KISHINCHAND CHELLARAM vs. COMMISSIONER OF INCOME-TAX CENTRAL BOMBAY

CIVIL APPEAL No. 462/1960Supreme Court[1963] 2 S.C.R. 26819 April 1962Bench: 3 JudgesAuthor: S.K. DAS, M. HIDAYATULLAH, J.C. SHAH10 pages
AI SummaryDismissed

What were the facts?

Chellsons Ltd., a private limited company, declared dividends in the assessment years 1945-46, 1946-47, and 1947-48. These dividends were credited to the shareholders' accounts. Subsequently, at an Extraordinary General Meeting on December 4, 1947, the company passed a resolution stating that the dividends were inadvertently paid without accounting for taxation liabilities. The resolution purported to treat these dividends as loans to the shareholders, to be repaid to the company. The assessees, who were shareholders, did not file revised returns or claim before the Income Tax Officer that the amounts were not taxable. The Income Tax Officer assessed these amounts as dividend income. On appeal, the Appellate Assistant Commissioner rejected the assessees' contention that the subsequent resolution altered the taxability. The Appellate Tribunal also held that amounts paid and received as dividends could not be recharacterized as loans by a subsequent resolution to avoid tax.

What did the Supreme Court hold?

The Supreme Court held that a subsequent resolution by a company, purporting to recharacterize payments made as dividends into loans, cannot retrospectively alter the character of the payment and exempt it from tax liability that has already attached. The Court reasoned that under the Indian Income Tax Act, liability to pay tax on dividend attaches as soon as it is paid, credited, or distributed, or deemed to have been paid, credited, or distributed. The Act does not contemplate an inquiry into whether the dividend was properly paid before the tax liability attaches. Furthermore, the Court affirmed that a payment made as dividend does not lose its character as dividend simply because it is paid out of capital. The Court dismissed the appeals, upholding the taxability of the amounts as dividend income.

What were the issues?

1. Whether the amounts credited to the assessees as dividends by Chellsons Ltd. could be treated as loans, thereby exempting them from income tax, in light of a subsequent company resolution. 2. Whether a payment made as dividend by a company to its shareholders loses its character as dividend merely because it is paid out of capital. Assessee's arguments: - The dividends were declared out of capital, rendering the declaration invalid under the Indian Companies Act. - The subsequent resolution, treating the dividends as loans, altered the character of the payment, making it not liable to tax. Revenue's arguments: - The revenue did not record specific arguments in the provided text, but their stance was that the amounts were taxable as dividend income, as upheld by the lower authorities.

Which sections of the Income-tax Act were involved?

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

AI-generated summary — verify with the full judgment below

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· u!'Uy wilohut prodding for taxation--Can the character of 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 d

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