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ingersoll-road India Ltd. Vs. Income-tax Officer. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Nagpur
Decided On
Reported in(1986)17ITD1002(Nag.)
Appellantingersoll-road India Ltd.
Respondentincome-tax Officer.
Excerpt:
.....general reserve. the question is whether the ito was justified in deducting the amount of the unpaid dividend, viz. rs. 29,52,000 out of the general reserve as on 1-1-1974, 1-1-1975, 1-1-1976 and 1-1-1977, respectively. for this purpose we shall have to determine whether the assessee had any existing liability for this amount. under section 5 the declaration after the appointed day. under the provisions of the companies act, 1956, once a company had in its annual general meeting declared a dividend, the company was bound to pay the dividend to the shareholders. the shareholders had an enforceable right against the company for the amount of dividend. it was an existing liability. once it is an existing liability, as explained by the learned judges of the supreme court in the case of.....
Judgment:
Per Shri D. V. Junnarkar, Accountant Member - In the present appeals, the assessee has disputed the order of the Commissioner (Appeals) upholding the deduction of the amount of proposed dividends amounting to Rs. 29,52,000 from the balance in the general reserves account of the assessee for working out the capital of the assessee for the determination of the Companies (Profits) Surtax Act, 1964 (the Act) payable by the assessee for the four years under consideration.

2. In the surtax assessment of the assessee for the assessment years 1975-76 to 1978-79, the relevant dates for which the capital of the company has to be ascertained were 1-1-1974, 1-1-1975, 1-1-1976 and 1-1-1977, respectively. Out of the profits for the year ended 31-12-1973, the directors of the company had recommended a dividend subject to deduction of tax, which dividend, if approved by the shareholders at the annual general meeting, would be paid out of the general reserve and no separate provision was made therefore under the head Proposed dividend". The amount of such proposed dividend was Rs. 30 lakhs. The general body meeting of the assessee-company met in the month of June 1974 and approved the payment of the aforesaid dividend.

Before, however, the aforesaid dividend could be paid out by the assessee, Companies (Temporary Restrictions on Dividends) Act, 1974 came into force with effect from 6-7-1974. Under section 5 of the said Act of this enactment for a period of two years from the date as appointed by that enactment, viz., 6-7-1974. Under section 5 of the said Act of this enactment for a period of two years from the date as appointed by that enactment, viz., 6-7-1974, any dividend declared or paid after the appointed date (6-7-1974) by a company to which this enactment applied in excess of its distributable profits in a financial year would, to the extent of such excess, be void and any amount paid by the company to any shareholder in excess of its distributable profits in that year would be recovered by the company to shareholder in excess of its distributable profits in that year would be recovered by the company and no such recovery could be waived by the company. The assessee was permitted to declare and pay dividend of 12 per cent of its capital, which in the assessees case amounted to Rs. 48,000 only.

The excess over Rs. 48,000, viz. Rs. 29,52,000 could not be paid out by the assessee though the dividend was declared at the annual general meeting of the company held in June 1974.

3. In the surtax assessment of the assessee, the ITO relied on the Supreme Court decision in the case of Vazir Sultan Tobacco Co. Ltd. v.CIT [1981] 132 ITR 559 and held that the amount of proposed dividend had to be deducted from the general reserve of the company. The assessee appealed against the ITOs decision in this respect. The Commissioner (Appeals) also relied on the Supreme Court decision in the case of Vazir Sultan tobacco Co. Ltd. (supra) and rejected the assessees appeal on this ground.

4. The assessee has filed the present appeals before the Tribunal objecting to the decision of the Commissioner (Appeals) in this respect. It is submitted on behalf of the assessee that though the assessee had declared at the annual general meeting held in June 1974 a dividend of Rs. 30 lakhs, the said amount could not be deducted from the general reserve of the assessee-company as prior to the actual payment of the dividend, the Parliament had enacted the Companies (Temporary Restrictions on Dividends) Act. It was submitted that under section 5 of the said enactment declaration or payment of dividend in excess of its distributable profits was void. The assessee not having paid the amount before the appointed day under the enactment, viz., 6-7-1974, the payment would have been void and the assessee was under a statutory obligation to recover the same from the shareholders. In the assessees case, the permissible payment was Rs. 48,000 which was paid.

But the balance of Rs. 29,52,000 could nnot have been paid and has not been paid and, therefore, the amount could not be deducted from the general reserve. Further, it is submitted that the Department of Company Affairs in a communication dated 7-2-1976 addressed to the Bengal Chamber of Commerce and Industry had stated that dividends declared by a company but not paid before 6-7-1974 to the extent they are in excess of distributable profits were void. Hence, the shareholders did not acquire any right thereto on the expiry of the period of the currency of the aforesaid enactment. Further, it is brought to our notice that the Director, Department of Company Affairs by his letter dated 19-1-1977, referred to the earlier communication dated 7-2-1976 and stated that the dividends declared in excess of the amounts referred to earlier could be paid after 6-7-1974 to the extent they are in excess of distributable profits were void. Hence, the shareholders did not acquire any right thereto on the expiry of the period of the currency of the aforesaid enactment. Further, it is brought to our notice that the Director, Department of Company Affairs by his letter dated 19-1-1977, referred to the earlier communication dated 7-2-1976 and stated that the matter was re-examined and on re-examination it was found that the matter was re-examined and on re-examination it was found that the dividends declared in excess of the amounts referred to earlier could be paid after 6-7-1976 subject to the other provisions of the Companies Act, 1956. In the circumstances, it is stated that the declaration and payment being void, the amount of the proposed dividend could not be deducted from the balance in the general reserve. On behalf of the revenue reliance is placed on the orders of the authorities below.

5. We find that under the Companies (Temporary Restrictions on Dividends) Act, the appointed date was 6-7-1974. In the case of the assessee, the distributable profit was an amount equal to 12 per cent on the face value of the equity shares of the company, which meant an amount of Rs. 48,0000 only. Section 5 reads as under : "Dividend in excess of distributable profits to be void and to be recovered. - For a period of two years from the appointed day, any dividend declared or paid after the appointed day by a company to which this Act applies, in excess of its distributable profits for a financial year shall, to the extent of such excess, be void, and any amount paid by the company any shareholder in excess of its distributable profits for that year shall be recovered by the company and no such recovery shall be waived by the company : Provided that where any such recovery is not practicable, the amount of dividend to the extent of such excess shall be adjusted against the dividend payable for the financial year next following the financial year for which such excess payment of dividend was made." The next of Circular No. 65 dated 8-3-1976 issued by the Associated Chambers of commerce & Industry of India, which referred to the Department of Company Affairs communication dated 7-2-1976 reads as under : "The Department of Company Affairs in a communication No. 18/67/74-CL XIV dated February 7, 1976 addressed to the Bengal Chamber of Commerce & Industry has stated that dividends declared by a company (but not paid) before the 6th July, 1974, to the extent they were in excess of distributable profits as defined in section 2(c) of the Companies (Temporary Restrictions on Dividends) Act, 1974 are void under section 5 of the Act and hence the shareholders do not acquire any right thereto on the expiry of the period of currency of the said Act. This is for your information." The letter dated 19-1-1977 from the Director of the Department of Company Affairs reads as under : "Please refer to this departments letter No. 18/67/74-CL XIV dated 7th February, 1976 wherein you were informed that dividends, declared by a company (but not paid) before 6-7-1974, to the extent they are in excess of distributable profits. are void under section 5 of the Companies (Temporary Restrictions on Dividends) Act, 1974 and that the shareholders did not acquire any right to this excess on the expiry of the period of currency of the said Act. The matter has been re-examined. The department is advised that the dividend declared in excess referred to above, can be paid after 6th July, 1976 subject to other provisions of the Companies Act, 1956." 6. We have carefully considered the facts and circumstances of the case and the submissions on either side. The assessee had in its annual general meeting held in June 1974 declared dividend of Rs. 30 lakhs to be paid out of the general reserves to its shareholders. Actually, it could pay only Rs. 48,000 being 12 per cent of its equity share capital as permitted under the Companies (Temporary Restrictions on Dividends) Act. The balance of the dividend, if permitted were to be paid out of the general reserve. The question is whether the ITO was justified in deducting the amount of the unpaid dividend, viz. Rs. 29,52,000 out of the general reserve as on 1-1-1974, 1-1-1975, 1-1-1976 and 1-1-1977, respectively. For this purpose we shall have to determine whether the assessee had any existing liability for this amount. Under Section 5 the declaration after the appointed day. Under the provisions of the Companies Act, 1956, once a company had in its annual general meeting declared a dividend, the company was bound to pay the dividend to the shareholders. The shareholders had an enforceable right against the company for the amount of dividend. it was an existing liability. Once it is an existing liability, as explained by the learned Judges of the Supreme Court in the case of the Vazir Sultan Tobacco Co. Ltd. (supra) whether the amount was separately earmarked as a provision or not, it had to be deducted from the balance in the general meeting held in June 1974 specifically resolved that the amount would be paid out of the general reserve, as a result of which no separate provision was made therefore for the proposed dividend. By virtue of this resolution, in our opinion, the amount to that extent acquired the nature of a provision against an existing liability. In this connection the guidelines laid down by the Supreme Court in the case of Vazir sultan tobacco Co. Ltd. (supra) make the position patently clear that the balance in the general reserve to the extent of this liability for dividend was provided for by making out a portion out of the general reserve for the aforesaid purpose.

7. As to the argument on behalf of the assessee on the basis of the Department of Company Affairs Communication dated 7-2-1976 to the effect that declaration of dividend even prior to the appointed day was void, does not appeal to us. To our mind the correct legal position has properly been explained by the Department of Company Affairs in their communication dated 19-1-1977, namely, that such declaration was not void. Only the payment was restrained for the time being. Some restriction on the payment temporarily did not extinguish the liability. The liability was always there and had to be met as soon as the statutory restriction was removed. For meeting this liability, the shareholders had created a provision at the annual general meeting.

Since this amount was a provision for an existing liability, in our opinion, the lower authorities were justified in deducting the amount from the balance standing in the general reserve for determining the capital of the assessee-company for the aforesaid four dates, namely 1-1-1974, 1-1-1975, 1-1-1976 and 1-1-1977, respectively.

9. In the result, the appeals filed by the assessee are hereby dismissed.


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