SHAH, - (1.) THE following Judgment of the court was delivered by
(2.) THIS is a group of appeals against orders passed by the High court of Bombay in Income Tax Reference under s. 66(1) of the Indian Income Tax Act. Chellsons Ltd. a Private Company was incorporated in April 1941. The shareholders of the company at the material time were Kishanchand Chellaram holding 6 shares and Shewakram Kishinchand, Lokumal Kishinchand and Murli Tabilram each holding three shares. Kishinchand, Shewakram and Lokumal were directors of the company. At a General meeting of the shareholders of the company held on 10/07/1943, it was resolved to declare dividend at `60 per cent on the shares` of the company and for the purpose of that of declaration the profits of the year 1941-43 were included in the profit of the year 1942-43. Pursuant to this resolution, Rs. 46,000.00 were credited in the books of the company to the account of Kishinchand Chellaram on 31/03/1944 and Rs. 23,000.00 were credited to each of the other three shareholders. Another meeting of the shareholders was held on 15/07/1944, and it was resolved to declare dividend at `60 per cent on the shares` out of the profit of the company for 1943-44. Pursuant to this resolution, on 29/09/1944, Rs. 30,000.00 were credited in the company's books of account to Kishinchand and Rs. 15,000.00 were credited to the accounts of each of the other there shareholders. In their respective returns for the assessment year 1945-46, Kishinchand, Shewakram, Lokumal and Murli-who will hereinafter be collectively called the assessees-included the amounts credited to them in the company's books of account as dividends for the three years 1941-42 to 1943-44. On 4/12/1947, at an Extraordinary General Meeting another resolution purporting to' reverse the earlier resolutions dated 10/07/1943 and Ju 15/07/1944, was passed by the company. The resolution read as follows:- `The notice dated 25/11/1947 calling the Extraordinary General Body Meeting for today, was placed on the table. ` Whereas the sum of Rs. 1,90,000.00 paid to the shareholders during the year 1944-45 as per details given below viz- JUDGEMENT_390_AIR(SC)_1963Html1.htm was sanctioned by the General Body in advertently without taking into consideration the Company's liability for taxation, including E. P. T. and all the shareholders having been fully apprised of the bona fide mistake it is hereby unanimously resolved that such dividend inadvertently paid be considered as loan to such individual shareholders' and be paid back to the Company forthwith, and the consideration of any dividend to the shareholder be deferred to the next Annual General Meeting. The adjustment in this regard will not be made in the books of the Company as on 6/04/1947.` Even though this resolution was passed, and the proceedings for assessment before the Income Tax Officer were not disposed of the assessees did not file revised returns excluding the amounts credited as dividend, nor did they claim before the Income Tax Officer that those amounts not being income were not liable to tax.
(3.) BY his order dated 1/01/1950, the Income Tax Officer brought the income returned by the assessees including the amounts credited to them as dividends, for the three years to tax. In appeals to the Appellate. Assistant Commissioner, the assessees contended that the amounts credited by the Company to their accounts in respect of the years 1941-42, 1942-43 and 1943-44 were not, in view of the subsequent resolution, liable to be taxed as dividend income. 'The Appellate Assistant Commissioner rejected this plea. The assessees then appealed to the Appellate tribunal and contended that the dividends for the three years in question were declared out of capital and such declaration of dividend being under the Indian, Companies Act invalid, in the assessment the amounts, credited to their accounts as dividend should be excluded. The Income Tax Appellate tribunal held that the dividends in respect of the years 1941-42 and 1942-43, having been received before the year of account relevant to the year of assessment 1945-46, were not liable to be taxed in that year. But the tribunal confirmed the orders of assessment as to the dividend for the year 1943-44, because, in their view, the resolution declaring dividend could not be reversed by a resolution at a subsequent General Meeting after the dividends had been paid. At the instance of the assessees the Appellate tribunal referred in each of the four cases the following two questions:- (1) Whether the shareholders of the company at the meeting held on 4/12/1947 could reverse the resolutions passed on 10/07/1943 and Ju 15/07/1944 ? (2) Whether the sum of Rs............... received by the assessee............... as dividend in the account year 1944-45 relevant for the assessment year 1945-46 has been lawfully taxed in the assessment year 1945-46? If not, could only the dividends that could have been paid out of the profits or a part thereof be taxed in the assessment year 1945- 46 ? (In each set of questions the appropriate amount received and the name of the assessee was incorporated in the second question). The tribunal observed in the order of reference that the Income Tax Department challenged the correctness of the claim made by the shareholders that dividend was paid without making provision for payment of tax, but they did not desire to go into accounts to ascertain whether provision for tax was made, as `the parties at the time of the hearing of the appeals proceeded on the footing that no such provision was made. Even if provision was made, it makes no difference in so far as the Department is concerned. The question is whether any dividend has been declared out of capital and that question will have to be examined at the time of passing the order under Section 66 (5) of the Act, in view of question No. 2.` The High court declined to answer the first question because in their view it was unnecessary, and 'answered the first part of the second question in the affirmative, and hold that the second part did not on that view arise for decision. Against the order of the High court these four appeals have been preferred by the assessees.;