Gauhati High Court
Tarajan Tea Company Pvt. Ltd. vs Commissioner Of Income-Tax on 21 April, 1993
Equivalent citations: [1993]204ITR218(GAUHATI)
Author: Chief Justice
Bench: Chief Justice
JUDGMENT U.L. Bhat, C.J.
1. The following two questions have been referred, at the instance of the assessee, by the Appellate Tribunal under Section 256(1) of the Income-tax Act, 1961 :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the dividend declared by the board of directors at the meeting held on December 12, 1977, was only a proposal and the dividend was declared in the annual general meeting held on July 22, 1978, which was beyond the 12-month period from the end of the accounting period ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal acted in law in holding that the provisions of Section 104 were applicable ?"
2. The dispute relates to the assessment year 1977-78. At the relevant time, the accounting year of the assessee ended with the calendar year. At a meeting of the board of directors held on December 12, 1977, it was resolved that the dividend for the years 1969 to 1971 on the paid-up six per cent. preference share capital of the company be declared, the amount being dividend at the rate of six per cent. on Rs. 2,65,000, i.e., Rs. 47,700, and the total taxes Rs. 10,971 making a total of Rs. 58,671 and the same be paid to the preference shareholders of the company. At the annual general meeting held on July 22, 1978, the above resolution of the board of directors was approved. The Income-tax Officer took the view that the resolution of the board of directors held on December 12, 1977, was only a proposal and the actual declaration of the dividend took place on July 22, 1978, not within 12 months immediately following the expiry of the previous year (i.e., December 31, 1976, in this case) and, therefore, there is no distribution of dividend as contemplated in Section 104(1) of the Income-tax Act, 1961. He, therefore, directed levy of income-tax at the rate of 25 per cent. on the undistributed income, there being no amount of dividend distributed for being reduced. The Commissioner of Income-tax (Appeals), at the instance of the assessee, disagreed with the above view and held that the declaration of dividend must be deemed to have taken place on December 12, 1977, which should be within the period of 12 months following December 31, 1976, and the amount of dividend so declared must be deducted from the distributable income for levying income-tax at the rate of 25 per cent. In further appeal at the instance of the Revenue, the Tribunal reversed the decision of the Commissioner of Income-tax (Appeals) and restored the decision of the Income-tax Officer. Plence, this reference.
3. Sub-section (1) of Section 104 of the Income-tax Act, 1961, which alone is relevant for the purpose of this case reads as follows :
"104. Income-tax on undistributed income of certain companies.--(1) Subject to the provisions of this section and of Sections 105, 106, 107 and 107A, where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the twelve months immediately following the expiry of that previous year are less than the statutory percentage of the distributable income of the company of that previous year, the Income-tax Officer shall make an order in writing that the company shall, apart from the sum determined as payable by it on the basis of the assessment under Section 143 or Section 144, be liable to pay income-tax at the rate of-
(a) fifty per cent., in the case of an investment company,
(b) thirty-seven per cent., in the case of a trading company, and
(c) twenty-five per cent., in the case of any other company, on the distributable income as reduced by the amount of the dividends actually distributed, if any (within the said period of twelve months)."
4. There is no dispute that the above provision is attracted to the instant case. The only dispute between the parties is as to whether there was any amount of dividend declared before December 31, 1977, which should go in reduction of distributable income for the purpose of levying tax. According to the Revenue, no dividend was distributed before December 31, 1977, and, therefore, income-tax was leviable on the entire distributable income. According to the assessee, there was distribution of dividend before December 31, 1977, and this should go in reduction of the distributable income for the purpose of reckoning the tax.
5. The short question for consideration is when dividend can be said to have been distributed for the purpose of Section 104(1) of the Income-tax Act, 1961. The decision of the board of directors was within the period contemplated in Section 104(1) of the Act but the decision of the annual general meeting was beyond the aforesaid period. The Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. CWT [1966] 59 ITR 767, observed (at page 772) :
"The directors cannot distribute dividends but they can only recommend to the general body of the company the quantum of dividend to be distributed, Under Section 217 of the Companies Act, 1956, there shall be attached to every balance-sheet laid before a company in general meeting a report by its hoard of directors with respect to, inter alia, the amount, if any, which it recommends to be paid by way of dividend. Till the company in its general body meeting accepts the recommendation and declares the dividend, the report of the directors in that regard is only a recommendation which may be withdrawn or modified, as the case may be. As on the valuation date nothing further happened than a mere recommendation by the directors as to the amount that might be distributed as dividend, it is not possible to hold that there was any debt owed by the assessee to the shareholders on the valuation date,"
6. Learned counsel for the assessee, inviting our attention to regulations 85 and 86 in Table 'A' of Schedule I to the Companies Act, 1956, contended that the decision of the board of directors must be taken to be declaration of interim dividend which it is within its competence to do. Regulation 85 states that the company, in general meeting, may declare dividends, but no dividend shall exceed the amount recommended by the board. Regulation 86 states that the board may from time to time pay to members such interim dividends as appear to it to be justified by the profits of the company.
7. Dealing with the subject of interim dividend, it is observed as follows at page 618 of Datta on the Company Law, Fifth edition :
"An interim dividend is a dividend declared at some date between two successive general meetings. Where the articles so authorise, the board of directors may pay interim dividend, if after making proper enquiries, the board estimates that the profits available for distribution will be sufficient. ... A mere resolution of the board to pay interim dividend does not create a debt as between the company and the shareholders and the directors are entitled to rescind the resolution subsequently but before payment, In the case of an interim dividend which the board of directors has resolved to pay, it is open to the board at any time before payment to review its decision and resolve not to pay the dividend. The directors can before or after the time of such resolution decide that the dividend shall be paid on some stipulated future date. If the time for payment is so specified, a shareholder has no enforceable right to demand payment prior to the stipulated date. A general meeting cannot pass a resolution for payment of interim dividend. But the general meeting may override the decision of the board to pay interim dividend. The general body can rescind the declaration of dividend before payment has been made. Interim dividend declared by the board of directors does not create any liability and can be revoked by the directors as also by the general meeting."
8. The resolution of the board of directors in the instant case does not refer to the dividend therein as interim dividend. The resolution, going by the findings of the appellate authority, was specifically placed before the general body for approval and the general body approved the same. In these circumstances, it must follow that the decision of the board was not in relation to interim dividend but to dividend as such. The board of directors can only recommend dividend ; it is for the general body to take a decision on the matter. The Tribunal was, therefore, justified in holding that the dividend cannot be said to have been declared on December 12, 1977, the date of the meeting of the board of directors and the declaration must be said to have taken place only on July 22, 1978, when the general body approved the recommendation of the board.
9. Our attention has been invited to a decision of the Supreme Court in J. Dalmia v. CIT [1964] 53 ITR 83, where Section 16(2) of the Indian Income-tax Act, 1922, came up for consideration. According to Section 16(2), 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. Dividend was actually paid on December 28, 1950.
10. The accounting year ended on September 30, 1950. The Supreme Court observed (at page 87) :
"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 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. ..."
11. The Supreme Court further observed (at page 88) :".... 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."
12. Going by the principles laid down above, it cannot be said that dividend was distributed in this case at any time prior to the date of the annual general meeting which took place beyond 12 months immediately following the expiry of the previous year. It must, therefore, follow that income-tax was leviable on the distributable income as there was no amount of dividend distributed to be reduced.
13. The Tribunal was justified in holding that the decision of the board of directors was only a proposal and the declaration was made by the annual general meeting.
14. The two questions referred are answered in the affirmative, that is, in favour of the Revenue and against the assessee.
15. A copy of this judgment under the signature of the Registrar and seal of the High Court be transmitted to the Appellate Tribunal.
16. There will be no direction as to costs.