(Appeal by special leave from the judgment and order dated September 18, 1973, of the Allahabad High Court in Income-tax Reference No.720 of 1971).

(a) Income-tax---

----Dividend---Taxable only in year in which paid, credited or distributed and not in year in which it becomes due.

The Income-tax Act, 1922, has made distinct provisions as to when the different heads of income become taxable. It does not make dividend income taxable in the year in which it becomes due. It is taxable only in the year in which it is paid, credited or distributed or is deemed to be paid credited or distributed.

(b) Income-tax---

----Dividend---Distribution of dividend in specie---Shares held by company handed over unconditionally to trustees in 1952 for distribution to shareholders---High Court granting application challenging resolution for distribution---Injunction restraining company from acting upon resolution-- Validity of resolution upheld and injunction vacated in 1957---Shares distributed thereafter---Dividend received by shareholder when shares made unconditionally available by transfer to trustees for distribution to shareholders in 1952 and taxable then---Income-tax Act, 1922, S. 16(2).

The appellant-company was a shareholder in two sugar companies. On January 16, 1952, the sugar companies each passed a resolution for the distribution of dividend in specie in the shape of shares held by them in a cement company. On the same day, the sugar companies transferred their holdings of shares in the cement company to trustees to hold them in trust for the shareholders and distribute them amongst the shareholders in accordance with the resolutions passed by them. The resolution was challenged by an application filed by some of the shareholders in the High Court; and the High Court, on February 22, 1952, granted an injunction restraining the sugar companies from giving effect to the resolution pending disposal of the application. In 1957, the matter was compromised and a decree was passed by the High Court upholding the validity of the resolution. The shares in the cement company were thereafter transferred to the shareholders and the appellant-Company received the dividend in specie on January 18, 1957. The question was whether the appellant-Company was assessable to tax on the dividend in the assessment year 1952-53 or in the assessment year 1957-58:

Held, that the general body of the shareholders of the sugar companies had unconditionally and irrevocably resolved to make over the dividend in specie, viz., the shares in the cement company, to trustees for being distributed to their shareholders. If any shareholder had called upon the trustees to distribute the shares falling to his share on any date between January 16 and February 22, 1952, the trustees would have been obliged to comply with the request. Nothing remained for the general body of the sugar companies to recall the dividend. The validity of the resolution of the sugar companies was upheld by the High Court in the compromise decree. The action of the sugar companies in showing in their balance-sheets the declared dividend as an asset, did not have the effect of recalling the valid resolution already passed making available unconditionally the dividend to the shareholders. The sugar companies must be deemed to have paid credited or distributed the dividend to their shareholders in 1952 and the dividend income of the appellant-Company fell to be taxed in the assessment year 1952-53 and not in the assessment year 1957-58.

C.I.T. v. Bharat General Reinsurance Co. Ltd. (1971) 81' ITR 303 (Delhi) approved.

J. Dalmia v. C.I.T. (1964) 53 ITR 83; 34 Comp. Cas. 668 (SC); Padmavati R. Saraiya v. C.I.T. (1964) 54 TTR (Sh.N) 5 (SC). Punjab Distilling Industries Ltd. v. C.I.T. (1965) 57 TTR 1; 35 Comp. Cas. 451(SC) and C.I.T. v. Bikaner Trading Co. Ltd. (1970) 78 ITR 12 (SC) rel.

Decision of the Allahabad High Court reversed.

Bishambar Lal and Ms. Shefali Khanna, Advocates for Appellant.

B.B. Ahuja and Ms. A. Subhashini, Advocates for Respondent.

JUDGMENT

K. RAMASWAMY, J: --This appeal by special leave is directed against the finding of the High Court of Allahabad in favour of the Revenue and against the appellant to the following question:

"Whether, on the facts and in the circumstances of the case, any amount was includible in the assessment of the assessee for the assessment year 1957-58 by way of dividend by reference to the value of the shares of the cement company received by it from sugar companies?"

The appellant is a limited company running a distillery. The assessment year in question is 1957-58 end the corresponding previous year is the year ended March 31,1957. The dispute relates to the income of Rs.77,500 representing the face value of 7,750 shares held by Dalmia Cement Bharat Co, (for short "the cement company") which was received on January 18, 1957, by the assessee-company from Raza Sugar Co. Ltd. and Bland Sugar Co. Ltd. (for short "the sugar companies"). The sugar companies by the general meeting of the shareholders in the extraordinary general meeting held on January 16,1952 (each) resolved thus:

"Resolved that a dividend be declared out of profits transferred to the Reserve Fund of the company by the distribution of one fully paid-up ordinary share of Dalmia Cement Ltd. held by this company as its investment against every two shares held by the members of this company and the directors are permitted to appropriate the book value of the investments from the reserve 'fund for this purpose and further the directors are authorised to issue negotiable certificates in order to meet fractional distribution."

It was further resolved authorising the directors thus:

"Resolved further that, for the purpose of giving effect to the above resolution, the directors are authorised to settle any difficulty which may arise in regard to tare distribution as they think expedient and may vest such specific assets in trustees upon trust for the persons entitled to the dividend as may seem expedient to the directors."

On the same date, i.e., January 16, 1952, the board of directors of the sugar companies transferred their holdings of the shares of the cement company to trustees under trust to hold the said shares and the income thereof in the trust for the shareholders of the sugar companies whose names appeared on the register of the sugar companies as on January 16, 1952, and to distribute amongst the shareholders of the sugar companies the said shares in accordance with the resolutions passed at the extraordinary general meeting of the sugar companies. Pursuant to the above resolution, negotiable certificates were also issued. Some of the shareholders of the sugar companies, thereafter, filed company applications in the High Court of Allahabad at Lucknow against the sugar companies restraining the company or its agents/servants from giving effect to the resolution. The High Court, by its order dated February 22, 1952, granted an injunction restraining the sugar companies or its agents/servants, etc., from acting upon the resolution of the company or from issuing and/or transferring to the shareholders of the company shares of the cement company and further from getting their names entered in the registers of the cement company as shareholders. The shares in the cement company, therefore, were not transferred in the names of the assessee-company, etc. immediate sugar companies in their balance-sheets noted that the shares in the cement company included in their investments were held by the trustees for the shareholders for distribution of dividend in specie and the cost of those h3A to be adjusted out of general reserves in terms of the resolution passed on January 16, 1952, by the shareholders in general meetings of the companies. In view of the injunction order issued by the High Court, no further action in this regard was taken to pay over to the shareholders of the sugar companies. Ultimately, the matter was compromised in the beginning of the year 1957 and a decree was passed upholding the validity of the resolution passed on January 16, 1952, and the same had to be given effect to forthwith by issuing and/or transferring to the shareholders of the sugar companies shares of the cement company. Accordingly, the shares were transferred and the assessee company received dividend on January 18, 1957. Initially, the assessee included the dividend income in the assessment year 1957-58 but, thereafter, a revised return was filed deleting the amount in question and claiming that the same was includible in the assessment year 1952-53 but not in the year 1957-58. The Income-tax Officer included the income in the assessment year 1957-58, On appeal, the Appellate Assistant Commissioner upheld the same. On further appeal, the Tribunal held that the sugar companies irrevocably placed the shares of the cement company with the trustees for being distributed to the shareholders as dividend in specie. The dividend was unconditionally available to the members entitled thereto. If, however, the members themselves chose not to take it, it cannot be said on that ground that the dividend was not available to them. Since the dividend had been declared on January 16, 1952, and was unconditionally available to the assessee on that date it was an amount, which fell to be taxed in the assessment year 1952-53 and not in the assessment year in which it had been assessed. On a reference, the High Court, in its impugned judgment dated September 18, 1973, held that the shares were not unconditionally available for' distribution to the shareholders. The main condition for unconditional distribution was missing, i.e., the complete transfer of shares, in law, either to the trustees or to the shareholders by execution of formal documents of law. It was only after fulfilling this condition that the distribution became complete. Actual transfer did not take place in the relevant accounting year but in a subsequent year. The sugar companies in their balance-sheets were still treating the shares as part of their investments. Therefore, the amount having been received in the previous year, the amount was liable to assessment in the assessment year 1957-58. Thus, the question was answered in favour of the Revenue and against the appellant.

The question, therefore, is whether the income from the dividend was liable to be taxed in the assessment year 1957-58? It is clear from the facts that, on January 16, 1952, in the general meeting of the shareholders, two resolutions came to be passed declaring the dividend and unconditionally the dividend in specie had been made over to the trustees on the same day to hold the same in trust for the shareholders of the sugar companies whose names appeared on the registers of the sugar companies as on January 16, 1952. The purpose of the trustees holding the shares in trust was to distribute them amongst the shareholders of the sugar companies. As far as the sugar companies are concerned, they had unequivocally declared the dividend and set apart the amount towards the shares of the cement company. They had done all that lay in their power to declare and distribute the dividend. They had also, by a subsequent resolution, empowered the board of trustees to distribute the dividend amongst the shareholders of the sugar companies whose names appeared on the registers of the company on January 16, 1952. In fact, negotiable certificates were issued. But, due to the objection raised by some of the shareholders by filing company applications in the High Court and due to the order of injunction issued by the High Court, the dividend in specie could not be distributed. Ultimately, the decree of the High Court upheld the validity of the resolutions dated January 16, 1952, and in terms thereof the payments were made on January 17, 1957

From these facts, the question is whether the dividend has been irrevocably placed for distribution to the shareholders of the sugar companies. Admittedly, the appellant was one of the shareholders whose names appeared on the registers of the sugar companies as on that date and the appellant is entitled to receive the dividend in dispute towards its share from the cement company.

Section 16(2) of the Indian Income-tax Act, 1922, reads thus:

"For the purposes of inclusion in the total income of an assessee any dividend shall be deemed to be income of the previous year in which it is paid, credited or distributed or deemed to have been paid, credited or distributed to him"

Section 16(2) of the Indian Income-tax Act, 1922, prescribes special rules relating to the determination of the previous year in which the dividend is liable to be included in the total income of the assessee. It is provided thereby that, for the purpose of inclusion in the total income of an assessee, any dividend shall be deemed to be income of the previous year in which it is paid, credited or distributed or deemed to have been paid, credited or distributed to him. The question, therefore, is when the declared dividend attracts the operation of section 16(2) of the Indian Income-tax Act, 1922?

In J. Dalmia v. C.I.T. (1964) 53 TTR 83 (SC), the facts are that the interim dividend was declared to the appellant therein on December 28, 1950, and the appellant claimed that the declared interim dividend was to be assessed in the assessment year 1951-52. The Revenue assessed it for the year 1952-53. The assessee claimed that the dividend was taxable in the assessment year 1951-52. While considering the incident of interim dividend, this Court considered the scope of section 16(2) and held that a mere resolution of the directors resolving to pay a certain amount as interim dividend does not create a debt enforceable against the company, for it is always open to the directors to rescind the resolution before payment of the dividend. Whether dividend, I interim or final, is income taxable in a particular year of assessment must be determined in the light of section 16(2) of the Indian Income-tax Act, 1922. The Legislature had not made dividend income taxable in the year in which it becomes due: by the express words of the statute, it is taxable only in the year in which it is paid, credited or distributed or is deemed to be paid, credited or distributed. The Legislature has made distinct provisions relating to the year in which different heads of income become taxable. The year in which a particular class of income becomes taxable must, therefore, be determined, in the light of its true character, and subject to the special provision, if any, applicable thereto. The expression "paid" in section 16(2), it is true, does not contemplate actual receipt of the dividend by the member. In general, dividend may be said to be paid within the meaning of section 16(2) when the company discharges its liability and makes the amount of dividend unconditionally available to the member entitled thereto. It was, accordingly held that the interim dividend is only taxable in the assessment year in which the amount was actually paid. Since the dividend was paid in the previous year and the assessment year being 1952-53, it accordingly, upheld the stand of the Revenue. It is thus settled law that if the dividend declared by a company was unconditionally available to the assessee to be paid, it is taxable only in the year in which it is paid, credited or distributed or is deemed to be paid, credited or distributed.

This view was reiterated in Padmavati R. Saraiya v. C.I.T. (1964) 54 ITR(Sh. N) 5 (SC), Punjab Distilling Industries Ltd. v. C.I.T.(1965) 57 ITR 1 (SC) and C.I.T. v. Bikaner Trading Co. Ltd.(1970) 78 ITR 12 (SC). The settled law, therefore, is that, generally, the dividend would be said to have been paid within the meaning of section 16(2) when the company discharges its liability and makes the amount of dividend unconditionally available to the members entitled thereto. The Legislature had not made the dividend income taxable in the year in which it became due by express words of the statute. It was taxable only in the year in which it was paid, credited or distributed or was deemed to be paid, credited or distributed. From the facts, it is clear that the sugar companies had irrevocably placed the shares of the cement company with the trustees for being distributed to the shareholders as dividend on January 16, 1952. They have also authorised the trustees to distribute to the shareholders by issuing negotiable certificates which have been made ready. But for the order of injunction issued by the High Court at the behest of some of the shareholders, the board of trustees would have carried out the formal handing over of the dividend in specie to the respective shareholders. In view of the fact that the injunction was issued prohibiting the board of trustees or their servants from distributing the dividend to the shareholders, they could not complete the distribution thereof. Since the dividend was unconditionally available to the members entitled thereto on January 16, 1952, in specie, it must be deemed to have been paid to the assessee. W e may mention that the Delhi High Court in C.I.T. v. Bharat General Reinsurance Co. Ltd. (1971) 81 ITR 303, took the same view on the same facts and we hold that the view taken by the Delhi High Court is correct in law. It is undoubted that the sugar a companies might remain to be owners till the dividend in specie is paid over qua the cement company. But the crucial question is whether the dividend in specie was unconditionally made available for being distributed and if anything was left to the general body of the shareholders to recall the dividend already resolved to be paid. Inasmuch as the general body of the shareholders unconditionally and irrevocably had resolved to making over the dividend to the board of trustees for being distributed to its shareholders, nothing was left for the general body to recall the resolution. If any shareholder had called upon the trustees to distribute the shares falling to his share on any date between January 16, 1952, and February 22, 1952, the trustees would have been obliged to comply with the request. Nothing remained for the general body of the sugar companies to recall the dividend. In fact, the validity of the resolutions was upheld by the High Court in the compromise decree. The action of the sugar companies in showing in their balance-sheet, the declared dividend as an asset, does not have the effect of recalling the valid resolution already passed making available unconditionally the dividend for distribution to the shareholders as part of their trading activity.

Accordingly, we hold that the High Court committed a clear error in holding that the amount in question is includible in the assessment year 1957-58. We have no hesitation to hold that the companies must be deemed to have paid credited or distributed to the shareholders and the dividend income of the assessee fell to be taxed in the assessment year 1952-53 and not in the assessment year 1957-58. The reference is answered in favour of .the assessee and against the Revenue. The appeal is, accordingly, allowed but, in the circumstances, parties are directed to bear their own costs.

M.BA.//1230/TAppeal allowed.