1. This appeal by the assessee is directed against the order dated 1-3-1982, passed by the Commissioner (Appeals).
2. The assessee is a private limited company. The assessment year is 1976-77. The assessment for the concerned year was completed on 30-9-1978. The ITO was satisfied that in respect of the previous year the profits and gains distributed as dividends by the assessee within 12 months immediately following the expiry of that previous year were less than the statutory percentage of the distributable income of the assessee for that previous year. He, therefore, issued notice under Section 105 of the Income-tax Act, 1961 ('the Act') intimating the assessee that he proposed to make an order of levy of additional tax under Section 104 of the Act. This notice was dated 24-12-1979 and was served on the assessee on 28-12-1979. In order to avoid levy of additional income-tax under Section 104, it was obligatory on the assessee to make a further distribution of its profits and gains so that the total distribution made is not less than the statutory percentage of the distributable income. The shortfall was of Rs. 25,669 and it was this amount which the assessee-company was required to distribute as dividends within three months of 28-12-1979.
3. On 27-3-1980, an extraordinary general meeting of the shareholders of the assessee-company was held and following resolution was passed therein : Resolved that the company pay and is hereby authorised to pay an amount of Rs. 25,669 as additional dividends for the year 1974-75 to the shareholders whose names appear in the register of members as on 30th June, 1975. Resolved further that the amount of dividends may be paid to the respective shareholders within 42 days from the date of this meeting, after deducting tax at source.
4. There were eleven shareholders of the assessee-company as on the relevant date. Consequently, additional dividends had to be distributed amongst those eleven shareholders. On 26-4-1980, the assessee apportioned the aforesaid amount of Rs. 25,669 amongst the shareholders by issuing separate cheques for the amounts which were due to each one of them.
5. It would be seen that the date on which the extraordinary general meeting was held was 27-3-1980. That date fell within three months of the date on which the notice under Section 105 was received by the assessee. The date on which the dividends were actually distributed by issue of the cheques was 26-4-1980. This date was beyond three months of the date of receipt of the notice under Section 105.
6. Before the ITO, the assessee raised three grounds. The main ground was that according to Circular No. 113, issued by the Ministry of Law, Justice and Company Affairs, once the dividend was declared in the annual general meeting for a particular year, further dividend could not be declared for the same year and, as such, it was not possible to comply with the order of the ITO. In the other two grounds, it was mentioned that there was, in fact, no shortfall in the distribution of the dividend already made, within 12 months of the expiry of the relevant previous year.
7. The ITO held that there was shortfall in the distribution of dividends and, as such, the assessee was bound to distribute additional dividends in order to escape liability to pay additional income-tax.
The assessee had not availed of the opportunity to distribute additional dividends of Rs. 25,669 within three months of the receipt of the notice. Consequently, there was justification for levy of additional income-tax under Section 104. The ITO, therefore, levied additional income-tax at 25 per cent of the distributable profits as reduced by the dividends actually distributed by the assessee.
8. The assessee filed appeal before the Commissioner (Appeals). The assessee did not dispute the fact that profits and gains distributed as dividends by the assessee within 12 months immediately following the expiry of that previous year were less than the statutory percentage of the distributable income of the assessee and that the shortfall was of Rs. 25.669. There was also no dispute on the point before the Commissioner (Appeals) that the assesses was liable to distribute the said amount as additional dividend under Section 105 in order to avoid levy of addi-tional income-tax under Section 104. The only point raised by the assessee was that the declaration of additional dividend at extraordinary general meeting of the shareholders on 27-3-1980 by the resolution, referred to above, amounted, in law, to the distribution of dividend within the meaning of that expression in Section 105, and, as such, no additional income-tax was leviable under Section 104. The Commissioner (Appeals) rejected this contention and he held that the term used in Section 104 and Section 105 was 'distribution of dividend' and not 'declaration of dividend'. Consequently, the so-called declaration at the extraordinary general meeting of the shareholders on 27-3-1980 did not, in law, amount to 'distribution of dividend' within the meaning of that expression in those sections. The distribution took place on 26-4-1980 (re., beyond three months of the date of receipt of the notice under Section 105) and, as such, distribution made on that date could not be availed of by the assessee for avoiding levy of additional income-tax under Section 104. Accordingly, he confirmed the order of the ITO. The assessee has now come in appeal before us.
9. The ground raised in the memorandum of appeal is that the Commissioner (Appeals) has erred in upholding levy of additional income-tax under Section 104. The contention of the assessee is that on account of declaration of additional dividends at the extraordinary general meeting held on 27-3-1980, an enforceable debt was created in favour of the shareholders and against the assessee. The shareholders were liable to be assessed in respect of the said additional dividends in the assessment year 1980-81. Consequently, the said declaration amounted to 'distribution of additional dividends' within the meaning of the expression in Section 105. Strong reliance was placed on the decision of the Madhya Pradesh High Court in Central India Industrial Corpn. Ltd. v. CIT  48 ITR 543.
10. The contention on behalf of the department was that the term 'distribution' connoted something actual and not notional Consequently, mere declaration of additional dividends at the extraordinary general meeting held on 27-3-1980 would not amount to 'distribution of additional dividends' as contemplated by Section 105. Reliance was placed on the decision of the Supreme Court in Punjab Distilling Industries Ltd. v. CIT  57 ITR 1. The further contention was that the resolution dated 27-3-1980 envisaged payment of additional dividends within 42 days and as such, the actual distribution authorised by the resolution was to take place after expiry of three months from the date of receipt of the notice under Section 105.
11. We have considered the rival submissions and facts on record. The relevant provision is Section 104(1)(ii)- That provision, so far as material, lays down that no order under Section 104 shall be made in the case of a company, which is not an investment company, whose distribution within the period of 12 months, referred to in Sub-section (1) of Section 104 falls short of the statutory percentage by more than 10 per cent of its distributable income, unless the company, within three months of the receipt of the notice from the ITO, fails to make a further distribution of profits and gains, so that the total distribution made is not less than the statutory percentage of the distributable income.
12. Let us first consider the intention underlying the provisions of Section 104 and Section 105. The intention is that the companies to which these provisions apply, viz., a closely-held company, should not postpone distribution of dividends in respect of profits earned with a view to assist the shareholders in avoiding payment of tax on dividend income. The dividend should go to the shareholders when profits are earned and the same should be available for taxation in the hands of the shareholders.
13. In the present case, the shareholders of the assessee have declared additional dividend at an extraordinary general meeting held on 27-3-1980. The legal implication of this declaration is that the assessee-company became legally liable to pay dividends in question to the shareholders. The additional dividend to which each shareholder became entitled was liable to be included in his net income for the assessment year 1980-81 because that dividend income accrued to him on 27-3-1980, in view of the provisions of Section 8 of the Act, although actual payment took place on 26-4-1980. Consequently, the purpose underlying Sections 104 and 105 was satisfied when resolution dated 27-3-1980 was passed at the extraordinary general meeting of the shareholders.
14. Now, let us see whether there is anything in the language used in Section 105 to disentitle the assessee from relief under Section 105.
As already stated, the word used is 'distribution'. The word 'distribution' has not been defined in the Act. However, it has been judicially interpreted in the context of analogous provision in the Indian Income-tax Act, 1922 ('the 1922 Act') viz., Section 23A in Central India Industrial Corpn. Ltd.'s case (supra).
15. In that case, a resolution for distribution of dividend had been passed at a general meeting of the shareholders on a date which fell within the prescribed period, but actual payment was made on a date which fell beyond the prescribed period. The words used in Section 23A of the 1922 Act (which is analogous to Section 104 of the 1961 Act) were 'distributed as dividends' and the question before the High Court was whether declaration of dividend at the annual general meeting amounted to 'distribution of dividends' within the meaning of Section 23 A. The High Court held in favour of the assessee. This is what the Madhya Pradesh High Court observed on this point : The short question that arises for consideration is whether the word 'distributed' as used in the above Sub-section means 'actually paid to the shareholders' or 'declared as dividends by the company'. The ordinary meaning of the word 'distribute'is 'divide' or 'apportion'.
Distribution in general is the act of dividing or making an apportionment. No doubt, in relation to distribution of publications or periodicals the term may mean delivery to persons. But when one speaks of distribution of a sum of money amongst a number of persons what is connoted is the division or apportionment of the amount amongst the persons and not an actual payment of the amount of their shares. A declaration of dividend by a company is nothing but a declaration of the distribution of the profits as dividends. On the declaration of dividend, the shareholders get a right to sue the company for the amount of the dividend. ... (p. 546) 16. The above decision is an authority for the proposition that for the purposes of Section 23A of the 1922 Act (which is in pari materia with Section 104 of the 1961 Act), the declaration of dividends amount to distribution of profits as dividends. The same interpretation would apply to the words 'further distribution of profits and gains' in Section 105.
17. We may mention here that although under the Companies Act, 1956, there is no provision for declaration of additional dividend at a general meeting of the shareholders, but the provisions of the Companies Act must be construed harmoniously with the provisions of the 1961 Act. Section 105 of the latter Act requires the company to make further distribution from profits and gains and such further distribution can only be made as a result of resolution at the general meeting of the shareholders. It, therefore, follows that the company would be under a legal obligation to convene an extraordinary general meeting of the shareholders for declaring additional dividend in compliance with the requirements of Section 105. Such declaration must be held to have been authorised by the law. Such declaration would create an enforceable right to sue for dividends in favour of the shareholders with further consequence that the said declaration of additional dividend would amount to further distribution of profits and gains.
18. The contention that since the terms 'declaration' and 'distribution' are used in Section 8, the term 'distribution' should be attributed a meaning different from 'declaration' is without substance.
What Section 8 lays down is that if dividend is declared by a resolution at a meeting of shareholders, then the date of such declaration would be the date on which dividend income accrued to the shareholder. However, if distribution or payment of the amount is made by the company and if such distribution or payment comes within the definition of 'deemed dividend' in Section 2(22) of the Act, then the date of such distribution or payment would be the date of accrual of dividend income.
19. It would, thus, be seen that the terms 'distribution' and 'payment' have been used in Section 8 in respect of only those apportionments and disbursements which are not concerned with declaration of normal dividend as such. In cases of 'deemed dividend', there would not be any declaration. Those distributions and payments are not, strictly speaking, dividends in the commercial sense, but are deemed to be dividends by special definition for the limited purposes of levy of income-tax on shareholders. Sections 104 and 105 are concerned with normal dividends and for such dividends, declaration at the meeting of shareholders is essential and such declaration embodies within itself distribution also.
20. The contention that since the resolution in question authorises the company to pay within 42 days, that resolution does not amount to instantaneous distribution is qually untenable. The provisions in the Companies Act prescribe period of 42 days for payment of dividends and what the resolution in question states on this point is what the law otherwise permits. It is pertinent to note that we are not concerned with 'payment' of dividend. The term 'payment' connotes actual disbursement of the amount. Section 105 does not require actual payment within the prescribed time. It envisages only 'distribution' within the said time and actual payment is not an essential element thereof.
21. Decision of the Supreme Court in Punjab Distilling Industries Ltd.'s case (supra), on which department relies, does not lay down any principle which runs counter to what we have already stated. In that case, a resolution was passed by the company for reduction of share capital on 1-12-1953, but subsequently, much time elapsed in obtaining approval from the High Court and obtaining of certificate from the registrar of companies. Thereafter, the amounts were credited to the accounts of the shareholders and payments were made in the accounting year, commencing from 1-12-1954 and ending on 30-11-1955. The question was whether distribution or payment took place during the year commencing from 1-12-1953 and ending on 30-11-1954 or whether it took place in the year commencing from 1-12-1954 and ending on 30-11-1955.
The Supreme Court said that it took place in the latter year. It observed : '. . . distribution' connoted something actual and not notional. It could be physical, it could also be constructive . . . Dividend must be deemed to have been paid or distributed in the year when it was actually, whether physically or constructively, paid to the different shareholders, i.e., when the amount was credited to the separate accounts of the shareholders or paid to them ....(p. 2) The Supreme Court was dealing with a case of 'deemed dividend', i.e., that which is not dividend in ordinary commercial sense, but is deemed to be such for taxation purposes by virtue of special definition in taxing statute.
22. In case of deemed dividend, physical act that would be necessary would be crediting the amount to the shareholders or making payment to them. Then alone there would be distribution of payment. This is because prior to those acts, there is no enforceable right in favour of the shareholder. The alleged distribution prior to the above acts is mere notional. It becomes physical, when by some act an enforceable right in favour of shareholder is created. That right is created when amount is credited in shareholder's account and hence, it is distribution because of constructive payment. Consequently, applying the ratio of the Supreme Court decision, declaration of dividends would amount to constructive payment and, as such, would amount to distribution. Thus, when viewed in proper perspective, the decision of the Supreme Court assists the assessee rather than the department.
23. For the reasons given above, we are of the opinion that resolution passed at the extraordinary general meeting of the shareholders on 27-3-1980 declaring additional dividend of Rs. 25,669 amounted to 'further distribution of profits and gains' within the meaning of Section 105, with the result that condition mentioned therein was duly satisfied and there was no legal justification for levy of additional tax under Section 104. We, therefore, cancel the impugned order of the ITO by which additional tax was levied.