ANGUS CO LTD Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(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.

(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.