RAMPUR DISTILLERY AND CHEMICALS CO. LTD.versusCOMMISSIONER OF INCOME-TAX, LUCKNOW

        RAMPUR DISTILLERY AND CHEMICALS CO. LTD.
A                                      V.
           COMMISSIONER OF INCOME-TAX, LUCKNOW

                            NOVEMBER 21, 1990

B         [S. RANGANATHAN AND K. RAMASWAMY, JJ.]

        Indian Income Tax Act, 1922-Section 16(2)-Declared dividend
    -Whe,n assessable to tax.

          The appellant was a limited company running a distillery, and
    getting income from a sugar company. The sugar company at an extra-
c   ordinary general meeting held on January 16, 1952, resolved by a reso-
    lution that a dividend be declared out of the profits transferred to the
    Reserve Fund and, by a subsequent resolution, empowered the Board of
    Trustees to distribute them . among its shareholders whose names
    appeared on the register of the company on the said date.
D
          On the same day, the Board of Directors of the Sugar Company
    transferred their holdings of the shares of the cement company to
    trustees under trust.

          Due to the objections raised by some of the shareholders by filing
E a company application in the High Court and due to the order of injunc-
    tion issued therein the pa)'ment of dividend in specie could not be dis·
    tributed. Ultimately the High Court upheld the validity of the aforesaid
    two resolutions and in terms thereof payments were made on January
    16, 1952.

F         The assessee company having received the dividend on January
    18, 1957, initially included the dividend income in the assessment year
    1957·58, but thereafter filed a revised assessment deleting the said
    amount and claiming that the same was to be includable in the assess-
    ment year 1952-53, and not in the year 1957-58.

0         The Income Tax Officer included the said income in the assess-
    ment year 1957-58 and the Appellate Assistant Commissioner upheld
    the same by dismissing the appeal of the assessee.

        On further appeal, the Tribunal held that the sugar company
  irrevocably placed the shares of the cement company with the trustees
H for being distributed to the share-holders as dividend in specie and that

                                      320
                           RAMPUR DISTILLERY v. C.l.T.                        321
 1

     since the dividend had been declared on January 16, 1952 and was
     unconditionally available to the assessee on that date it was an amount         A
     which fell to be taxed in the assessment year 1952-53 and not in the
     assessment year in which it had been assessed.

           The High Court, in the reference made to it, held that the shares
     were not unconditionally available for distribution to the sharesholders,       B
     and that actual transfer did not take place in the relevant accounting
     year, but in a subsequent year viz. January 18, 1957, was liable to
     assessment in the assessment year 1957-58, and answered tbe question
     in favour of the Revenue and against tbe assessee.

           In the appeal by the assessee to this Court on the question, whether
     the income from the dividend was liable to be taxed in tbe assessment           C
     year 1957-58.

           Allowing the appeal;

           HELD: 1.. If the dividend declared by a company was uncondi-              D
     tionally available to tbe assessee to be paid, it is taxable only in the year
     in which it is paid, credited or distributed or is deemed to be paid,
     credited or distributed. [327A-B]

(
           2. Generally the dividend would be said to have been paid within
     the meaning of Section 16(2) of the Income-Tax Act, when the company            E
     discharges its liability and makes the amount of dividend uncondition-
     ally available to the members entitled thereto. The Legislature had not
     made the dividend income taxable in the year in which it became due by
     express words of the statute. It was taxable only in the year in which it
     was paid, credited or distributed or was deemed to the paid, credited or
     distributed. [327C-D]                                                           F
·-       3. The High Court committed a clear error in holding that the
     amount in question is includable in the assessment year 1957-58. [328D I

            4. In tbe instant case, the sugar company had irrevocably placed
     tbe shares of the cement company with the trustees for being distributed        G
     to the share-holders as a dividend on 16.1.1952. It has also authorised
     the trustees to distribute to the share-holders by issuing negotiable
     certificates which have been made ready. But for tbe order of injunc-
     tion issued by the High Court at the behest of some of the share-holders
     the BoaFd of Trustees would have carried out the formal handing over
     the dividend in specie to tbe respective share-holders. Since the injunc-       H
                                                                                    •

        322         SUPREME COURT REPORTS                [ 1990] Supp. 3 S.C.R.

    A   tion was issued prohibiting the Board of Truestees or their servants
        from distributing the dividend to the share-holders, they could not
        complete the distribution thereof. [327D·F]

              5. The action of the sugar company to show in their balance sheet
        the declared dividend-as-the asset, does not have the effect of recalling
    B   the valid resolution already passed making available unconditionally
        the dividend for distribution to the share-holders as part of its trading
        activity. [328B-C]

              6. As the dividend was unconditionally available to the members
        entitled thereto on 16.1.1952 in specie; the company must be deemed to
        have paid, credited or distributed to its share-holders of the sugar-
    C   company, and the dividend income of the assessee fell to be taxed, in the
              mentyear 1952-53andnotinthemuentyear 1957-58. [327F,3281).E]

              J. Dalmia v. Commissioner of Income-tax, [1964] 7 SCR 579,
        followed.
    D
              Padmavati R. Saraiya and Ors. v. Commissioner of Income-Tax,
•       Bombay City-I, [1965] 1 SCR 307; Punjab Distilling Industries Ltd. v.
        Commissioner of Income-Tax, Punjab, [1965] 3 SCR l; Commis-
        sioner of Income~tax (Central), Calcutta v. Bikaner Trading Co. Ltd.,
        [1970] 78 ITR 12, referred to.                                                  )


    E
              Commissioner of Income-tax v. Bharat General Reinsurance Co.
        Ltd., [1971] 8IITR303, approved.

             CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1762
        (NT) of 1975.
    F
             From the Judgment and Order dated 18.9.1973 of the Allahabad
        High Court in I. T. Reference No. 720 1971.

              Bishambar Lal and Ms. Shefali Khanna for the Appeilant.

    G         B.B. Ahuja and Ms. A. Subhashini (N.P.) for the Respondent.

              The Judgment of the Court was delivered by

             K. RAMASWAMY, J. This appeal by special leave is directed
        against the finding of the High Court of Ailahabad in favour of the
    H   revenue and against the appeilant to the following question:
         RAMPUR DISTILLERY v. C.l.T. [K. RAMASWAMY, J.]              323

            "Whether on the facts and in the circumstances of the case
                                                                            A
            any amount was includible in the assessment of the assessee
            for the assessment year 1957-58 by way of dividend by
            reference to the value of the shares of the cement company
            received by it from sugar companies?"
                                                  \
      The appellant is a limited company running a distillery. The          B
assessment year in question in 1957-58 and the corresponding previous
year is the year ended March 31, 1957. The dispute relate to the
income of Rs.77,500 representing the face value of 7750 shares held by
Dalmia Cement Bharat Co. (for short 'the Cement Company') which
was received on January 18, 1957 by the assessee company from Raza
Sugar Co. Ltd. and Buland Sugar Co. Ltd. (for short 'the sugar com-
pany). The sugar company by the general meeting of the shareholders         c
in the extraordinary general meeting held on January 16, 1952 resol-
ved thus:

           "Resolved that a dividend be declared out of profits trans-
           ferred to the Reserve Fund of the company by the distribu-       D
           tion of one fully paid up ordinary share of Dalmia Cement
           Ltd. held by this Company as its investment against every
           two shares held by the members of this Company and the
           Directors are permitted to appropriate the book-value of
           the investments from the _Reserve Fund for this purpose
           and further the Directors are authorised to issue negotiable     E
           certificates in order to meet fractional distFibution.

It was further resolved authorising the Directors thus:

           "Resolved further that for the purpose of giving effect to
           the above resolution the Directors are authorised to settle      F
           any difficult which may arise in regard to the distribution as
           they think expedient and may vest such specific assets in
           trustees upon trust for the persons entitled to the Dividend
           as may seem expedient to the Directors_"

      On the same date, i.e. January 16, 1952, the Board of Directors G
of the sugar company transferred their holdings of the shares of the
cement company to trustees under trust to .hold the said shares and the..
income thereof in the trust for the shareholders of the sugar company
whose names appeared on the register of the sugar company as on
January 16, 1952 and to distribute amongst the shareholders of the
sugar company the said shares in accordance with resolution passed at H
    324         SUPREME COURT REPORTS               [1990] Supp. 3 S.C.R.

  the extraordinary general meeting of the.sugar companies. Pursuant to
A
  the above resolution negotiable certificates were also issued. Some of
  the shareholders of the sugar company thereafter filed company appli-
  cation in the High Court of Allahabad at Lucknow against the sugar
  company restraining the company or its agents/servants to give effect
  to the resolution. The High Court by its order dated February 22, 1952
  granted in junction restraining the sugar company or its agents/ser-
  vants etc. from acting upon the resolution of the company or from
  issuing and/or transferring to the shareholders of the company shares
  of the cement company and further from getting their names entered
  into the registers of the cement company as shareholders. The shares
  in the cement company, therefore, were not transferred in the names
  of the assessee company etc. immediately. The sugar company in its
  balance sheets noted that the shares in the cement company included
                                                                               -
  in their investments were held by the trustees for the shareholders for
  distribution of dividend in specie and the cost of those had to be
  ad justed out of general reserves in terms of the resolution passed on
  January 16, 1952 by the shareholders in general meetings of the com-
p panies. In view of the injunction order issued by the High Court no
  further action in this regard was taken to pay over to the shareholders
  of the sugar company. Ultimately the matter was compron.ised in the
  beginning of the year 1957 and a decee was passed upholding the
  validity of the resolution passed on January 16, 1952 and the same had
  to be given effect to forthwith by issuing and/or transferring to the
E shareholders of the sugar company shares of the cement compnay.
  Accordingly the shares were transferred to cement company and the
  assessee company received dividend on January 18, 1957. Initially the
  assessee included the dividend income in the assessment year 1957-58
  but thereafter a revised assessment was filed deleting the amount in
  question and claiming that the same was to be ineluctable in the assess-
F ment year 1952-53 but not in the year 1957-58. The Income-tax Officer
  included the income in the assessment year 1957-58. On appeal the
  Appellate Assistant Commissioner upheld the same. On further
  appeal the Tribunal held that the sugar company irrevocably placed
  the shares of the cement company with the trustees for being distri-
  buted to the shareholders as dividend in specie. The dividend was
  unconditionally available to the mempers entitled therdo. If,
  however, the members themselves chose not to take it, it cannot be
  said, on that ground, that the dividend was not available to them.
  Since the dividend had been declared on January 16, 1952 and was
  unconditionally available to the assessee on that date it was an al)'IOunt
  which fell to be taxed in the assessment year 1952-53 and not in the
H assessment year in which it had been assessed. On a reference the High
           RAMPUR DISTILLERY v. C.l.T. [K. RAMASWAMY, J.l               325

  Court in the impugned judgment dated September 18, 1973 held that
  the shares were not unconditionally available for distribution to the        A
  shareholders. The main condition for unconditional distribution was
  missing i.e. the complete transfer of shares in law either to the trustees
  or to the shareholders by execution of formal documents of law. It was
· only after fulfilling this condition the distribution became complete.
  Actual transfer did not take place in the relevant accounting year but       B
  in a subsequent year. The sugar company in its balance sheet was still
  treating the shares as part of its investment. Therefore, the amount
  having been received in the previous year, the amount was liable to
  assessment in the assessment year 1957-58. Thus the question was
  answered in favour of the revenue and against the appellant.

       The question, therefore, is whether the income from the                 c
 dividend was liable to be taxed in the assessment year 1957-58? It is
 clear from the facts that on January 16, 1952 in the general meeting of
 the shareholders two resolutions came to be passed declaring the
 dividend and unconditionally the dividend in specie had been made
 over to the trustees on the same day to hold the same in trust for the        D
 shareholders of the sugar company whose names appeared on the
 register of the sugar company as on January 16, 1952. The purpose of
 the trustees holding the shares in trust was to distribute them amongst
 the shareholders of the sugar company. As far as the sugar companies
 are concerned they had unequivocally declared the dividend and set
 apart the amount towards the shares of the cement company. They had           E
 done all that lay in their power to declare and distribute the dividend.
 They had also, by the subsequent resolution, empowered the Board of
 Trustees to distribute them amongst its shareholders of the sugar com-
 panies whose names appeared on the register of the company on
 January 16, 1952. In fact negotiable certificates were issued. But due
 to the objection raised by some of the shareholders by filing company         F
 application in the High Court and due to the order of injunction issued
 by the High Court, the payment of dividend in specie could not be
 distributed. Ultimately the decree of the High Court upheld the vali-
 dity of the resolutions dated January 16, 1952 and in terms thereof the
 payments were made on January 17, 1957.
                                                                               G
       From these facts the question is whether the dividend has been
 irrevocably placed for distribution to the shareholders of the sugar
 company. Admittedly cement company was one of the shareholders
 whose names appeared on the register of the sugar company as on that
 datj: and the appellant is entitled to receive the dividend of the amount
 in dispute towards its share from cement company.                             H
     326         SUPREME COURT REPORTS                [1990] Supp. 3 S.C.R.

           Sub-section 16(2) of the Indian Income-tax Act, 1922 reads thus:
A
                 "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
                       ,,
B

            Section 16(2) of the Indian Income-tax Act, 1922 prescribes
     special rules relating to the determination of the previous year in



c
     which the dividend is liable to be included in the total income of the
     assessee. It is provided thereby that for the purpose 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 ques-
     tion, therefore, is when declared dividend attracts the operation of
     Section 16(2) of the Indian Income-tax Act, 1922?

D           In J. Dalmia v. Commissioner of Income-tax, New Delhi, [1964 I
     53 ITR 83=[1964] 7 SCR 579 the facts are that the interim dividend
     was declared to the appellant therein on December 28, 1950 and the
     appellant claimed that the declared interim dividend was to be asses-
     sed 'in the assessment year 1951-52. The revenue assessed for the year
     1952-53. The assessee claimed that the dividend was taxable in the
E    assessment year 1951-52. While considering the incident of interim
     dividend this Court considered the scope of Section 16(2) and held that
     a mere resolution of the Directors resolving to pay certain amount as
     interim dividend does not create a debt enforceable against the com-
     pany, for it is always open to the Directors to rescind the,resolution
     before payment of the dividend. Whether dividend interim or fixed is
fl   income taxable in a particular year of the assessment must be deter-
     mined in the light of Section 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 distributed or is deemed to be paid,
     credited or distributed. The Legislature has made a distinct provision
G    relating to the year in which different heads of income become tax-
     able. 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 expres-
     sion 'paid' in Section 16(2) it is true does not contemplate actual
     receipt of the dividend by the member. In general, dividend may be
Ji   said to be paid within the meaning of Section 16(2) when the company
          RAMPUR DISTILLERY v. C.l.T. [K. RAMASWAMY, J.]               327
discharges its liability and makes the amount of dividend uncondition-
ally available to the member entitled thereto. It was accordingly held        A
that the interim dividend is only taxable in the assessment year in which
the amount was actually paid. Since the di.vidend was paid in the pre-
vious year and the assessment year being 1952-53 it accordingly upheld
the stand of the revenue. It is thus settled law that if the dividend
declared by a company was unconditionally available to the assessee to
be paid, it is taxable only in the year in which it is paid, credited or
distributed or is deemed to be paid, credited or distributed.
        This view· was reiterated in Padmavati R. Saraiya and Ors. v.
Commissioner of Income-tax, Bombay City-I, [1964] 54 ITR (S. Note
p. 5)=[1965] 1SCR307 and Punjab Distilling Industries Ltd. v. Com-
 missioner of Income-tax, Punjab, [1965] 57 ITR 1=[1965] 3 SCR I and
 Commissioner of Income-tax (Central), Calcutta v. Bikaner Trading
 Co. Ltd., [1970] 78 !TR 12. The settled law, therefore, is that gener-
 ally the dividend would be said to have been paid within the meaning
 of Section 16(2) when the company discharges its liability and make'
 the amount of dividend unconditionally available to the members
 entitled thereto. The Legislatures had not made the dividend income          t)
 taxable in the year in which it became due by express words of the
 statute. It was taxable only in the year in which it was paid, credited or
 distributed or was deemed to be paid, credited or distributed. From
 the facts it is clear that the sugar company had irrevocably placed the
shares of the cement company with the trustees for being distributed to
the shareholders as a dividend on January 16, 1952. It has also               E
 authorised the trustees to distribute to the shareholders by issuing
 negotiable certificates which have been made ready. But for the order
 of in junction issued by the High Court at the behest of some of the
shareholders the Board of Trustees would have carried out the formal
handing over the dividend in specie to the respective shareholders. In
view of the fact that the injunction was issued prohibiting the Board of      F
Trustees or their servants from distributing the dividend to the share-
holders, they could not complete the distribution thereof. Since the
dividend was unconditionally available to the members entitled
thereto on January 16, 1952 in specie, it must be deemed to have been
paid to the assessee. We may mention that ti)e Delhi High Court in
Commissioner of Income-tax v. Bharat General Reinsurance Co. Ltd.,            G
[ 1971] 81 ITR 303 took the sam_e view on the same facts and we hold
that the view taken by the Delhi High Court is correct in law. It is
undoubted that the sugar company might remain to be owners till the
dividend in specie are paid over qua the cement company. But the
crucial question is whether the dividend in specie was uncoditionally
made available for being distributed and if anythin_g was left to the         H
    328         SUPREME COURT REPORTS              {1990] Supp. 3 S.C.R.

A general body of the share-holders to recall the dividend already resol-
  ved to be paid. Inasmuch as the general body of the shareholders
  unconditionally and irrovocably had resolved making over the divi-
  dend to the Board of Trustees for being distributed to its shareholders,
  nothing was left for the general body to recall the resolution. If any
  shareholder had called up on the trustees to distribute the shares
B falling to his share on any date between 16.1.1952 and 22.2.1952, the
  trustees would have been obliged to comply with the request. Nothing
  remained for the general body of the sugar company to recall the
  dividend. In fact the validity of the resolutions were upheld by the
  High Court in the compromise decree. The action of the sugar com-
  pany to show in their balance sheet the declared dividend as the asset,
c does not have the effect of recalling the valid resolution already passed
  making available unconditionally the dividend for distribution to the
  shareholders as part of its trading activity.

           Accordingly we hold that the High Court committed a clear error
    in its holding that the amount in question is includable in the assess-
D   ment year 1957-58. We have no ~esitation to hold that the company
    must be deemed to have paid, crebited or distributed to its share-
    sholders of the sugar company, and the dividend income of the asses-
    see fell to be taxed in the assessment year 1952-53 and not in the
    assessment year 1957-58. The reference is answered in favour of the
    assessee and against the revenue. The appeal is accordingly allowed
E   but in the circumstances parties are directed to bear their own costs.

    V.P.R.                                                Appeal allowed.