FALSHAW J. - In this reference under section 66 of the Income-tax Act the question propounded by the Tribunal for our consideration reads :
'Whether on a true interpretation of article 95 of the First Schedule to the Indian Companies Act, 1913, the dividend of Rs. 4,12,500 was liable to be included in the assessment year 1952-53 ?'
The relevant facts are that the accounting period for the assessment year in question was from October 1, 1950, to September 30, 1951. The assessee is a Hindu undivided family and had as its karta, Shri J. Dalmia, and the assessee held 1,500 shares in the company Messrs. Govan Brothers (Rampur) Ltd. The directors of that company at a meeting held on August 30, 1950, declared an interim dividend of Rs. 275 per share which constitutes the disputed amount of Rs. 4,12,500. The payment of this interim dividend was made by a warrant issued on December 28, 1950, i.e. during the relevant accounting period.
The view of the lower authorities that in spite of the fact that the dividend was declared by the directors on August 30, 1950, the dividend was liable to be included in the assessment year 1952-53 was upheld by the Appellate Tribunal. The decision was based on a distinction drawn between dividend declared and paid under article 95 of Table 'A' in the First Schedule to the Indian Companies Act, 1913, and dividend paid under article 96. These articles read :
'95. The company in general meeting may declare dividends. But no dividends shall exceed the amount recommended by the directors.
96. The directors may from time to time pay to the members such interim dividends appear to the directors to be justified by the profits of the company'.
There does not appear to be any direct authority on the point but the distinction was based on the view that while, as was held by the Bombay High Court in Commissioner of Income-tax v. Laxmidas Mulraj Khatau, as soon as a dividend is declared in a general meeting of a company that dividend becomes the income of the assessee, the decision of the directors of the company to pay an interim dividend does not amount to a declaration of dividend under article 95 because such a decision is revocable and the dividend only becomes the income of the assessee when actually paid.
It is agreed by the learned counsel appearing for the parties that the two English cases referred to in the order of the Tribunal, In re Severn and Wye and Severn Bridge Railway Co. and Bond v. Barrow Haematite Steel Co. are not helpful on the point in issue. One case has been cited which deals with the question of interim dividend, Lagunas Nitrate Co. Ltd. v. Henry Schroeder & Co. In that case the directors of a company passed a resolution declaring an interim dividend payable on a future date, but before that date arrived the directors resolved that, having regard to certain litigation then pending, the payment of the dividend should be postponed. The directors had requested the companys bankers to set aside out of moneys in their hands under a special account entitled 'interim dividend account' a sum sufficient to cover the dividend, pending the companys instructions, but on the termination of the litigation the company claimed a declaration that neither they nor their bankers were bound to apply the sum in payment of the dividend. On these facts it was held by Joyce J. that the money need not be applied in payment of the dividend. The relevant article in the companys memorandum and articles of association provided that the directors may from time to time pay to the members on account of the next forthcoming dividend such interim dividend as, in their judgment, the position of the company justifies, but the learned judge was of the opinion that it was open to the directors to reconsider their decision to pay an interim dividend and to decide whether it should be paid at all.
The only difference between that case and the present one appears to be that in the resolution for the payment of the interim dividend a sub-sequent date was fixed for the payment, and it was decided to reconsider the matter before that date arrived, whereas in the present case no date appears to have been fixed when the directors decided on August 30, 1950, to pay the dividend, but I very much doubt whether this makes any difference to the position.
Reliance was placed on the fact that in the articles of association of Govan Brothers (Rampur) Ltd. which apparently was registered under the Rampur State Companies Act, 1932, the wording of the relevant articles differs slightly from the words used in articles 95 and 96 of Table 'A'. The two relevant articles read :
'73. The company in general meeting may declare a dividend to be paid to the members according to their rights and interests in the profits.
74. When in their opinion the profits of the company permit, the directors may declare an interim dividend'.
Thus the word 'declare' is used in article 74 as compared with the word 'pay' in article 96 of Table 'A'. It appears to me to be doubtful whether the use of the word 'declare' in this article gives such a declaration the same status as the formal declaration of annual dividend at the companys general meeting. The matter is dealt with by Halsburys Laws of England, third edition, volume 6, paragraph 778, as following.
'A final dividend can, as a general rule, only be sanctioned at the annual meeting, when the accounts are presented to it, and the articles usually contain a specific provision to this effect, and also that no dividend shall exceed the amount recommended by the directors. A power to declare interim dividends is usually vested by the articles in the directors. An interim dividend is a dividend declared at some date between the ordinary general meetings. The directors may pay an interim dividend, if, after making proper inquiries, they estimate that the profits will be sufficient. In such a case the court will not interfere with their discretion of an interim dividend may be rescinded before payment has been made.'
The reference regarding this last sentence is to the decision in Lagunas Nitrate Co.s case.
Two points emerge from this passage, namely, that there appears to be no significance attached to the use of the word 'pay' or 'declare' regarding directors power with respect to interim dividends and that the learned editors, the latest of whom is Lord Simonds, former Lord Chancellor of Great Britain, have interpreted the decision in Lagunas Nitrate Co.s case as meaning that a resolution of the directors for payment of interim dividend may be rescinded before payment has been made, their reference to the fixing of any date for payment. In the circumstances, I am of the opinion that the decision of the authorities and the Tribunal was correct in this case and that the question propounded for our consideration is to be answered in the affirmative. The Commissioner will have his costs from the assessee. Counsels fee Rs. 250.
CAPOOR J. - I agree.
Question answered in the affirmative.