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The Angus Co. Ltd. Calcutta Vs. Commissioner of Income Tax, West Bengal. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 60 of 1952
Reported in[1954]25ITR431(Cal)
AppellantThe Angus Co. Ltd. Calcutta
RespondentCommissioner of Income Tax, West Bengal.
Cases ReferredGeneral v. Ashton Gas Company. The
Excerpt:
- chakravartti, c.j. - the question involved in this reference was described by both parties as a very short one, but both found it necessary to address to us a fairly long argument. at the end of that argument the point does appear to be free from intricacy, but in order to reach that comprehension of its simplicity, certain notions apt to mislead the mind had to be eliminated. in short the question is, when a company resolved to pay a dividend of a stated percentage less income-tax, what is the dividend declared is it a dividend of the full amount required to make up the specified percentage of the relevant share capital, or is it only a dividend of the amount actually paid to the shareholders after deduction of tax the question has arisen in the following way. the assessee, the angus.....
Judgment:

CHAKRAVARTTI, C.J. - The question involved in this reference was described by both parties as a very short one, but both found it necessary to address to us a fairly long argument. At the end of that argument the point does appear to be free from intricacy, but in order to reach that comprehension of its simplicity, certain notions apt to mislead the mind had to be eliminated. In short the question is, when a company resolved to pay a dividend of a stated percentage less income-tax, what is the dividend declared Is it a dividend of the full amount required to make up the specified percentage of the relevant share capital, or is it only a dividend of the amount actually paid to the shareholders after deduction of tax

The question has arisen in the following way. The assessee, the Angus Company Limited, is an Indian company, having a share capital of Rs. 37,50,000 divided into 15,000 preference shares and 22,500 ordinary shares, in each case of Rs.100 each. Under clause 5 of the Memorandum of Association of the company, the preference shares confer on their holders 'the right to a fixed cumulative preferential dividend at the rate of 6 per cent per annum on the capital for the time being paid up thereon.' The shares have been fully paid up. For the year 1948, the company decided to pay on its preference shares a dividend at the rate of 6 per cent. per annum, less income-tax, and, in fact, paid to them a sum of Rs. 1,54,687. At the same time it declared a dividend of 12 1/2 per cent. free of income-tax on its ordinary shares and paid on that account a sum of Rs. 9,17,063. No question arises in this reference with regard to that payment. With out deduction of income-tax, a dividend of 6 per cent on the preference shares would have amounted to Rs. 2,25,000.

The company keeps its accounts by the English calendar year and therefore the assessment year, relative to the accounting year 1948 was the year 1949-50. The rates of income-tax for that year were fixed by the Indian Finance Act of 1949. Section 9 of that Act provided that for the year beginning on the 1st day of April, 1949, 'income-tax shall be charged at the rates specified in Part I of the Third Schedule.' Clause B of that Part laid down the rate applicable to companies and also provided by the first of two provisos for a rebate to be allowed to them in certain circumstances. So far as is material the clause reads as follows :-

'In the case of every company -

Rate

On the whole of total income......... Five annas in the rupee :

Provided that in the case of an Indian company -

(i) Where the total income, as reduced by seven annas in the rupee and by the amount, if any, exempt from income-tax, exceeds the amount of any dividends (including dividends payable at a fixed rate) declared in respect of the whole or part of the previous year for the assessment for the year ending on the day March 31, 1950, and no order has been made under sub-section (1) of Section 23A of the Income-tax Act, a rebate shall be allowed at the rate of one anna per rupee on the amount of such excess.'

The object of the allowance of the rebate is said to have been to encourage the retention of profits in the hands of industrial concerns, with a view to their re-employment in business, instead of their dissipation by distribution among the shareholders. But with the object of the concession or with the legislative policy behind it, we are not concerned. The seven annas referred to in the proviso, I have just read, represents the total rate of tax payable by a company. The substance of the provision is that if the sum, arrived at by reducing from the total income of the company the tax payable on it and the amount exempt from tax, is found to be larger than the total amount of dividends of all kinds declared in respect of the previous year, then a rebate of one anna in the rupee shall be allowed on the difference between the two sums. All that we need notice in the provision is that in arriving at the sum on which rebate is allowable, the amount of the dividends declared is to be deducted so that the smaller the deduction, the larger will be the rebate available. The question of the amount of the dividend declared is, therefore, a very material factor.

As I have already said, in respect of its ordinary shares the company declared a dividend of 12 1/2 per cent free of income-tax and paid a sum of Rs. 9,17,063 which represented the full 12 1/2 per cent. In respect of the preference shares, it was bound under its Memorandum of Association to pay a dividend of 6 per cent, but it purported to discharge that liability by paying not a sum of Rs. 2,25,000 which would represent the full 6 per cent, but only a sum of Rs. 1,54,687 which represented 6 per cent less income-tax. In the course of its assessment for 1949-50 the company raised a contention that in computing the excess for the purpose of the first proviso to clause B of Part I of Schedule III of the Finance Act of 1949 only the sum of Rs. 1,54,687 should be taken as the amount of the dividend declared on the preference shares and not the sum of Rs. 2,25,000.

The only question in the present reference is whether that contention of the company was right. It was held by the Income-tax Officer to be wrong, but by the Appellate Assistant Commissioner to be right and again held to be wrong by the Appellate Tribunal. The company has thereafter brought up the question to this Court and it has been referred in the following form :-

'Whether the expression dividend declared in the proviso (i) to clause B of Part I of the Third Schedule to the Indian Finance Act, 1949, means the net amount of the dividend paid to the shareholders, that is Rs. 1,54,687, or such amount increased by the income-tax charged thereon in the hands of the company, that is, Rs. 2,25,000 ?'

The framing of the question so far as it is given the form of a general proposition, is perhaps not wholly accurate, because in applying the proviso to a particular case, the matter for enquiry will not, I think, be or always be what the declaration of a dividend means in the abstract, but what dividend was actually declared on the occasion by the company concerned. As limited to the facts of the present case, however, the question is accurate enough, because it contemplates only a case where a company purports to pay a dividend of a stated percentage less income-tax and claims that it is the amount that it actually paid to its shareholders which it declared as a dividend, and not that amount together with the tax deducted. The question, therefore is : is the dividend declared in such circumstances the same as the dividend paid in cash to the shareholders ?

The paper-book does not contain the documents relating to the declaration of a dividend on the preference shares of the assessee company in the year of account. We were, however, shown a copy of the Memorandum of Association which provides, as I have already said, for the payment of a fixed cumulative preferential dividend at the rate of 6 per cent. per annum on the capital for the time being paid up. Thus not only is the rate of the dividend a fixed rate, but since it is a cumulative dividend, it must be paid in full whether out of the profits of the current year or out of the profits of subsequent years, before any dividend can at all be declared in favour of ordinary shareholders. Nothing however is said in the Memorandum of Association about deduction of income-tax. The resolution declaring the dividend in the year of account was not available, but we were shown a copy of a dividend certificate from which it appears that the directors decided to pay a dividend at the rate of 6 per cent. per annum less income-tax on the preference shares of the company for the year ended December 31, 1948. What is referred to in the dividend certificate as the decision of the directors may reasonably be taken to have been the declaration by the company and it was a declaration of a dividend of 6 per cent. less income-tax. Was that a declaration of Rs. 1,54,687 or of Rs. 2,25,000 ?

Before dealing with the contentions of the parties, it will be useful to refer broadly to the incidents of a declaration of a dividend from the point of view of company law and of a declaration free of or less tax, as concerning the company on the one hand and the shareholders on the other. A dividend is the share of a companys profits whether at a fixed rate or otherwise, which is allocated to the shareholders at a division. The profits are determined by deducting the expenditure from the receipts, but not also by deducting the income-tax, because tax is not one of the items of expenditure incurred in order to the earning of profits, but is a levy on the profits after they have been earned. A dividend can be paid only out of the profits though it need not be out of the profits of the current year. But in every case it is for the company to decide whether it will pay any dividend at all and if it decides to pay, what sum it will set aside to be declared and distributed by way of dividends. In determining the quantum of the sum, which is called divisible fund, the company has to take into account the tax it has paid or will have to pay on its own profits, because the profits of the company are its own and not of the shareholders and the tax on the profits must be borne by the company itself on its own account as the taxpayer. The whole of the profits of a company including the part that may be distributed by way of dividend must, therefore, bear tax in the hands of the company which the Treasury will recover from it, except of course such part as may be exempt from tax. With this liability present to its mind, the company will decide what sum it will distribute by way of dividends and will also decide whether it will pay the dividend tax-free or less tax or, as it is sometimes called, subject to tax. In order to appreciate what matters the company will have to take into consideration it is necessary to understand what a tax-free dividend and a dividend subject to tax mean. A dividend is expressed in terms of percentage. The total amount proposed to be distributed by way of dividends is considered in relation to the share capital on which it had to be paid and the percentage of dividend is the percentage of profits which such sum enables the company to pay on the share capital concerned. When the percentage is thus ascertained a dividend of that percentage is declared. When a dividend is declared tax-free, it does not mean that the dividend is totally immune from tax in relation to the Treasury, but it means that the declared percentage of dividend is paid by the company to the shareholders in full without any deduction therefrom on account of tax. It is tax-free in the sense that as between the company and the shareholder, it is not diminished by any retention of tax by the company out of it, so that the actual net amount received by the shareholder is the full percentage declared. When, however, a dividend is paid less tax or subject to tax, it means that the company does not pay to the shareholder the declared percentage of the dividend in full, but deducts from it an aliquot part of the tax paid or payable by it on the whole of its profits so that the shareholder receives the declared percentage, less such deduction. It will be obvious that when a dividend is declared tax-free, the whole of the divisible fund will be exhausted by the distribution since the full percentage declared is paid out; but if a dividend of the same percentages is declared less tax, a portion of the fund will remain in the hands of the company. In the first case the company will have to pay tax on its total profits including in them the divisible fund from other funds in its hands, but in the second case it will be able to apply to such payment a portion of the divisible fund itself. This, however, can happen only when a divisible fund is first created merely on the basis of a certain percentage of the share capital and a dividend of that percentage is declared tax-free in one case and less tax in the other. In actual practice the divisible fund will be a particular sum which the company thinks it can pay by way of dividends and the percentage of the dividend and the form in which it will be declared will be a matter of calculation. The company will take into account the financial implications of tax-free dividend and a dividend less tax and decide a dividend of what percentage and what form it can pay with the fund which it has set aside for distribution as dividends. The whole of the divisible fund will be paid out. What is important to notice, however, is that as between a declaration of a certain percentage of dividend tax-free and a declaration of the same percentage of dividend, less tax, by the same company in respect of the same share capital, the company will pay to the shareholders more in the first case and less in the second.

There is also a declaration of dividend of a third kind, very exceptional, which is a declaration of a dividend without deduction of tax not, however, intended to be tax-free. Such a declaration is possible when a specially segregated fund which has not itself borne tax or borne it only in the notional sense is divided among the shareholders. See Neumann v. Inland Revenue Commissioners. It is also possible when a company does not in fact deduct tax, although a dividend is paid out of taxed or taxable profits that is to say, it declares a certain percentage of dividend without prior deduction of tax so as to arrive at the percentage declared and pays the declared percentage in full without making any deduction out of it. Such a declaration is illustrated by Cull v. Commissioners of Inland Revenue Suppl. Whether such a case will ever be come across in actual experience in India, I very greatly doubt. But if ever a company declares a dividend in that form, it will pay the shareholder the full percentage of the dividend declared in such a case as well as in the case of tax-free dividends.

It is important to note that a declaration of a dividend or the form in which it is declared is entirely a matter between the company and its shareholders. Whether any dividend is declared at all or if declared, whether it is declared tax-free or less tax, does not affect the tax liability of the company in any way. It has to pay the tax chargeable on the whole of its profits in any event, and does not pay more if it declares a dividend tax-free, or less if it declares a dividend less tax. Distribution by way of dividend is only an application of the profits and therefore the profits are charged in the hands of the company in the same way and to the same extent in whatever manner it may distribute a part of them by way of dividend.

The above is all that need be said from the point of view of the company. As regards the shareholders, they receive the full percentage of the declared dividend when it is paid tax-free and receive it less tax, computed at the company rate when it is declared less tax. In either case the company has paid tax on the whole of its own profits out of which the dividend has been paid. But Section 49B of the Income-tax Act provides that when a dividend has been paid by a company to a shareholder the latter shall, if the dividend is included in his total income in his own assessment, be deemed to have himself paid tax in respect of the dividend at the rate applicable to the income of the company. In other words, the payment by the company is treated as payment by the shareholder who thus gets the benefit of it. Because he gets such benefit, the amount of payment is deemed to be his additional income on the dividends and accordingly Section 16(2) of the Act provides that in including the dividend in his total income the amount actually received shall be increased to such an amount as would leave a sum equal to it, if the income-tax at the rate applicable to the company were deducted therefrom. In other words, the true dividend income is taken to be a hypothetical sum which, after deduction of tax at the company rate, would be reduced to the amount actually received.

Next comes Section 18(5) which, so far as dividend income is concerned, is practically of the same effect as Section 49B and it provides that any sum by which a dividend has been increased under Section 16(2) shall be treated as a payment of income-tax by the shareholder concerned. The total effect of the three provisions is that the amount of tax paid by the company is added to the dividend income of the shareholder since he gets the benefit of it, and on the other hand, he gets the credit for the same amount in the computation of his tax liability since the payment by the company is deemed to be a payment by himself. If the payment by the company has been at a rate higher than what is applicable to the income of the shareholder, he is entitled to a refund under Section 48(1), if, after satisfaction of the whole of his tax liability, there is still an excess.

Section 16(2) does not make any distinction between a tax-free dividend and a dividend less tax. It applies to all kinds of dividend. In all cases where a dividend has been received the amount must be grossed up in the manner laid down in the section and the provision rests on the consideration that the shareholder is getting the benefit of the tax paid by the company under other provisions of the Act. Whether Section 16(2) would apply if a company paid dividend without deduction of tax, but not intending to pay it tax-free as was the position in Culls case, I need not consider, because such a case is exceptional and, as I have said, is not likely to be come across in actual experience. As a rule the company deducts tax when it declares a dividend. There is no specific provision in the Act requiring a company to do so but it is always done in practice in view of the provisions of Section 20 which requires payment of dividend to be accompanied by a certificate to the effect that the company has paid or will pay income-tax on the profits which are being distributed. When a dividend is declared tax-free what is really done is that the deduction of tax is made prior to the fixation of the percentage declared and the so-called tax-free dividend is the net amount under such a prior deduction of tax. (per Lord Wright in Neumann v. Commissioners of Inland Revenue). When on the other hand a dividend is declared less tax, the deduction is made out of the declared percentage and the net amount received by the shareholder is the amount of such percentage, less the deduction. Accordingly the only difference between the two cases as regards the operation under Section 16(2) is that in the first case, the net or basic amount taken for grossing up will be the full percentage of the dividend which the shareholder has received in full, while in the second case it will be the sum reduced from the full percentage by deduction of tax, which is the sum the shareholder has actually received. In each case, the sum actually received by the shareholder will be taken only as a net sum to which the gross sum of the dividend has been reduced by deduction of tax. It will, therefore, be grossed up. Only when a dividend has been declared out of profits wholly exempt from tax,no grossing up will be necessary or permissible, because the amount of dividend received by the shareholder is a gross and not a net amount and obviously one cannot gross up what is already gross.

It will be clear from what I have said so far that when a dividend is declared tax free, the shareholder really gets the benefit of a larger dividend. 'The tax-free dividend', observed Lord Macmillan in Cull v. Commissioners of Inland Revenue, 'is not really a dividend of the amount received, but a dividend of a larger sum less the tax thereon. It is therefore treated notionally as income-tax at the source and in the return of total income must be entered at the gross amount which, less tax, gives the actual net amount received.' When, however, a dividend is declared less tax, the shareholder gets the benefit of the full percentage declared but of nothing more and a portion of that benefit he receives indirectly.

With these preliminary observations which, I am conscious, have been inordinately long but none the less necessary, as will be seen, I may take up the contentions of the parties. Mr. Mitra who appeared on behalf of the assessee contended that although the company was bound to pay a dividend of 6 per cent on the preference shares, it could discharge and had effectively discharged that liability by paying only a sum of Rs. 1,54,687 and therefore payment of that sum should be taken to be a declaration and a payment of a dividend of 6 percent. To pay a dividend of 6 per cent, no further payment was required. Declaration of a dividend of a certain percentage, it was contended, meant a declaration of that percentage, inclusive of tax. The case of Attorney-General v. Ashton Gas Company was cited and particular reliance was placed on the following observation of Romer, L.J., occurring at page 629 of the report :

'If, for example, a company such as this had preference shareholders as well as ordinary shareholders and the preference shareholders were only entitled to receive out of the profits a fixed sum say 5 per cent then, when income-tax is paid by the company out of its profits, the company must be treated in respect of so much of the profits as is going to the preference shareholders as having paid their income-tax in respect of their 5 per cent. Accordingly, to my mind, it is clear on principle in such a case that there ought to be deducted from the dividend warrants payable to the preference shareholders the income-tax on the 5 per cent which had been previously paid on their behalf by the company.'

On the reasoning underlying that passage, it was contended by Mr. Mitra that in the present case the dividend declared in favour of the shareholders, although a dividend of Rs. 1,54,687 was really a dividend of 6 per cent. It was true, so it was further contended, that the shareholders would get the benefit of the difference between Rs. 1,54,687 and Rs. 2,25,000 in their own assessments but the sum would really be no part of the income of the shareholders, being only treated as, or deemed to be such, income under certain special provisions of the Income-tax Act. Reference was also made to the decision of the Bombay High Court in Bai Lalita v. Tata Iron and Steel Company Ltd. and the decision in Purshottamdas Harkisondas v. Central India Spinning, Weaving and Manufacturing Company Limited. On the authority of those cases as also the case of the Ashton Gas Company, it was contended that the holders of preference shares though entitled to a fixed dividend of 6 per cent, were not entitled to be paid that dividend free of tax because if they were so paid, they would in fact be paid more than 6 per cent and the whole burden of the tax would fall on the ordinary shareholders. A fixed preferential dividend of a stated percentage according to Mr. Mitra was fully paid by payment of a sum computed at that percentage less income-tax and a declaration of a dividend of that percentage would mean the declaration of the reduced sum actually paid. In the present case that sum was Rs. 1,54,687.

The contention of Mr. Meyer who appeared on behalf of the Commissioner of Income-tax was as follows. It was immaterial,he said, that a declared percentage of dividend on preference shares, or indeed any shares, meant such percentage, inclusive of tax. It was such percentage nevertheless and if the company paid a part of it only in cash it paid the rest in tax which enured to the benefit of the shareholder and was, therefore, in effect paid to him. The tax included in the declared percentage was not withheld by the company and retained for its own purposes, but it was only collected from the shareholder for payment to the Revenue authorities who gave credit for it to the shareholder. What was thus paid by the company by way of tax was paid to the shareholder all the same so that both in substance and in fact the shareholder got the full percentage of the declared dividend. It was further said that the position would be clearly seen if a transaction of dividend declaration was considered after eliminating the company which paid the dividend and if it was so considered and if the shareholder was brought face to face with the Revenue authorities, the position would be found to be that the dividend income of the shareholder was the full percentage of the declared dividend and he paid the tax on it through the payment made by the company. The difference between the declared percentage and the sum received in cash was also received by the shareholder; otherwise it could not have become a part of his dividend income as it was treated to be in actual fact and further that amount of the difference was also paid to him by the company, not directly but by way of discharging his obligation to a third party, namely, the Revenue authorities. As the company did not, in fact, pay the shareholder anything less than the full percentage declared, there was no reason to hold that it had declared anything less. On that basis Mr. Meyer contended that the position he was taking up was entirely unaffected by the principles relied upon by Mr. Mitra and the cases cited by him. He could accept them all and yet contend that the full percentage of the dividend has been declared and paid. In any event, it was further contended, the provision in the Finance Act spoke of dividends declared and there was no warrant for reading the word 'declared' as 'paid'.

The primary and indeed the only question in the case undoubtedly is what the proviso contemplates by the expression 'amount of any dividends declared'. Assuming that one has merely to read the proviso according to its language and see what dividend was declared in a given case, the answer must be in favour of the assessee, because what was declared was not a dividend of 6 per cent., but a dividend of 6 per cent. less tax. It appears from the authorities that the declaration was in conformity with the rights of preference shareholders for the dividend assured to them must be taken as inclusive of tax. But even if the declaration was not in accordance with the rights of the preference shareholders and gave them less than what they were entitled to the matter is of no importance for the present purpose, because what we are concerned with is not what ought to have been declared but what was actually declared. The textual argument of Mr. Meyer is therefore not sufficient for the Revenue to succeed.

I may also add that, in fact, there was no error in the declaration, because in the absence of any special provision in the Memorandum or Articles of Association of a company, shareholders entitled to a dividend of a stated percentage are as matter of law entitled to receive it subject to tax, and even if the declaration in the present case did not contain the words 'less tax', the effect would have been the same. If the full 6 per cent. had been declared free of tax, the shareholders would on Mr. Meyers own argument get more than 6 per cent., because in addition to the declared percentage they would also get the benefit of the tax payment made by the company, which on Mr. Meyers own argument would be equivalent to payment by the company by the company to the shareholders of a portion of the dividend. In that event the full amount of the 6 per cent. received by the preference shareholders would be grossed up to an amount which, after deduction of tax, would leave the amount of the 6 per cent. and the increased amount would be the dividend income of the preference shareholders and there would thus be a receipt in excess of their right. The declaration was, therefore, in consonance with the rights of the shareholders and the only question is what it meant in terms of money.

I am not forgetting that the resolution declaring a dividend has not been produced. But the dividend certificate states what the directors recommendation was and under Article 168 of the companys Articles of Association, the company at a general meeting could not have declared a larger dividend nor could the dividend certificate mention a smaller dividend than had been declared at a general meeting. The declaration must, therefore, be taken to have been a declaration of a dividend of 6 per cent. less tax.

Mr. Meyer contended that the whole sum of 6 per cent. including the tax deducted therefrom was the declared dividend and in support of his contention referred to the decision in Attorney-General v. Ashton Gas Company. The facts of that case were that a statutory company precluded by a special Act from dividing among its shareholders in any year more than 10 per cent. of its profits paid a dividend of 10 per cent free of tax and in a suit by the Attorney-General and the Corporation of the place, it was held by all the Courts that in arriving at the rate of dividend the profits were to be calculated as inclusive and not exclusive of the amount payable for income-tax. Mr. Meyer contended that the effect of the decision was that the income-tax included in the amount of the dividend declared was taken as a part of it, because the 10 per cent. was made up with the income-tax and therefore the sum of Rs. 70,313, which was the tax amount in the present case, should be taken as a part of the dividend of 6 per cent. and as included in the amount covered by a declaration of that percentage. I do not think that the effect of Ashton Gas Companys case was as contended by Mr. Meyer. It was not a tax case at all and it did not decide that in a dividend of 10 per cent, inclusive of tax, the tax part was a part of the dividend. All that it decided was that in paying a dividend of 10 per cent free of tax, the company had divided more of its profits than it was permitted by the special Act to do and that it was to take 10 per cent of its profits as inclusive of tax and see at what rate a dividend within the statutory limit could be declared. The true import of the decision in Ashton Gas Companys case was explained at length by Lord Wright in Culls case at pages 76 and 77, and after pointing out that the case had not been even mentioned by any of the Lords in Neumanns case, although it had been cited, and that it had not been referred to by the Court of Appeal in Culls case itself, he observed that with regard to questions relating to income-tax, Ashton Gas Companys case 'should be disregarded once and for all'. I do not therefore think that Mr. Meyer can derive any assistance from the Ashton Gas Companys case on which he relied.

The actual declaration in the present case was definitely of a dividend of 6 per cent. less tax, that is Rs. 1,54,687. The whole basis of Mr. Meyers contention was that the tax deducted was also paid and therefore was to be taken as included in the declaration, not as a deduction but as a payment. Upon giving my best consideration to the matter, I am unable to accede to Mr. Meyers argument. It is true that the tax deducted would come back to the shareholders through Section 16(2) and Section 49B, but it would not come back as a payment to them by the company, although its payment as tax to the Revenue authorities would enure to their benefit. The company paid the tax to the Revenue authorities as a part of its own tax and as it is now established, it does not pay it either as an agent of the shareholders or on their behalf. Under Section 49B, the shareholders are only to be deemed to have paid the tax themselves and under Section 18(5), the amount added to the net dividend amount under Section 16(2) is only to be treated as a payment on behalf of the shareholder concerned. In neither case would it be an actual payment by the company to the shareholder by way of a dividend, and therefore it cannot be said that it could be treated as a part of dividend. It is true that under Section 16(2) the amount would be added to the dividend income, but it would be added by an extraneous operation prescribed by the section which does not even mention payment of tax, but merely lays down a quantitative measure of the addition in general terms. The fact that a payment made by A to B of a debt due from A to B is treated under a statutory provision as payment by or on behalf of C, does not make the payment a payment by A to C.

To my mind, the one fact which seems to remove all doubts as to the true character of the payment of the tax of Rs. 70,313 is that the company did not have to pay it and did not in fact pay it, because it declared the dividend, but would have to pay it as a part of the charge on its own profits, in any event, whether it declared any dividend or not. The payment was therefore not on account of the declaration of the dividend and it was not by reason of the declaration that the funds of the company were depleted to the extent of Rs. 70,313. The depletion of the companys funds which can really be said to have been caused by the declaration of the dividend was limited to Rs. 1,54,687, which was the only amount that the company would not have to part with, if it did not declare a dividend, and, therefore, it seems clear to me that the financial effect of the declaration was co-extensive with that sum and did not extend to the further sum of Rs. 70,313. As I have already said, that amount of Rs. 70,313 the company would have to pay and part with in any event irrespective of any declaration of dividend, because it was a part of the tax payable by it on its own profits. This in my view is the right approach to the question. The provision in the Finance Act is looking at a dividend declaration from the point of view of the company and not from the point of view of the shareholder and it is directed at ascertaining what was left in the hands of the company after the declaration of the dividend and to what extent the funds of the company were affected by reason of the declaration. The receipts of the company, after the deduction of expenditure, are subject to two payment which cause a depletion where a dividend is declared. One is the payment of tax by the company, the other is a distribution by way of dividend. The provision in the Finance Act is not asking to what extent the funds of the company have been depleted by payment of tax, but is asking to what extent they have been depleted by the declaration of a dividend. It seems to me that the funds of the company are affected, in a case of a declaration of dividend, only to the extent of the sum which the company has to pay because of the declaration and which it would not have to pay otherwise and that sum obviously is the sum which it actually distributes as dividends.

I may also add that clause B of Part I of Schedule III provides specifically that for the purposes of the proviso to the proviso to the clause dividend shall have the same meaning as assigned to it by Section 2(6A). 'Dividend' includes any distribution by a company of accumulated profits and all the clauses in the definition are concerned with distribution. To my mind, it can by no means be said that when a company pays a dividend, the tax paid by it in respect of the amount as a part of its own tax, although it may be treated as tax paid by the shareholder for the purposes of the shareholders own assessment, can be said to be distributed by the company. In my view the amount of dividend declared is, in terms of money, the actual amount paid to the shareholders which only is the divisible fund and that in any event where the declaration is of a stated percentage less tax, there seems to be no question that the amount of the tax is no part of the dividend declared.

For the reasons given above, the answer to the question should in my opinion, be : It means the net amount of the dividend paid to the shareholders, in this case Rs. 1,54,687.

The assessee will have the costs of this reference.

Certified for two counsel.

LAHIRI, J. - I agree.


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