KISHINCHAND CHELLARAM versus COMMISSIONER OF INCOME-TAX CENTRAL BOMBAY

268

SUPREME OOURT FEPORTS [1963]

KISHINCHAND CHELLARAM v.

COMMISSIONER OF INOOME-TAX ' CENT HAL BOMBAY (S. K. DAS, M. liIDAYATULLAH and J.C. SHAH, JJ.)

lnC<>fM Tax- Dit-idend declared by company inadvtr· the character of for taxation--Can

u!'Uy wilohut prodding dividend be altered to a loan by " subsequent reso/ution lndian Income-Tax Act, 1922 (11 pf J.922), s. 16 (2).

Chellsons Ltd., a private Ltd. Company, declared divi· dends without taking into account the company's liability for taxation, including Extra Pro6ts Tax. The dividends so dec lared were credited in the books of the compony to the accounts of each of the share-holders. Share-holders in their return for the relevant assessment year included the amounts credited to them in the company's books of account.

Payment of dividends otherwise than out of profits of the year, or other undistributed profits was at the material time prohibited, by Art. 97 of Table A of the Indian Companies Act, 1913, as amended by Act XXXII of 1936 read withs. 17 (2) of the Act; therefore such payment could not be regarded as lawful, the company having failed to provide for payment of tax before declaring dividend. On discovering its mistake at an :t--:xtra Ordinary General Meeting another revolution pur· porting to reverse the earlier resolutions declaring the dividends was moved, and the sharehoJders unanimously resolved inter alia that all the shareholders having been full} appriscd·of the bonajide mistake, the dividends inadvertently paid be consi dered as loans to such individual shareholders. Before the In come Tax Officer the assessee who was a shareholder did not fi)c a re\o;scd return, nor did he cJaim that the amount received by him was not liable to tax. But on appeal before the Appe llate Assistant Commissioner the assesscc contended that amount credited by the company to his account y,·as not in view of the subsc:qucnt resolution, liable to be taxed as dividend income. 1"he plea was rejected. Before the Tribunal the assessce contended that the dividends were declared out of capital and such declaration was invalid under the Companies Act.

·~ ;

The tribunal held that what was paid and received as dividend could not by a sub5equent resolution of the company he treated as paid othcrwi1e than as dividend. The Higlli

I

Kishinchond Chtlltwam v. Commf•sioner Of Incom11 .. t•x, Centr.Z Bombay

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• I

I

2 S.C.R.

·SUPREME COURT REPORTS

269

Court agreed with the Tribunal observing that assessment for each year is self-contained and subs.equent events cannot justify modification of the assessment.

The assessee came up in. appeal to the Supreme Court,

\ Held, that if the directors of the company have deliber• \ alely paid or negligently been instrumental in paying dividends \ out of capital they may have, in an action by the company or instance of' the 1 if the company is being wound up at the liquidator, to compensate the company for loss occasioned by their wrongful or negligent conduct.

'

1

In Mntter of The Union Bank, Allahabad Ltd.

I.L. R. 47 All. 669 approved.

(1925)

Held, further, in ascertaining whether liability to pay . income tax on dividend arose, a resolution of the company ' whereby payments made to the shareholders as dividends are ',to be treated as loans cannot retrospectively alter the charact . er of the payment and thereby exempt it from liability which

has already atta~hed thereto.

Held, also, the payment made as dividend by a comp· any to its share holders does not lose the character, of divid end merely because it is paid out of capital. Under the In come Tax Act, liability to pay tax attaches as soon as dividend is paid, credited or distributed or is declared. The Act does not contemplate an enquiry whether the dividend is properly· paid, credited or distributed before liability to pay tax attaches thereto.

C.rvn. APPELLATE JURISDICTION : Civil Appeal

Nos. 462 to 465 of 1960.

Appeals from the judgment and order dated September 26, 1955, of the Bombay High Court I. T. R. No. 22 of 1955.

, K. N. Rajagopal Sastri, J. K. Hiranandi and

N.H. Hingorani for the appellants.

'1

• 'J

N. D. KarkhAnis and D. Gupta for the res

pondents.

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1962. April 19. The Judgment of the Court

was delivered by ..

1912

KUliinchbctl C!Jtlla1oz

••

C•mmi•1itm#r of Tn&tn111-la11t Gt trol Bomi•y

210 SUPREME OOURT REPORTS [1963]

SHAH, J.-This is a. group of appeals a.gs.inst orders pa.seed by the High Court of Bombay in Income Tax Reference under s. 66( l) of the Indian Income Ta.x Act.

Chellsons Ltd. a Private Company wa.s incor porated in April 1941. The shareholders or the company a.t the ma.teria.I time were Kishinchand Chellaram holding 6 shares and Shewakram Kishin chand, Lokumal Kishinchand and i\Iurli Ta.hilram each holding three shares. Kishinchand, Shewak ram and Lokumal were directors of the company. At a General meeting of the shareholders of the company held on July 10, 1943, it was resolved to declare dividend at "60 per cent on the shares" of the company and for the purpose of that of declaration the profits of the year 1941-43 were included in the profit of the year 19-12-43. Pursu ant to this resolution, Rs. 46,000/- were credited in the books of the company to the account of Kishin and chand Chellaram Rs. 23,000/- Wflre credited to each of the other three ahoreholders. Another meeting of the shareholders was held on July 15, 1944, and it was resolved to declare dividend at "60 per cent on the shares" out of the profit of the company for 1943-44. Pursuant to resolution, on September 29, 1944, Rs. 30,000/- were credited in the company's books of account to Kishinchand and Rs. 15,000/- were credited to the accounts of each of the other there shareholders.

on March 31, 1944

this

In their respective returns· for the assessment year 1945-46, Kishinchand, Shewakram, Lokumal and Murli-who will hereinafter be collectively called the assessees-included the amounts credited to them in the company's books of account a.s divi· dends for the three years 1941-42 to 1943-44. On December 4, 1947, at a.n Extraordinary Ge.aeral Meeting another resolution purporting to reverse tho earlier .resolutions dated July 10, 1943 and Jul:v

I

1901

Kishinclumd Clul!.,•m •• Commissioner of JneorrU-t<U Cenlral Bombq

Sh•h .1.

2 S.C.R.

SUPREME OOURT REPORTS

271

15, 1944, w&e passed by the company. The resolut

•' r ion read as follows:-

' "The notice dated 25th November, 1947 the Extraordinary General Body

calling Meeting for today, was placed on the table.

"Whereas the sum of Rs. 1,90,000 paid to the shareholders during the year 1944-45 as per details given below viz-

--I For' I

, I

I

1941-42 1942-43 1943-44 Total

.. \

iltr. Kishinchand Chellaram Kr. Shewakram Kishincliand Mr. Lokumal Kishincband

Kr. Murli Tahilram

10,000 36,000 30,000 76,000

5,000 18,000 15,000 38,000

5,000 18,000 15,000 38,000

5,000 18,000 15,000 38,000

Total

25,000 90,000 75,000 190,000

was sanctioned by the General Body inadver tently without taking into consideration the Company's liability for taxation, including E. P. T. and all the shareholders having been fully. apprised of the bona fide mistake it is hereby unanimously resolved that such divi dend inadvertently paid be considered as loan to such individual shareholders, and be paid back to the Company forthwith, and the con sideration of any div~dend to the shareholder be deferred to ,the ne:xt Annual General-Meet ing. The adjustment in this regard will not·

...

K i"""""°"4 0..U...•m

Commirftonn •J 1-

CNr•I B•m/Joy

8/WJ.

272

SUPREME OOURT REPORTS [1963)

be made in the books of the Company WI on 6th April, 1947."

•-.

1 Even though this resolution was p&BBed, and the proceedings for IM!SCssment before the Income Tax Offi "Jer weore not diRposed of the a.ssesseeR did not file revised returns excluding the amounts credited as dividend, nor did they claim before the Income Tax Officer that th•JSe amounts not being income were not liable t-0 tax.

By his order dated January I, 1950, the In come Tax Officer brought the income returned by the asso88ees including the amounts credited to t.hem as <lividends for the three years to tax. In appeals to the Appollate Assistant CommiBSioner, the assessee~ contend<'d that the amounts credited by the Company to their accounts in respect of the years 1941-42, 1942·43 and 1943.44 were not, in view of the subsequent resolution, liable to be taxed as dividend income. The Appellate Assistant rejected this pica. The assessees Commissioner then appealed to the Appellate Tribunal and that contended three the dividends years question were declared 0ut of capi- in tal and such declaration of dividend being .under the Indian Companies Act invalid, in the &88eSS ment the amount.P credited to their accounts as dividepd should be excluded. The Income Tax Appellate Tribunal held that the dividends in r011- pect of the yea.rs 1941-42 and 1942-43, having been received before the year of account relevant to the year of assessment 1945-46, wore not liable to be taxed in that year. But the Tribunal confirmed the orders of assessment as to the dividend for the year 1943-44, ·because, in their view, the resolution declaring dividend could not be reversed by a resolution at a subsequent Genera.I Meeting after the dividenda had been paid. At the instanoe of )

the

for

' L

..

1962

Kuhinl;hand Chdlarmn v. Commiasi,mer of ..-]n(fJme-lax Qntrol Bom'ba.1

S/,,,h J.

2 S.C.R.

SUPREME COURT REPORTS

273

,, .,

the assessees the Appellate , Tribunal referred in each of the four cases the following two questions:-

(1) Whether the shareholders of the company at the meeting held on December 4, 1947 could reverse the resolutions pa8sed on July 10, 1943 and July 15, 1944 ?

(2) Whether the sum of Rs ............... received by the assessee .......... ., ... as dividend in the account year 1944-45' relevant for the assessment year 1945-46 has been lawfully taxed in the assessment year 1945-4 6 ? If not, could onlJ the dividends that could have been paid out of the profits or a part thereof be taxed in the assessment year 1945-46 ?

(In each set of questions the appro priate amount the name of the assessee was incorpo rated in the second question).

received and

The Tribunal observed in the order of reference , that the Income Tax Department challenged the correctness of the claim made by the shareholders that dividend was paid without making provision for payment of tax, but they did not desire to go into accounts to ascertain whether provision for tax was made, as "the parties at the time of the hearing of the appeals proceeded on the footing that, no such provision was made. Even if provision was made, it makes no difference in so far as the Department is concerned. The question is whether any divident has been declared out of capital and that question will have to be examined at the time of passing the order under Section 66 (5) of the Act, in view of question No. 2."

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The High , Court declined to answer the first question because in their view it was unnecess ary, and answered the first pa.rt· of the second

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274

SUPREME OOURT REPORTS [1003]

question in the affirmative, and beld the second part did not on that view a.rise for de<Jision. Against the order of the High Court these four appeals have been preferred by tho a.aseaaeee .

that

·,

The only question m"terial to these appeals which was argued by the assessees before the Tribunal was whether it waB competent to the company by a. subsequent resolution to reverse an earlier resolution declaring the dividend. The Tribunal held that the earlier resolution could not be rev1irsed by a. subsequent resolution, and t.here fore what was paid and received as dividend could not by a. subllllquent resolution of the company be treated as paid otherwise than as dividend. The High Court held that the a.sseBBments were properly made by the Income Tax Officer. Tney observed that the assessment of an asseBBee for each year is self-contained and subsequent events cannot justify modification of the assessment.

fact, credited

Section 16(2) provided (in so far as it is mate rial) that "for the purposes of inclusion in the total income of an a.sseBBee 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. x x x". It is common ground that on July 15, l!J44 dividend was declared by a resolution of the company and the aBBessees were, the amounts payable to on September 29, 1944, in in the accounts maintained by the company, shareholders as dividend. to oaoh of as The a.mounts were dividend, treated a.a dividend and received by the a.ssessees as dividend. The assessees included the to their a.ooounts in the dividends so credited returns: It may be a.ssnmed that the company failed to provide for payment of tax before decla ring dividend and that a.fter providing for payment of ta.I, the net profi'8 of the company may not havo

therefore

declared

the

..

..

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Jr~ CAdl#o'" Con.mi1sirnur ef ]~e lo.I' Cmtrol Bntb•.1

Sboh J,

\

1151

KisfiWllod ci..u. .... ••

Camml.JJlo<ur •J -c..utal· llltd!ld7

-B/rah3.

2 S.d.R.'

SUPREME COURT REPORTs

275

or

the year, at

been sufficient to justify declaration of dividend at 60% of the value of the shares. On that assumption it may be inferred that the dividend or a part thereof was in $ruth. paid out of the capital of the compa.ny. Payment of dividend otherwise than out .other of profiltfl of undistributed profits was the material time prohibited by Art. 97 of Table A of the Indian Companies Act, 1913 as amended by Act. XXXII of 1936 read with s. 17 (2) of the Act; and therefore such payment may be regarded as unlawful. If the Directors of a company have deli berately paid or negligently been instrumental in paying dividend out of ca.pita! they may have, in an action by the company-or if the company is being wound up at the instance of the Liquidator-to com· pensa.te the company for Joss occasioned by their (In the matter of wrongful or negligent conduct. The Union Bank Allahabad Ltd. ('). In this case we are not concerned with the validity of the distribu tion of dividend, or the liability of the directors arising out of improper distribution of dividend. We. are concerned 'with the true character of the payment made on September 29, 1944, to the aBSeB!lees. If dividend is declared and the amount is credited or paid to the share-holders as dividend oa.n the character of the credit or payment be altered by a subsequent resolution so as to alter the incidence of ta.x which attaches to that amount?

,.

t

·~

By virtue of s .. 16(2) the liability to pay ta:i: attaches as soon as dividend is paid, credited or diti tributed or deemed to have been paid, credited or distributed to the shareholders and the Income Tax Act <ionta.ins no provision for altering the incidence or liability to pay ta.x on the dividend, merely because it is found that in declaring dividend and the company violated a. prohibition

it

\. paying

(I) (192$) J.l.,R, 47 All. li69.

l96Z --Kis~Vuhan.J.

Chellaram. v.· Com111 isaiom,. 1f · Income-la%' C~nCrol Bomboy

Shah I.

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276

SUPREME COURT REPORTS [1963]

relating to payment of dividend in the Indian Com- panies Act.

·

It is not: necessary to consider in this case whether the shareholders may be compelled by the company to refund the amount improperly paid as dividend out of capital. Even if the shareholders agree to ·refund the amounts received by them as dividend the original character of the receipt as In ascertaining . dividend is. not thereby. altered.. whether liability to pay Income-tax on dividend· arose, a resolution of the company whereby pay ments made to the.ehareholders as dividend are to be ·treated as loans cannot retrospectively alter the character of the payment and thereby exempt it from liability which has already attached thereto.

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Before this Court two contentions were raised by counsel for the assesses· i (I) that on the amount the assessees · tax was not received by each of exigible because it was not dividend at all, and {2) that what was declared and paid as dividend ceased to be such by · virtue of the subsequent . The first plea was not raised before resolution. the Tribunal, and on the question as framed it did not arise for decision on a reference under s. 66 of the Indian Income Tax Act. Tho jurisdiction of the High Court under s. 66 being advisory, they were concerned to give their opinion on questions which fairly arose out of the order of the Tribunal, and were in fact raised and referred .. The question whether the payment made . by the Company was not in the nature of dividend not having fairly arisen out of the order of the Tribunal; it cannot be raised in this Court as it could not in the High In any event, we are of the opinion that payment made as dividend by a company to its shareholders does not. lose that character merely . because it is paid out of capital. Under the Income - · Tax Act, liability to pay tax attaches as soon as dividend is .:paid, cndited or distributed or is so

____ Court.

2 s.c.R.

SUPREME COURT REPORTS

277

declared. The Act does not contemplate an enquiry whether the dividend is properly paid credited or distributed before thereto. The answer to the second contention for reasons already set out by us must be in the negai;ive.

liability to pay· Tax attaches ,

The appeals therefore fail and are . dismissed. In the circumstances of the case there will be no order as to costs.

AppeaJ,s dismiased.

11/U ---. lfUloin</rJMd c.wu.... .. c-i•......,., v. .....,...,.,. 8,.,,, J.

C..Wd Bomb111

'

THE COLLECTOR OF CUSTOM8, MADRAS

v.

1952

A/Jf'il 19.

K. GANGA SETTY (B. P. SINHA, 0. J .• P. B. GAJENDRAGADKAR, K. N. WANCHOO, N . .RAJAGOPALA AYYANGAR and ' T. L. VENKATARAMA AIYAR, JJ.)

High, Oourt--Decision of Otl8toms A.utlwritits-Oonatruc tion of entiries in tariff Schedt1k-Jt1risdiction to interfere falls withi,. "folder" "Feed oats" u,sed horse or "grain"-lmport Trade Control Schedule, Part JV.Item Nos. 32 and 42-Specific Relief A.ct, 1877 (1 of 1877). •. 46

feed-Whether

Item 42 of Part IV of the Import Trade Control Schedule -permitted "fodder ..... " to be imported'Without a special import licence from a soft Currency area ... Item 32 of the same Sche dule related to "grain .... "and included oats;· and a licence was necessary for importing goods covered by this item. The respondent imported from Australia, without a liccncc,.goods described as "feed·oats" for feeding race horses. He claimed that the goods were covered by Item 42 and could be imported without a licence. The customs authorities held that the goods were "grains" within the meaning of Item 32 which could not be imported without a licence, confiscated the goods and im; posed a penalty in lieu of confiscation. The . respondent moved the High Court for the issue of a writ of mandamus under s, 45 specific Relief Act. The High Court held that the

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