J. DALMIA vs. COMMISSIONER OF INCOME-TAX, NEW DELHI

CIVIL APPEAL No. 505/1963Supreme Court[1964] 7 S.C.R. 57901 April 1964Bench: 3 JudgesAuthor: K. SUBBA RAO, J.C. SHAH, S.M. SIKRI8 pages
AI SummaryDismissed

What were the facts?

The appellant, J. Dalmia, a Hindu Undivided Family, held shares in Govan Bros. (Rampur) Ltd. The Board of Directors of Govan Bros. passed a resolution on August 30, 1950, declaring an interim dividend. The appellant received a dividend warrant dated December 28, 1950, for Rs. 4,12,500/-. The appellant's accounting year ended on September 30, 1950. The revenue authorities taxed this dividend in the assessment year 1952-53, rejecting the appellant's contention that it was income for the assessment year 1951-52. The High Court, on reference, agreed with the revenue, holding the dividend taxable in assessment year 1952-53.

What did the Supreme Court hold?

The Supreme Court held that a mere resolution by the Board of Directors to pay an interim dividend does not create an enforceable debt against the company, as it is always open to the directors to rescind the resolution before payment. The Court distinguished the case of a dividend declared in a general meeting, which gives rise to a debt. The Court found that the test applied by Chagla C.J. in Commissioner of Income-tax, Bombay v. Laxmidas Mulraj Khatau, where a dividend becoming due and disposable by the assessee made it taxable in the year of declaration, was not correct. The Court reiterated that under Section 16(2) of the Indian Income-tax Act, 1922, dividend income is taxable in the year it is paid, credited, or distributed, or deemed to be so. Dividend is considered paid when the company discharges its liability and makes the amount unconditionally available to the member. A declaration of interim dividend, being capable of rescission, does not operate as payment under Section 16(2) before the company has actually parted with the amount or discharged its obligation. Therefore, the High Court was correct in its affirmative answer.

What were the issues?

1. Whether, on a true interpretation of Article 95 of the First Schedule to the Indian Companies Act, 1913 (or Article 74 of Govan Bros.' Articles of Association), the dividend of Rs. 4,12,500/- was liable to be included in the assessment year 1952-53? Assessee's contention: The directors of Govan Bros. had authority to declare the dividend, and upon declaration on August 30, 1950, it became a debt due to the appellant, thus taxable in assessment year 1951-52. Revenue's contention: The directors paid the interim dividend by warrant on December 28, 1950, pursuant to the August 30, 1950 resolution. Under Section 16(2) of the Indian Income-tax Act, 1922, dividend is taxable only in the year it is paid, credited, or distributed. A board resolution to pay interim dividend does not create an enforceable obligation as it can be rescinded.

Which sections of the Income-tax Act were involved?

Section 16(2),Section 66(1),Section 17(2)

AI-generated summary — verify with the full judgment below

'I / .: 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 comvany- lncome 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 declar- ed 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 com- pany. The appellant's year of accounting had ended on Sep- tember 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

The order continues below.

Read the full judgment

A free account opens 10 full judgments a month. Re-reading one you have already opened does not count again.

Create a free accountSign in

See plans and prices

The summary, the parties, the sections and the citations above are open to everyone and always will be. Only the text of the order and the PDF are metered.

More judgments on Section 66(1)

All 184 judgments and leading authorities on Section 66(1) →

Recent GST High Court judgments

Search GST case law →