Kishinchand Chellaram v. Commissioner of Income-Tax Central Bombay

268 SUPREME OOURT FEPORTS [1963]

I

KISHINCHAND CHELLARAM

v.

COMMISSIONER OF INOOME-TAX CENT HAL BOMBAY '

(S. K. DAS, M. liIDAYATULLAH and J.C. SHAH, JJ.)

lnC<>fM Tax- Dit-idend declared by company inadvtr· u!'Uy wilohut prodding for taxation--Can the character of dividend be altered to a loan by " subsequent reso/utionlndian Income-Tax Act, 1922 (11 pf J.922), s. 16 (2).

Chellsons Ltd., a private Ltd. Company, declared divi· dends without taking into account the company's liability for taxation, including Extra Pro6ts Tax. The dividends so declared were credited in the books of the compony to the accounts of each of the share-holders. Share-holders in their return for the relevant assessment year included the amounts credited to them in the company's books of account.

Payment of dividends otherwise than out of profits of the year, or other undistributed profits was at the material time prohibited, by Art. 97 of Table A of the Indian Companies Act, 1913, as amended by Act XXXII of 1936 read withs. 17 (2) of the Act; therefore such payment could not be regarded as lawful, the company having failed to provide for payment of tax before declaring dividend. On discovering its mistake at an :t--:xtra Ordinary General Meeting another revolution pur· porting to reverse the earlier resolutions declaring the dividends was moved, and the sharehoJders unanimously resolved inter alia that all the shareholders having been full} appriscd·of the bonajide mistake, the dividends inadvertently paid be considered as loans to such individual shareholders. Before the Income Tax Officer the assessee who was a shareholder did not fi)c a re\o;scd return, nor did he cJaim that the amount received by him was not liable to tax. But on appeal before the Appe- llate Assistant Commissioner the assesscc contended that amount credited by the company to his account y,·as not in view of the subsc:qucnt resolution, liable to be taxed as dividend income. 1"he plea was rejected. Before the Tribunal the assessce contended that the dividends were declared out of capital and such declaration was invalid under the Companies Act.