CHAKRAVARTTI, C. J. - (1.) 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 ?
(2.) THE question has arisen in the following way. THE assessee, the Angus Company Ltd, 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 cl. 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 121/2 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. Without 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. Sec. 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 31st day of March, 1950, and no order has been made under sub-s. (1) of s. 23A of the IT 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.
(3.) AS I have already said, in respect of its ordinary shares the company declared a dividend of 121/2 per cent free of income-tax and paid a sum of Rs. 9,17,063 which represented the full 121/2 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 ITO to be wrong, but by the AAC to be right and again held to be wrong by the 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 ?" ;