the Schools that they should apply it in a particular way".

No doubt it is possible for another court to come to a different conclusion on the construction of the provisions of the scheme; but the learned Judge came to the conclusion that cl. (c) of para. I of the scheme provided for an additional salary to the Assistant Masters. Indeed, the Court of Appeal in Edwards (H. M. Inspector of Taxes) v. Roberts(') construed a similar scheme and came to the contrary conclusion and explained the earlier decision on the basis we have indicated. There, the respondent was employed by a company under a service agreement dated August 2l. 1921, which provided inter a/ia, that, in addition to an annual salary, he should have an interest in a "conditional fund", which was to be created by the company by the payment after the end of each financial year of a sum out of its profits to the trustees of the fund to be invested hy them in the purchase of the company's shares or debenture stock. Subject to possible forfeiture of his interest in certain events. the respondent was entitled to ; receive the income produced by the fund at the expiration of each financial year, and to receive part of the capital of the fund, (or, at the trustees' option, the investments representing the same) at the expiration of five financial years and of each succeeding year. and, lln death whilst in the company's service or on the termination of his employment by the company, to receive the whole amount then standing to the credit of the capital amount of the fund (or the actual investments\. The respondent resigned from the service of the company in September. 1927, and at that date the trustees of the fund transferred to hi.m the shares which they had purchased out of the payments made to them by the company in the years 1922 to 1927. He was assessed to income-tax on the amount of the current market value of the

(') (1935) 19 T.C. 618, 638, 640.

J, fP(ll)IHCf-17

Oommisaiomr of I ncome-taz, Kerala and Coimbatore

L. W. Russel

Subba Rao, J.

Oammissianer of

Income-tax, Kenda and

Coimbatore

L. W. Russel

Subba Rao, J.

578 SUPREME COURT REPOR'l S [1964}

shares at the date of transfer. The assessee contended that immediately a sum was paid by the company to the trustees of the fund he became invested with a beneficial interest In the payment which formed part bf his emoluments for the year in which it was made, and for no other year, and that, accordingly, the amount of the assessment for the year 1927- 28 ought not. in any event, to exceed the aggregate of the sums paid by the company tb the trustees, the difference between the amount and the value of the investments at the date of transfer representing a capital apprnciation not liable to tax for any year. The Court of Appeal rejected the contention. Lord Hanwbrth, M. R., in rejecting the contention, observed: - " .................. ur:der these circumstances there could not be said to have accrued to this employee a vested interest in these successive sums placed to his credit, but only that he had a chance of being: paid a sum at the end of six years if all went well. That chance has now supervened, and he has got it by reasbn of the fact of his employment, or by reason of his exercising an employment of profit within Schedule E.'".

Maugham, L. J., said much to the same effect thus:

"The true nature of the agreement was that he was to

be entitled in the events, and only in the events mentioned in Clause 8 of the agreement, to the investments made by the Compa1iy out of the net profits of the Company as provided in Clause 6."~ The decision of Channell, J., in Smvth v.

Srrettonl') was strongly relied upon before the appellate court. But the learned Judges distinguished that case on the ground that under the scheme which was the subject-matter bf that decision the sums taxed were really additions to the salary of the Assistant Master and that. in any view. that decision should be confined to the facts of that case. The principle laid down by the Court of Appt:.al. namely, that unless a vested interest in the sum accrues to an employee it is not taxable, equally applies to the present case. As we have pointed out earlier, no interest in the sum contributed by the employer under the scheme vested in the employee, as it was only a contingent interest depending upon his reaching the age of superannuation. It is nnt a perquisite allowed to him by the employer or an amount due to him from the tmployer within the meaning of s. 7(]) of the Act. We, therefore, hold that the High Court has given correct answers to the questibns of law submitted to it by the Income-tax Appellate Tribunal.

In the result, the appeal fails and is dismissed.

Appeal dismissed.

(') (1904) 5 T.C. 35. 46.

/ .:

1 S.C.R:,

SUPRE)!E COURT REPORTS 579

'-.... -

J; DALMIA v. \

COMMISSIONER OF INCOME-TAX. NEW DELHI

[K. SUB BA RAo. J. C. SHAH AND S. M. SIKRI, JJ.]

Company Law-Resolution of Board of Directors-Interim dividend-If creates a debt enforceable against the comvanylncome Tax-Payable on the dividend in the year in which it was actually paid, credited, or distributed OT deemed to be :paid-"Paid"-Meaning of-Indian Companies Act, 1913 (7 of 1913), s. 17(2), Art. 95 Sch. I-Income-tax Act, 1922 (11 of 1922), .s. 16(2).

The appellant held shares in a company the Board of Directors of which by a resolution dated August 30, 1950 declared interim dividends. The appellant received a dividend warrant dated December 28, 1950 for a certain amount being the interim dividend in respect of its share holdings in the company. The appellant's year of accounting had ended on September 30, 1950. The revenue authorities brought to tax the .amount so received with other income of the appellant in the assessment year 1952-53 after rejecting the objection of the .appellant that it represented income for the assessment year 1951-52. In a reference made under s. 66(1) of the Indian Incometax Act, 1922, the High Court agreed with the Revenue authority that the dividend was in view of Art. 95 of the First Sche- -dule to Indian Companies Act, 1913, liable to be included in the cassessment year 1952-53.

Held: A declaration of dividend by a company in a general meeting gives rise to a debt.

In re Severn and Wye and Severn Bridge Railway Co.

(1896) 1 Ch. 559, referred to.

But a mere resolution 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 the dividend.

The Lagunas Nitrate Schroeder and Company, 17 to.

Campany (Ltd.) v.

J. Henry Times Law Reports 625, referred

Commissioner of Income-tax, Bombay v. Laxmidas Mulraj Khatau, 16 I.T.R. 248, distinguished.

• (ii) The test applied by Chagla C. J. (in C.I.T., Bombay

v. Laxmidas Mulraj Khatau, 16 I.T.R. 248) that because the dividend becomes due to the assessee who has the right to deal \vith or dispose of the same in any manner he likes, it is taxable in the year in which it is declared cannot be regarded as correct.

(iii) Dividend may te said to be paid within the meaning of s. 16(2} of the Indian Income-tax Act, 1922 when the company discharges its liability and makes the amount thereof unconditionally available to the member entitled thereto.

Purshottamdas Thakurdas v. C.I.T., Bombay, 34 I.T.R, 204, referred to.

LiP(D)l8CT-17(a\

.April I

. I

I .

J.Dalmia

-- T.

Commi8sioner of

Income.taz, ·

l!,,..ewDtlhi

Sooh, J.

' ' ' ··,,-·.-:-f-,,'/- -~ ;\- ' -- >:;;; r-

/ \) - ;·,•,.....;.- ·'"-~-----~

' ' '580 SUPRE)lE COURT REPORTS (1964} , - _(iv) The declaration of interim dividend capable of being rescinded 'by the directors does not operate as a payment under s. 16(2) of the Income-true Act before the company has parted w<ith the amount of dividend or discharged its obligation by some other act. ·

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 505 of 1963. Appeal from the judgment and order dated March 6, 1961 of the Punjab High Court (Circuit Bench) at Delhi in I.T.R. No. 16 of 1959.

S. K. Kapur and B. P. M aheslnvari, for the appellant.

C. K. Daphtary, Attorney-Genera/, K. N. Rajagopal Sastri and R. N. Sachthey, for the respondent.

April 1, 1964. The judgment of the Court was delivered by.

SHAH, J.-The appellant which is a Hindu undivided family was the registered holder of 1,500 shares of M / s Govan Bros. (Rampurl 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 R.~. 4,12,500/- being interim dividend in respect of its share-holding 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.

At the instance of the appellant the Appellate Tribunal drew up a statement of the case and referred the question set out hereinbelow to the High Court of Punjab under s. 66(1) of the Indian Income-tax Act:

"Whether on 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 year 1952-53."

The High 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.

Even though the question was framed as if article 95 of the First Schedule to the Indian Companies Act, 1913,-applies to Govan Bros, it i~ common ground that_ the company

was registered under the Companies Act of the former Rampur State, and it had adopted special Articles of Association in supersession of Table A of the Companies Act. The relevant articles of Govan Bros. dealing with declaration or payment of final and interim dividends were articles 73 and

74. The High Court therefore proceeded to deal with the question on the footing that it was, by the question referred, called upon to interpret article 7 4 of the Articles of Association of Govan Bros. It is common ground between the appellant and the Revenue that the provisions of the Companies Act of the former Rampur State were in terms identical with the provisions of the Indian Companies Act, 1913.

The appellant contends that the directors of Govan Bros. had in exercise of authority expressly conferred upon them by article 74 declared dividend in their meeting dated August 30, 1950 and on such declaration the dividend became a debt due to the appellant and under the Indian Income-tax Act it became taxable in the year of assessment 1951-52, for the previous year of tlie appellant had ended on September

30, 1951. The Commissioner of Income-tax says that the directors of Govan Bros. had paid by warrant issued on December 28, 1950 pursuant to a resolution dated August 30, 1950, interim dividend and it was only on payment the dividend became taxable under s. 16(2) of the Indian Incometax Act. It is said by the Commissioner that dividend final or interim is taxable not in the year in which it is declared but only in the year in which it is paid, credited or distributed, or deemed to be paid, credited or distributed, and that in any event a resolution by the Board of Directors to pay interim dividend does not create an enforceable obligation. for it is always open to the directors to rescind the resolution for payment of dividend even if it is one in form declaring dividend.

The Indian Companies Act, 1913 contains no provision for declaration of dividend either interim or final: it does not say as to who shall declare the dividend, nor does it say that dividend may be declared in a general meeting of the company. But s. 17(2) provides that the company may adopt all or any of the regulations contained in Table A in the First Schedule to the Companies Act as its articles of association. and shall in any event be deemd to contain regulations identical with or to the same effect, amongst others, as regulation 95 and regulation 97 contained in that T.able.

Regulation 95 of Table A provides that the company in general meeting may declare dividends, but no dividends shall exeed the amount recommended by the directors, and regulation 97 states that no dividends shall be paid otherwise than out of profits of the year or any other undistributed profits. Regulation 96, which is not an obligatory article, provides that the

J, Dalmia v.

Commiasionef'of

Income-tax,

New Delhi

Shah, J.

J.Dalmia v.

Oommi...wn.rof

lntomt-tM, New Delhi

Shah, J.

582 SUPREl\IE COURT HEPORTS [196iJ

directors may from time to time pay to the members such interim dividends as appear to the directors to be justified by the profits of the company. Govan Bros. had in their Articles of Association made the following provision with regard to dividends:

"Art. 73. The Company in general meeting may declare a dividend to be paid to the members according to their rights and interests in the profits.

Art. 74. When in their opinion the profits of the company permit, the directors may declare an interim dividend.

Art. 77. No dividend shall be payable, except out of the net profits arising from the business of the cempany, and no larger dividends shall be declared than is recommended by the directors."

By Art. 80 it was provided that unless otherwise direded by the company in general meeting any dividends may be paid by cheque or warrant sent through the post to the registered address of the member entitled to the same.

In Art. 74 relating to payment of interim dividend, there was a slight departure from the regulation under Table A of the First Schedule to the Companies Act. Whereas under regulation 96 Table A the flirectors are authorised to pay to the members interim dividends, by Art. 74 of the Articles of Association of Govan Bros. the directors are authorised to deClare interim dividend. It may be noticed that under s. 17, adoption of an article in form identical with, or to the same effect as regulation 96 of Table A, is not made obligatory.

The material part of s. 16(2) of the Income-ta)\ Act as it stood before it was deleted by s. 7 of the Finance Act, 1959 with effect from April 1, 1960, read as follows:

"For the purposes of inclusion in the total income of an assessee any dividend shall be deemed to be income of the previous year in which it is paid, credited or distributed or deemed to have been paid, credited or distributed to him • • *"

The clause in terms made dividend the income of the year in which it was paid, credited or distributed or was deemed to have been paid, credited or distributed.

In the present case dividend was paid to the appellant on December 28,

1950. It is not the case of the appellant that thj! amount was either credited in the books of account of Govan Bros. to the appellant or was distributed or deemed to have been paid, credited or distributed to the appellant before the close of the appellant's year of account ending September 30, 1950. But Mr. Kapur contends that under the law governing companies

/ - ' 7 _s.c.R:\ -,~UPRE~[E COURT REPORTS 583

' '. • - "< .- -- - -;·- -··---_--- on declaration, dividendinterim or final becomes due, and

it must fie regarded for the purpose of the Income-tax Act as paid to the member on the date on which -it is declared.

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 imme diately 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 Railway Company('). But this rule applies only in case of dividend declared by the company ill 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 articles 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 shareholder. But a mere resolution of the directors re:>olving 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 the dividend. In The Lagunas Nitrate Company (Limited)

v. J. Henry Schroeder and Company (') the directors of a company passed a resolution declaring interim dividend payable on a future date, and reque:>ted the company's bankers to set apart, out of the money of the company in their hand, into a special account entitled "interim Dividend Account", a sum sufficient to cover the dividend, pending the company's instructions. But before the date fixed for payment. the directors resolved that pending certain litigation to which the company was a party, payment of dividend be postponed.

It was held by the Court that the directors had the right even after resolving to pay interim dividend to rescind the resolution and no . enforceable right arose in favour of the members of the company by the declaration of interim dividend.

In Halsbury's Laws of England, III Edn., Vol. 6 p. 402, Art. 778, it has been stated:

"A directors' declaration of an interim dividend may be rescinded before payment has been made."

(') (1896) 1 Ch. 559. (') 17 Time_s Law Reports 625.

J.Dalmia ...

Commiuioner of

lncome-taz, }ttwDelhi

Shah, J.

196l

J.Dalmia

CommiaaiO'Ut' of

111.come-taz~ Ne111 Delhi

Shah, J.

' Therefore a 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. 7 4 of the Articles of Association of Govan Bros. from the statutory version under Table A of the power in respect of interim dividend which may be entrusted to the directors, makes no real difference in the tnie 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 the resolution.

Counsel for the appellant does not rely upon any evidence of actual payment or upon any credit given to the appellant in the books of account of the company nor upon any distribution. Even the resolution of the directors of August 30, 1950 is not on the record, and there is no evidence that it was resolved to pay the dividend on any date before it was actually paid, and the company had taken any step to implement the. resolution within the year of account corresponding to the assessment year 1951-52. There is no statutory provision which gives rise to a fiction that on declaration of interim dividend, it should be deemend to be paid, credited or distributed.

In support of the plea that interim dividend was taxable in the year of assessment 1951-52, the appellant relies upon two facts only-the power vested in the directors to declare interim dividend, and the passing of a resolution by the directors relating to interim dividend on August 30, 1950 followed by the drawing of dividend warrants dated December 28,

1950. But for reasons already stated a resolution of the board of directors declaring interim dividend, until it is implemented by some step taken by the company, creates no enforceable right in the shareholders. The judgment of the Bombay High Court in Commissioner of Income-tax, Bombay

v. Laxmidas Mu/raj Khatau(') on which counsel for the appellant relies, does not assist him either. In that case the company declared a dividend out of its profits, and made it payable a few days later. The dividend was paid on the

('.) 16 I.TR. 248.

date on which it was made payable by the resolution of the company. The Income-tax Officer treated the amount received by the member as dividend income for the asessment year in which it was actually received. The High Court of Bombay in a reference under s. 66 observed that as soon as the dividend was declared it became the income of the assessee which income the assessee could deal with or dispose of in any manner he liked. Chagla C. J ., speaking for the Court enunciated the law as follows:

"It L> impossible to give a literal construction to the expression "paid" used in this sub-section (sub-s.

(2) of s. 16). If a literal corntruction were to be given, then it would amount to this that "until the dividend warrant was actually cashed and the dividend amount was actually realised it cannot be stated that the dividend was paid to the shareholder. • • • • • I think the proper construction to give to that word is when the dividend is declared then a 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 arfr; es to him.

The mere fact that the actual payment of the income is deferred is immaterial and irrelevant." But whether dividend-interim or fixed-is income taxable in a particular year of assessment must be determined in the light of s. 16(2) of the Indian Income-tax Act. The Legislature had not made dividend income taxable in the year in which it becomes due: by express words of the statute, it is taxable only in the year in which it is paid, credited or di;; tributed or is dmed to be paid, credited or distributed. The Legislature has made distinct provisions relating to the year in which different heads of income become iaxable. Salary 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 iB taxable when it is received by the asses see. Under s. 9 tax on property becomes payable not on any actual receipt of income from the property but on a purely national 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 busines.>, profession or vocation carried on by an assessee are computed in accordance with the method of accounting regularly employed by the assessee, unless the Income-tax Officer being of the opinion that profits or gains cannot properly be deduced therefrom, directs otherwise.

Other sourcei; of income-and dividends are included in this residuary class-become taxable in the year in which they

196~

J. Dalmia.

Oommisaicmer of

Jncqm, e,.tax, New Delk~

Shah, J.

J. Dalmia v.

Commissioner of

lnconie-tax, '-Yew Delhi

Shah, J.

are received or accrue or arise or are deemed to be received, accrued or arise, 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, applicable thereto. The Legislature has enacted an express provfaion making dividend income taxable in the year in which it is paid, credited or distributed or is to be deemed, so paid, credited or distributed. The test applied by Chagla C. J., that because the dividend becomes d11e to the assessee who has the right to deal with or dispose of the same .in any manner he likes, it is taxable in the year in which it t> declared, cannot be resarded as correct. The expression "paid" in s. 16(2) it is true does not contemplate actual receipt of the dividend by the member. In general, dividend may be said to be paid within the meaning of s. 16(2) when the company discharges its liability and makes the amount of dividend unconditionally available to the member entitled thereto. Chagla C. J., has himself in Purshotamdas Thakurdas v. Commissioner of Income-tax, Bombay City /(') expressed a different view.

The learned Chief Justice in delivering the judgment of the court referred to Laxmidas M ulraj Khatau's case (3) and observed that the principle of that case applied only to those cases where in facts the djvidend was paid to the shareholder and not to cases where a contingent liability was undertaken and no payment was made.

He , observed:

" * * • one thing is clear from the language used by the Leg1lature that it did not intend to equate "paid" with "declared" in every case.

Therefore, it is open to us to consider, notwithstanding the Khatau Mills' case, whether on the facts "of this case, it could be said that dividend has been paid, which although it may have been declared may never be payable and in fact has not been paid." If the mere declaration of dividend in general meeting of the company is not to be.regarded as payment within the 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 obligation by some other act. The High Court was therefore right in recording an affirmative answer to the question propounded for the consideration of the Court.

The appeal fails and is dismissed with costs.

Appeal dismissed.

(') 34 I.T.R. 204.