NATHANI STEEL (P) LTD. v. INCOME TAX OFFICER
[Citation -1984-LL-0517]

Citation 1984-LL-0517
Appellant Name NATHANI STEEL (P) LTD.
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 17/05/1984
Assessment Year 1976-77
Judgment View Judgment
Keyword Tags declaration of dividend • annual general meeting • additional income-tax • distributable income • closely-held company • memorandum of appeal • additional dividend • investment company • prescribed period • legal obligation • deemed dividend • payment of tax • actual payment • additional tax • share capital
Bot Summary: 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 no shortfall in the distribution of the dividend already made, within 12 months of the expiry of the relevant previous year. 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. 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. 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 words used in section 23A of the 1922 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 23A. The High Court held in favour of the assessee. The above decision is an authority for the proposition that for the purposes of section 23A of the 1922 Act, the declaration of dividends amount to distribution of profits as dividends. 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.


This appeal by assessee is directed against order dated 1-3-1982, passed by Commissioner (Appeals). 2. assessee is private limited company. assessment year is 1976-77. assessment for concerned year was completed on 30-9-1978. ITO was satisfied that in respect of previous year profits and gains distributed as dividends by assessee within 12 months immediately following expiry of that previous year were less than statutory percentage of distributable income of assessee for that previous year. He, therefore, issued notice under section 105 of Income-tax Act, 1961 ('the Act') intimating assessee that he proposed to make order of levy of additional tax under section 104 of Act. This notice was dated 24-12-1979 and was served on assessee on 28-12-1979. In order to avoid levy of additional income-tax under section 104, it was obligatory on assessee to make further distribution of its profits and gains so that total distribution made is not less than statutory percentage of distributable income. shortfall was of Rs. 25,669 and it was this amount which assessee-company was required to distribute as dividends within three months of 28-12-1979. 3. On 27-3-1980, extraordinary general meeting of shareholders of assessee-company was held and following resolution was passed therein: "Resolved that company pay and is hereby authorised to pay amount of Rs. 25,669 as additional dividends for year 1974-75 to shareholders whose names appear in register of members as on 30th June, 1975. Resolved further that amount of dividends may be paid to respective shareholders within 42 days from date of this meeting, after deducting tax at source." 4. There were eleven shareholders of assessee-company as on relevant date. Consequently, additional dividends had to be distributed amongst t h o s e eleven shareholders. On 26-4-1980, assessee apportioned aforesaid amount of Rs. 25,669 amongst shareholders by issuing separate cheques for amounts which were due to each one of them. 5. It would be seen that date on which extraordinary general meeting was held was 27-3-1980. That date fell within three months of date on which notice under section 105 was received by assessee. date on which dividends were actually distributed by issue of cheques was 26- 4-1980. This date was beyond three months of date of receipt of notice under section 105. 6. Before ITO, assessee raised three grounds. main ground was that according to Circular No. 113, issued by Ministry of Law, Justice and Company Affairs, once dividend was declared in annual general meeting for particular year, further dividend could not be declared for same year and, as such, it was not possible to comply with order of ITO. In other two grounds, it was mentioned that there was, in fact, no shortfall in distribution of dividend already made, within 12 months of expiry of relevant previous year. 7. ITO held that there was shortfall in distribution of dividends and, as such, assessee was bound to distribute additional dividends in order to escape liability to pay additional income-tax. assessee had not availed of opportunity to distribute additional dividends of Rs. 25,669 within three months of receipt of notice. Consequently, there was justification for levy of additional income-tax under section 104. ITO, therefore, levied additional income-tax at 25 per cent of distributable profits as reduced by dividends actually distributed by assessee. 8. assessee filed appeal before Commissioner (Appeals). assessee did not dispute fact that profits and gains distributed as dividends by assessee within 12 months immediately following expiry of that previous year were less than statutory percentage of distributable income of assessee, and that shortfall was of Rs. 25,669. There was also no dispute on point before Commissioner (Appeals) that assessee was liable to distribute said amount as additional dividend under section 105 in order to avoid levy of additional income-tax under section 104. only point raised by assessee was that declaration of additional dividend at extraordinary general meeting of shareholders on 27-3-1980 by resolution, referred to above, amounted, in law, to distribution of dividend within meaning of that expression in section 105, and, as such, no additional income-tax was leviable under section 104. Commissioner (Appeals) rejected this contention and he held that term used in section 104 and section 105 was 'distribution of dividend' and not 'declaration of dividend'. Consequently, so-called declaration at extraordinary general meeting of shareholders on 27-3-1980 did not, in law, amount to 'distribution of dividend' within meaning of that expression in those sections. distribution took place on 26-4-1980 (i.e., beyond three months of date of receipt of notice under section 105) and, as such, distribution made on that date could not be availed of by assessee for avoiding levy of additional income-tax under section 104. Accordingly, he confirmed order of ITO. assessee has now come in appeal before us. 9. ground raised in memorandum of appeal is that Commissioner (Appeals) has erred in upholding levy of additional income-tax under section 104. contention of assessee is that on account of declaration of additional dividends at extraordinary general meeting held on 27-3-1980, enforceable debt was created in favour of shareholders and against assessee. shareholders were liable to be assessed in respect of said additional dividends in assessment year 1980-81. Consequently, said declaration amounted to 'distribution of additional dividends' within meaning of expression in section 105. Strong reliance was placed on decision of Madhya Pradesh High Court in Central India Industrial Corpn. Ltd. v. CIT [1963] 48 ITR 543. 10. contention on behalf of department was that term 'distribution' connoted something actual and not notional. Consequently, mere declaration of additional dividends at 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 decision of Supreme Court in Punjab Distilling Industries Ltd. v. CIT [1965] 57 ITR 1. further contention was that resolution dated 27-3-1980 envisaged payment of additional dividends within 42 days and, as such, actual distribution authorised by resolution was to take place after expiry of three months from authorised by resolution was to take place after expiry of three months from date of receipt of notice under section 105. 11. We have considered rival submissions and facts on record. 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 case of company, which is not investment company, whose distribution within period of 12 months, referred to in sub-section (1) of section 104 falls short of statutory percentage by more than 10 per cent of its distributable income, unless company, within three months of receipt of notice from ITO, fails to make further distribution of profits and gains, so that total distribution made is not less than statutory percentage of distributable income. 12. Let us first consider intention underlying provisions of section 104 and section 105. intention is that companies to which these provisions apply. viz., closely-held company, should not postpone distribution of dividends in respect of profits earned with view to assist shareholders in avoiding payment of tax on dividend income. dividend should go to shareholders when profits are earned and same should be available for taxation in hands of shareholders. 13. In present case, shareholders of assessee have declared additional dividend at extraordinary general meeting held on 27-3-1980. legal implication of this declaration is that assessee-company became legally liable to pay dividends in question to shareholders. additional dividend to which each shareholder became entitled was liable to be included in his net income for assessment year 1980-81 because that dividend income accrued to him on 27-3-1980, in view of provisions of section 8 of Act, although actual payment took place on 26-4-1980. Consequently, purpose underlying sections 104 and 105 was satisfied when resolution dated 27-3-1980 was passed at extraordinary general meeting of shareholders. 14. Now, let us see whether there is anything in language used in section 105 to disentitle assessee from relief under section 105. As already stated, word used is 'distribution'. word 'distribution' has not been defined in Act. However, it has been judicially interpreted in context of analogous provision in Indian Income-tax Act, 1922 ('the 1922 Act') viz., section 23A in Central India Industrial Corpn. Ltd.'s case. 15. In that case, resolution for distribution of dividend had been passed at general meeting of shareholders on date which fell within prescribed period, but actual payment was made on date which fell beyond prescribed period. words used in section 23A of 1922 Act (which is analogous to section 104 of 1961 Act) were 'distributed as dividends' and question before High Court was whether declaration of dividend at annual general meeting amounted to 'distribution of dividends' within meaning of section 23A. High Court held in favour of assessee. This is what Madhya Pradesh High Court observed on this point: "The short question that arises for consideration is whether word 'distributed' as used in above sub-section means 'actually paid to shareholders' or 'declared as dividends by company'. ordinary meaning of word 'distribute' is 'divide' or 'apportion'. Distribution in general is act of dividing or making apportionment. No doubt, in relation to distribution of publications or periodicals term may mean delivery to persons. But when one speaks of distribution of sum of money amongst number of persons what is connoted is division or apportionment of amount amongst persons and not actual payment of amount of their shares. declaration of dividend by company is nothing but declaration of distribution of profits as dividends. On declaration of dividend, shareholders get right to sue company for amount of dividend. . . " [Emphasis supplied] 16. above decision is authority for proposition that for purposes of section 23A of 1922 Act (which is in pari materia with section 104 of 1961 Act), declaration of dividends amount to distribution of profits as dividends. same interpretation would apply to words 'further distribution of profits and gains' in section 105. 17. We may mention here that although under Companies Act, 1956, there is no provision for declaration of additional dividend at general meeting of shareholders, but provisions of Companies Act must be construed harmoniously with provisions of 1961 Act. Section 105 of latter Act requires company to make further distribution from profits and gains and such further distribution can only be made as result of resolution at general meeting of shareholders. It, therefore, follows that company would be under legal obligation to convene extraordinary general meeting of shareholders for declaring additional dividend in compliance with requirements of section 105. Such declaration must be held to have been authorised by law. Such declaration would create enforceable right to sue for dividends in favour of shareholders with further consequence that said declaration of additional dividend would amount to further distribution of profits and gains. 18. contention that since terms 'declaration' and 'distribution' are used in section 8, term 'distribution' should be attributed meaning different from 'declaration' is without substance. What section 8 lays down is that if dividend is declared by resolution at meeting of shareholders, then date of such declaration would be date on which dividend income accrued to shareholder. However, if distribution or payment of amount is made by company and if such distribution or payment comes within definition of 'deemed dividend' in section 2(22) of Act, then date of such distribution or payment would be date of accrual of dividend income. 19. It would, thus, be seen that 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 commercial sense, but are deemed to be dividends by special definition for limited purposes of levy of income-tax on shareholders. Sections 104 and 105 are concerned with normal dividends and for such dividends, declaration at meeting of shareholders is essential and such declaration embodies within itself distribution also. 20. contention that since resolution in question authorises company to pay within 42 days, that resolution does not amount to instantaneous distribution is equally untenable. provisions in Companies Act prescribe period of 42 days for payment of dividends and what resolution in question states on this point is what law otherwise permits. It is pertinent to n o t e that we are not concerned with 'payment' of dividend. term 'payment'connotes actual disbursement of amount. Section 105 does not require actual payment within prescribed time. It envisages only 'distribution' within said time and actual payment is not essential element thereof. 21. Decision of Supreme Court in Punjab Distilling Industries Ltd.'s case, on which department relies, does not lay down any principle which runs counter to what we have already stated. In that case, resolution was passed by company for reduction of share capital on 1-12-1953, but subsequently, much time elapsed in obtaining approval from High Court and obtaining of certificate from registrar of companies. Thereafter, amounts were credited to accounts of shareholders and payments were made in accounting year, commencing from 1-12-1954 and ending on 30-11-1955. question was whether distribution or payment took place during year commencing from 1-12-1953 and ending on 30-11-1954 or whether it took place i n year commencing from 1-12-1954 and ending on 30-11-1955. Supreme Court said that it took place in 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 year when it was actually, whether physically or constructively, paid to different shareholders, i.e., when amount was credited to separate accounts of shareholders or paid to them . . ." Supreme Court was dealing with 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 amount to 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 shareholder. alleged distribution prior to above acts is mere notional. It becomes physical, when by some act 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 ratio of Supreme Court decision, declaration of dividends would amount to constructive payment and, as such, would amount to distribution. Thus, when viewed in proper perspective, decision of Supreme Court assists assessee rather than department. 23. For reasons given above, we are of opinion that resolution passed at extraordinary general meeting of shareholders on 27-3-1980 declaring additional dividend of Rs. 25,669 amounted to 'further distribution of profits and gains' within meaning of section 105, with 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 impugned order of ITO by which additional tax was levied. 24. In result, appeal is allowed. *** NATHANI STEEL (P) LTD. v. INCOME TAX OFFICER
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