WEST COAST PAPER MILLS LTD Vs. COMMISSIONER OF INCOME TAX BOMBAY

JUDGEMENT

(1.) THE question raised on this reference arises out of an order made against the assessee treating it to be under default under section 18 (7) of the Indian Income-tax Act, in respect of the taxes that should have been deducted and paid but not paid by it. The assessee is a public limited company incorporated on the 25th March, 1955. Part of its paid up capital consists of 60,000 6% (free of tax) cumulative preference shares of Rs. 100 each. The company's year of account ended on the 30th of June of each calendar year and in the first three years of its existence, viz. , in the years ended on 30th June, 1956, 30th June, 1957, and 30th June, 1958, the company did not make any profits out of which it could distribute dividends and, therefore, no dividend was declared on the preference shares with reference to those three years. In the next year thereafter, which was the year ended on the 30th June, 1960, the company made profits. During the course of this year, on 9th February, 1960, the board of directors of the company passed a resolution "that the dividend on the 60,000 cumulative preference shares of the company of Rs. 100 each in respect of the years ended 30th June, 1956, and 1957, remaining in arrears be paid at the rate of 6% free of tax out of the profits of the current year ending on 30th June, 1960. " On 30th May, 1960, they passed a similar resolution for the payment of dividend on the cumulative preference shares which had remained in arrears in respect of the third year ended 30th June, 1958. In accordance with these resolutions, the dividends were actually paid from 25th April, 1960, and 24th June, 1960, respectively. Adjustments with reference to these dividends were made in the balance-sheet prepared as at 30th June, 1960, and in the said balance-sheet a sum of Rs. 7,56,000 was shown as preference share dividend for the three years ended 30th June, 1958. At the annual general meeting of the company, which was held on 28th March, 1961, the payments of the dividends on the cumulative preference shares in accordance with the resolutions passed by the board of directors were confirmed by the said annual general meeting and dividends on preference shares for the subsequent years, viz. , 1958-59 and 1959-60, as proposed by the board of directors were also passed. Now, by the Finance Act of 1959, certain changes were introduced in the scheme of taxation of the company and of the shareholders. By section 9 of the said Act, which introduced an amendment in section 18 (3d) of the Indian Income-tax Act and also introduced a further sub-section as and (3e), an obligation was imposed upon the company to deduct tax on dividends declared by the company and remit it to the Government. By section 19 (2) of the Finance Act, the provisions introduced by section 18 (3d) and 3 (E) were brought into force with effect from April 1, 1959. Sub-section (4) of section 19 of the Finance Act, however provided an exemption from the operation of the provisions of section 18 (3d) and (3e) in certain circumstances. The extent of the exemption permitted under this sub-section was modified with retrospective effect by the Finance Act of 1960. The provisions of section 19 (4) as amended subsequently with retrospective effect was as follows :

(2.) THE company did not deduct the taxes from the dividends declared on February 9, 1960, and May 30, 1960, and paid out subsequently in April and June, 1960, because in its opinion they were entitled to exemption from the operation of section 18 (3d) and (3e) by reason of section 19 (4) of the Finance Act. In the course of the assessment of the company for the assessment year 1960-61, the Income-tax Officer took the view that the company ought to have deducted the tax in respect of the said dividends, as they were not entitled to the exemption contained in section 19 (4) of the Finance Act. In his opinion, therefore, the company was liable to be treated as having committed a default under section 18 (7) of the Income-tax Act. He, therefore, called upon the company to show cause why action under section 18 (7) should not be taken against it and ultimately made an order under the said section to the extent of Rs. 2,32,748. 70. According to the Income-tax Officer, since the dividends were declared out of the profits of the previous year ended 30th June, 1960, they were in the nature of interim dividends pertaining to the previous year relevant to the assessment year 1961-62 and, consequently, not entitled to exemption under section 19 (4) of the Finance Act, which gave that exemption in relation to dividends declared in respect of any previous year, relevant to any assessment year prior to the assessment year prior to the assessment year 1960-61. The view taken by the Income-tax Officer was confirmed in appeal by the Appellate Assistant Commissioner, who observed that, as the dividend had been declared out of the income of the year for which the relevant assessment year was the year 1961-62, provisions of section 19 (4) of the Finance Act were clearly inapplicable to the said dividends. In the further appeal to the Income-tax Appellate Tribunal, it was contended on behalf of the assessee that the view taken by the Income-tax Officer and the Appellate Assistant Commissioner that, because the dividends were paid out of the profits of the previous year 1959-60, relevant to the assessment year 1961-62, the exemption under section 19 (4) of the Finance Act was not available, was clearly wrong. It was argued that the dividends, which the company had declared on 9th February, 1960, and on 30th May, 1960, were in respect of the three years ended the 30th June, 1956, 30th June, 1957, and 30th June, 1958, for which the dividend to which the preference shares were entitled in respect of the said three years. The dividend for the previous year 1959-60 on the preference shares was declared at the annual general meeting but the earlier dividends, which were declared on 9th February, 1960, and on 30th May, 1960, were not in respect of the year 1959-60 but in respect of the earlier years. It was argued on behalf of the assessee that section 19 (4) of the Finance Act was enacted to give exemptions in respect of such dividends which were in respect of the earlier years and which were declared between the dates 1st April, 1959, when the new obligation of deducting tax source was imposed on the company, and the 30th June, 1960.

(3.) THE Tribunal did not accept this contention, which was put forth by the assessee. Relying on two English decisions, one in In re Wakley and the other in Godfrey Phillips Ltd. v. Investment Trust Corporation Ltd. , it took the view that dividends on cumulative preference shares, which are in arrears, when subsequently paid, do not constitute dividends in respect of the years in which they are declared. In that view of the matter, the Tribunal was of the opinion that the dividends declared by the company on February 9, 1960, and May 30, 1960, were dividends in respect of the year 1959-60 and consequently in respect of the previous year relevant to the assessment year 1961-62. The dividends, therefore, were not entitled to exemption under section 19 (4) of the Finance Act, 1959, and the company was under an obligation to deduct taxes on the said dividends and pay it over to the Government. According to the Tribunal, therefore, the Income-tax Officer was right in making an order under section 18 (7) of the Indian Income-tax Act against the company. The assessee applied under section 66 (1) of the Income-tax Act for a reference to this court and on the said application the Tribunal has referred the following question to this court as arising out of its order :