1. The question for consideration in this reference made at the instance of the Revenue under section 256(1) of the Income-tax Act, 1961, reads thus :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the interim dividend of Rs. 7,50,000 should not be taken into account for the purpose of levying tax at the rate of 7.5 per cent. under the Finance Act, 1968, and consequently holding that dividend declared was only Rs. 8,00,000 as against Rs. 15,50,000 adopted by the Income-tax Officer ?'
2. The assessee is a limited liability company. The assessment year with which we are concerned is the assessment year 1968-69, the corresponding previous year being the calendar year 1967.
3. On June 29, 1967, the assessee declared at its annual general meeting a dividend of Rs. 8,00,000 in respect of the profits earned in 1966.
4. On December 19, 1967, the assessee's directors at a board meeting exercised the powers conferred upon them under article 149 of the articles of association to pay members such interim dividend as was in their judgment justified, having regard to the position of the company. They decided to pay an interim dividend aggregating to Rs. 7,50,000 in respect of the profits earned in 1967, this interim dividend being payable on or after January 10, 1968.
5. The Income-tax Officer applied the provisions contained in sub-clause (b) of Part I of Paragraph F of the First Schedule to the Finance Act, 1968, and calculated the total dividend declared during the relevant previous year to be Rs. 15,50,000 and charged additional tax at the rate of 7.5 per cent. thereon.
6. In appeal, the Appellate Assistant Commissioner concluded that the dividend declared by the assessee during the year was Rs. 8,00,000 and not Rs. 15,50,000. In the Revenue's appeal, the Income-tax Appellate Tribunal, considering the question from all angles, held that the interim dividend could not be said to have been declared by the assessee and, consequently, it could not be clubbed with the final dividend for the purpose of applying the aforestated provisions.
7. The relevant portion of Paragraph F of the First Schedule to the Finance Act, 1968, reads thus :
In the case of a company, other than the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (31 of 1956), -
Rates of income-tax
I. In the case of a domestic company - ...... (B) in addition, where the company is -
(i) a company in which the public are substantially interested, or (ii) a company as is referred to in clause (iii) of sub-section (2) or clause (a) or clause (b) of sub-section (4) of section 104 of the Income-tax Act, or
(iii) such a company as is exempt from the operation of section 104 of the said Act by a notification issued under the provisions of sub-section (3) of that section, on so much of the total income as does not exceed the relevant amount of distributions of dividends by the company.... 7.5 per cent.
Explanation 1. - In clause (B), the expression 'the relevant amount of distributions of dividends' means the aggregate of the following amounts, namely :-
(a) the amount, if any, by which the 'relevant amount of distributions of dividends' by the company as computed in accordance with Explanation 1 to Item I of Paragraph F of Part I of the First Schedule to the Finance (No.2) Act, 1967 (20 of 1967), exceeds its total income (reduced by the amount of capital gains, if any, relating to capital assets other than short-term capital assets included therein) assessable for the assessment year commencing on the 1st day of April, 1967; and
(b) so much of the amount of the dividends, other than dividends on preference shares, declared or distributed by the company during the previous year as exceeds ten per cent. of its paid up equity share capital as on the 1st day of the previous year.'
8. The real question for determination is the meaning to be given to the words 'declared or distributed by the company' in clause (b) of Explanation 1 quoted above. It was the submission of Mr. Jetly, learned counsel for the Revenue, that these words encompass the entirety of the dividend and, therefore, the Income-tax Officer was right in levying additional tax on the sum of Rs. 15,50,000. On behalf of the assessee, it was submitted by Mr. Irani that an interim dividend could not be said to be a dividend declared by the company.
9. The judgment of the Supreme Court in J. Dalmia v. CIT : 53ITR83(SC) , considered the nature of interim dividend. It noted that the declaration of dividend by a company in its general meeting gives rise to a debt, but this rule applies only in the case of dividends declared by the company in general meeting. The power to pay an 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; the directors are authorised by the articles of association to pay the said amount which they think proper having regard to their estimate of profits made by the company. On payment, the interim dividend becomes the property of the shareholders, 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 interim dividend.
10. Interim dividend declared by a resolution of the board of directors of a company is not, therefore, dividend 'declared...... by the company'. For the purposes of the application of the afore-mentioned provisions to the assessment year in question, the amount of the interim dividend of the aggregate amount of Rs. 7,50,000 cannot be included in the computation for the purposes of additional tax.
11. We answer the question in the affirmative and in favour of the assessee.
12. The Revenue shall pay to the assessee the costs of this reference.