1969 PLP 215 (PTD)

DIXIT, C. J.‑The question which we have been asked to answer in this reference by the Income‑tax Appellate Tribunal (Delhi Bench) at the instance of the assessee is as follows: ".'Whether op a true interpretation of section 23‑A of, the Indian Income‑tax Act the 'declaration of the dividend' by the assessee‑company in its general meeting held on February 28, 1956, was tantamount to 'distribution of dividend' within the meaning of that section ?" The material facts are that the assessee is a company in which the public are not substantially interested within the meaning of the provisions of section 23‑A of the income‑tax Act, 1922. At a general meeting held on 28th February 1956, the assessee‑company passed a resolution for distribution of Rs. 15,125 as dividend. The dividend was, however, not actually paid to the shareholders up to 31st July 1956. No dividend warrants were even issued up to that date. The Income‑tax Officer computed the assessee's income for the assessment year 1955‑56 at Rs. 30,

111. He further found that the taxes levied amounted to Rs. 13,080 ; that there were no losses in the earlier years ; and that con sequently the distributable profits were Rs. 17,

031. He, however, held that as no dividend amount was actually paid td the shareholders within twelve months of the previous year, that is, before 31st March 1956, an order under section 23‑A was imperative. Accordingly, after obtaining the approval of the inspecting Assistant Commissioner the Income‑tax Officer made an order under section 23‑A directing the company to pay additional super tax (apart from the sum determined as payable by it on the basis of assessment under section 23) at the rate of 0‑4‑0 in a rupee on Rs. 17,031 being the distributable profits. The assessee then preferred an appeal before the Appellate Assistant Commissioner contending that as it had by its resolution dated 28th February 1956, declared a dividend of Rs. 15,125 which was more than 60 % of the distributable profits, the order under section 23‑A passed by the Income‑tax Officer was illegal. The Appellate Assistant Commissioner accepted this contention and held that dividend was distributed by the company on the date it was declared and this was 28th February 1956, and, as the distribution was within twelve months immediately following the expiry of the previous year, the order made by the Income‑tax Officer was bad. Accordingly, the order of the Income‑tax Officer was set aside by the Appellate Assistant Commissioner. The Department then preferred an appeal before the Appellate Tribunal which was allowed and the order of the Income‑tax Officer was restored. According to the Tribunal, the expressions "distribution of dividends" and "declaration of dividends" were not synonymous and under section 23‑A dividend is distributed when the shareholders get the amount of the dividend. The matter is governed by section 23‑A as it stood after it was amended in 1955. The portion of section 23‑A which is relevant here is as follows : "23‑A. Power to assess companies to super tax on undistri buted income in certain cases.‑(1) Subject to the provisions of subsections (3) and (4), where the Income‑tax Officer. is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the twelve months immediately following the expiry, of that previous year are less than sixty per cent. of the total income of the company of that previous year as reduced by . " The short question that arises for consideration is whether the word "distributed" as used in the above subsection means "actually paid to the shareholders" or "declared as dividends by the company". The ordinary meaning of the word "distribute" is "divide" or "apportion". Distribution in general is the act of dividing or making an apportionment. No doubt, in relation to distribution of publications or periodicals the term may mean delivery to persons. But when one speaks of distribution of a sum of money amongst a number of persons, what is connoted is the division or apportionment of the amount amongst the persons and not an actual payment of the amount of their shares. A declaration of dividend by a company is nothing but a declaration of the distribution of the profits as dividends. On the declaration of dividend, the shareholders get a right to sue the company for the amount of the dividend. It is easy to see that if distribution of dividends for the purpose of section 23‑A is taken to mean actual payment of the dividend amount to the shareholders, then it would be difficult to reconcile section 16(2) and section 23‑A. Under section 16(2) as soon as a dividend is declared, it becomes the income of the shareholder and he is liable to be assessed on the dividend income irrespective of the fact whether he has actually received it or not during the relevant assessment year. It has been held by the Bombay High Court in Commissioner of Income‑tax v. Laxmidas Mulraj Khatau ((1948) 16 I T R 248), that it is impossible to construe literally the word "paid", used in section 16(2) ; that in determining the year of taxability of dividend the material date is not when the dividend is payable or actually paid but when it is declared ; and that, therefore, if the dividend is declared in one account ing year and made payable on a date which falls within the next accounting year, the dividend is to be treated as the income of the year in which it is declared. If a company makes a declaration of dividend within the period indicated in subsection (1) but does not actually pay the dividend amount to the shareholders, then both the company and the shareholders would be assessed in respect of the dividend declared if distribution is taken to mean "payment". Thus in the case before us the shareholders of the assessee‑company would be assessed in respect of the dividend declared on 28th February 1956, and the company will also have to pay an extra super tax if it is held that the dividend income was not actually paid to the shareholders and thus distributed within the relevant period. According to the well‑settled rule of construction, the construction of section 23‑A must be harmonious with the other provisions of the Income‑tax Act. A construction which would result in inconsistency and absurdity cannot be adopted. If for purposes of section 23‑A the distribution of dividend is taken to signify declaration of dividend, then the object of section 23‑A is in no way defeated. Section 23‑A was enacted for the purpose of striking at the evasion of super tax by the shareholders of a company in which the public are not substantially interested. This object is fully carried out by giving to the word "distributed" occurring in section 23‑A the meaning of "declared". To read the word "distributed" as meaning actual payment would obviously be contrary to the object of the provision and would lead to a manifest absurdity amounting to an inconsistency with the provisions of section 16(2). We are, therefore, of the view that for the purpose of section 23‑A no real distinction can be drawn between declaration and distribution of dividend and that if dividends are declared by a company, then for the purpose of that provi sion there is a distribution of dividends. Our answer to the question referred to us is, therefore, in affirmative. The assessee shall have the costs of this reference. Counsel's fee is fixed at Rs.

100. Question answered in the affirmative: