Per Shri P. J. Goradia, Accountant Member - The revenue has come up in appeal taking a very unusual and interesting ground as under : "On the facts and in the circumstances of the case the learned Commissioner (Appeals) erred in holding that the liability of Rs. 2,90,240 in assessment year 1972-73 in respect of liability of dividend on cumulative preference shares would arise only when the company would make profit and when the dividend would be declared by company to be deductible, from the value of the assets while computing employed." [For assessment year 1973-74 amount is Rs. 3,14,465. ] Both the appeals involve a common ground, they are disposed of by this common order.
2. While computing capital employed under section 80J of the Income-tax Act, 1961 (the Act) as amended by the Finance (No. 2) Act, 1980, the ITO deducted the amount of liability in respect of accumulated dividend on preference shares for the years ended on 31-5-1971 and 31-5-1972.
The petitioner pleaded that it was a contingent liability and, therefore, not deductible from the capital employed. The ITO rejecting the argument of the petitioner observed that on page 16 of printed balance sheet for the respective accounting years there was a separate paragraph for contingent liability were these liabilities for dividend had not been shown and these outstanding liabilities of the company towards the shareholders tantamount to the debts due by the company, as the same was required to be deducted.
3. In appeal, the Commissioner (Appeals) agreed with the view of the petitioner holding that the purported liability in respect of the dividend on preference of shares could not be considered to be a liability at all and that payment of dividend on preference shares would depend whether the company made any profits or not and whether it has declared an dividend or not. Against this order, the revenue has come up in appeal before us.
4. At the time of hearing, the learned counsel on behalf of the revenue submitted that since the petitioner was following the mercantile system of accounting and because the preference shares were cumulative preference shares the liability in respect of the payment of dividend did accrue from year to year irrespective of the fact that the same was paid or not. To substantiate he relied upon page 750 of the commentary on Income-tax Law by Chaturvedi and Pithisaria, Vol. I. where the liabilities such as contingent liability and liability dependent upon the contingencies were discussed, relying upon in the case of southern Railway of Peru Ltd. v. Owen (Inspector of Taxes)  32 ITR 737 (HL.) Besides, the payment of dividend was to be made as per the contract and the terms of issue and, therefore, receipt or payment by/to the shareholders did not make any material difference.
5. The learned counsel for the petitioner submitted that there was no liability at all because the dividends were not declared and reliance was placed on the case of Mrs. Kusumben D. Mahadevia v. CIT  47 ITR 214 regarding time oaf declaration of dividend, etc., as decided by the Honble Bombay High Court.
6. We have heard patiently the submissions made by both the representatives and have also gone through the material placed before us.
7. It was really an exhilerating odyssey to ponder over the issue involved. In respect of the cumulative preference share dividend could be deducted from the computation of capital employed only if it is a debt owed by the company. In this connection we would like to recall the observations of Hidayutullah, CJ. in the case of H. H.Maharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur v. Union of India AIR 1971 SC 530 as under : "Dynamic theory of obligations regards a debt as a claim to an equivalent in value to floating charge against the generality of things which are the properties of the debtor. From this is developed the notion of credit debt where property rights arise from a promise, expressed or implied, in respect of ascertained or readily ascertained sums of money." From this it would be clear that a debt must give to the creditor a right to claim and to the debtor an obligation to pay. Now, when we are considering the term dividend it would be necessary to consider when such obligations arise. The expression dividend has two meanings. As applied to a company which is going concern, it usually means the portion of the profits allocated to the owners of the shares in the company. In the case of winding up, it means a division of the assets amount the creditors and contributors according to their respective rights. Therefore, right to claim dividend will arise only after the portion of the profits is ascertained by the company. In other words, when the dividend is declared by the company in general meeting, until and unless sit is so declared to shareholder has any claim against the company in respect of it - Mathai Chandy v. H. L. Motor Union Ltd. ILR  Trav. 73. Mere fact that in the case of preference shareholders fixed dividend is to be distributed and that the same has to be cumulative from year to year does not created a right to claim dividend in favour of the preference shareholder unless and until a dividend is declared by the company. It is, to put on plainly, only a condition that when the profits are distributed, first the preference shareholders have a preference over the profits to be distributed. The right of accumulation in respect of dividend for past years is given because that will ensure certainly of return of investment. There can be no declaration of dividend for past yers in respect of which the accounts have already been closed at previous annual general meeting. Because of this, a right of accumulation to preference shareholders is given by the terms of issue.
This itself does not create a debt against the company.
8. We would also like to touch upon section 511 of the Companies Act, 1956 in respect of distribution of property of company on winding up.
Under that section the holders of preference shares shall be entitled to payment of capital first but where the terms of issue of any preference shares provide for payment of arrears of dividend, then only, the preference shareholders can claim from the liquidator not only repayment of the capital but also all arrears of dividend due on the shares. This suggests that even when winding up of the company takes place the arrears of dividend in respect of the preference shares, will be paid only if after the payment of the capital and that too only terms so provide. This would given an idea that arrears of dividend cannot be considered as a liability at the end of each accounting period. We, therefore, uphold the order of Commissioner (Appeals).