Judgment Case ID: 2646

Judgment:
Civil Appeal No. 1033 of 1966. Appeal by special leave from the judgment and order dated September 21	 1964 of the Allahabad. High	 Court in Income tax Misc. Case No. 121 of 1956. S.T. Desai	 A.K. Verma and Y.B. Dadachanji	 for the appellant. Jagdish Swarup	 Solicitor General	 S.K. Aiyar	 R.N. Sachthey and B.D. Sharma	 for the respondent. By order dated August 23	 1968	 we called for a supplementary statement on the issue whether dividend warrants were delivered by he Glass Works to the Bank on August 3	 1949. The Tribunal has submitted 'a statement of the case that the only relevant facts proved are that the dividend was declared on July 25	 1949 and the Bank encashed the dividend warrants on December 31	 1949. The appeal must therefore be decided on the footing that the dividend warrants were handed over to the Bank by the Glass Works on August 3	 1949	 is not proved. The material facts which have a bearing on the point in issue are these. 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. Cheques 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. The dividend received by the Bank has .been brought to tax in the assessment year 1950 51. Counsel for the Bank urged that the Bank cannot be assessed to. tax in respect of dividend accruing to it at a time when the Bank was a non resident. It is urged that by virtue of section 14(2) (c) of the Income tax Act	 1922	 as then in force	 the income received by the Bank was not liable to be taxed. At the relevant time section 14(2)(c) read as follows: "(2) The tax shall not be payable by an assessee (c) in respect of any income	 profits 'or gains accruing or arising to him within an Indian State	 unless such income	 profits or gains are received or deemed to 'be. received in or 'are brought into British India in the previous year by or on .behalf of the assessee	 or are assessable under section 12B or section 42. " By the Adaptation of Laws Order	 1950	 the words "an Indian State" were substituted by the words "a Part B State"	 and the words "British India" were substituted by the words "taxable territories". Section 2(14A) (which was also incorporated by the Adaptation of Laws Order	 1950	 with effect from April 1950) insofar as it is material provides: "taxable territories ' means (a) . . . . . (b) as respects any period after the 14th day of August	 1947	 and before the 26th day of January 671 1950	 the territories for the time being comprised in the Provinces of India	 but excluding the merged territory of Cooch Behar	 Provided that the taxable territories shall be deemed to include (a) the merged territories (i) as respects any period after the 31st day of March	 1949	. for any of the purposes of this Act	 and 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 by the Taxation Laws (Extension to Jammu & 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. It was then urged that the dividend must be deemed to have been received by the Bank on July 25	 1949 the day on which it was declared and on that date the Bank being a non resident it could not be brought to tax. But under section 16(2) of the Indian Income tax Act	 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 vs Commissioner of Income tax	 Delhi(1) 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 of Income tax vs Laxmidas. s Mulraj Khatau(2) 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 (1) (2) 672 or arises to him	 and that the fact that the actual payment of the income is deferred is immaterial and irrelevant. 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 section 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	 1959	 by virtue of section 4(1)(b)(ii) it was liable to be taxed in respect of the dividend income in the year of assessment 1950 51. The appeal fails and is dismissed with costs including the costs of the hearing at which the order calling for a supplementary statement was made. V.P.S. Appeal dismissed.

Summary:
The appellant Bank (assessee) was a share holder in a company which declared a dividend on July 25	 1949. The State of Benares in which the Bank had its registered office merged with the Indian Union on December 1	 1949. Cheques far the amount of dividend were encashed by the assessee on December 31	 1949. The assessee 's year of account was the calendar year. 'The. dividend was sought to be taxed in the assessment year 1950 51	 but the assessee contended that: (1) the dividend income was exempt from tax under section 14(2)(c)	 as it stood in the year of assessment; and (2) that it must be deemed to have been received by the assessee even on July 25	 1949	 on which date the assessee was a non resident. HELD: (1) On December 1	 1949	 by merger	 the State of Benares became part of the taxable territories as defined in section 2(14 A) of the Act. Hence	 though the dividend might have accrued in an Indian State	 it was received by the assessee in the taxable territories on December 31	 1949	 and	 by the express words in section 14(2)(c)	 as modified by the Adaptation of Laws Order	 1950	 the dividend income was not exempt from tax liability. [671 C E] (2) Dividend income is deemed to have been received by an assessee	 under section 16(2)	 only when it is paid	 credited or distributed	 or	 is deemed to be paid	 credited or distributed. Though paid does not contemplate 'actual receipt ' the dividend can only said to be paid	 not when it is declared	 but when the company discharges its liability 'and makes the amount of dividend unconditionally available to the member entitled thereto. In the present case	 there was no evidence that before December 31	 1949	 the dividend income was paid	 credited or distributed to the assessee within the meaning or section 16(2). [671 E G; 672 A B] J. Dalmia vs C.I.T. Delhi	 followed.