Srinivasan, J.
1. The question referred to us is:
'Whether, on the facts and in the circumstances of the case, the amount, viz., interim dividend of Rs. 42,500, credited in the accounts of the shareholders of the company, was a distribution of dividend as contemplated by the Finance Act of 1956 '
2. The assessee is a private limited company with a paid-up capital of Rs. 3,40,000. During the account year relevant to the assessment year 1956-57, the general body, at its meeting held on 2nd July, 1955, declared a dividend ofRs. 59,500. On 28th December, 1955, the board of directors resolved to pay an interim dividend of Rs. 42,500. This latter amount was credited to the accounts of the individual shareholders of the company entitled to that interim dividend. The actual payment of the dividend was however made to the members after the close of the accounting year which was on 31st December, 1955. The Income-tax Officer applied the provisions of the Finance Act of 1956, as the total dividend declared came to Rs. 1,02,000 which was in excess of 6 percent, of the paid-up capital of the company. The rebate which the company was entitled to was reduced in the mariner specified in the Finance Act. The result was that the rebate of Rs. 27,456, which the company would have been entitled to if the dividend declared was not in excess of 6 per cent. of the paid-up capital, became reduced to Rs. 13,006. The assessee-company objected to the disallowance of the full rebate contending that, though the board of directors resolved to pay the interim dividend specified above, there was no distribution of that dividend within the accounting year and that therefore the interim dividend of Rs. 42,500 should not be taken into consideration in the computation of the tax liability of the assessee-company for the assessment year 1956-57. An appeal was taken to the Appellate Assistant Commissioner who held that the assessee did in fact distribute to its shareholders during the previous year in question the total amount of Rs. 1,02,000. On a further appeal to the Tribunal, the Tribunal came to a different conclusion. It took the view that a distinction had to be made between what was declared and what was distributed and that there was no distribution in the sense of payment out to the shareholders. In the opinion of the Tribunal, the mere credit to the accounts of the members would not amount to a distribution, particularly with regard to interim dividend. The Tribunal thought that such a distinction was apparent in the Income-tax Act itself, having regard to the previous Finance Act of 1955, where a different phraseology was employed in this connection. The result was that the sum of Rs. 42,500 was directed to be deleted from the computation of the total dividend paid during the relevant year of account.
3. On the application of the Commissioner of Income-tax under Section 66(1) of the Act, the Tribunal has submitted the question set out above for the determination of this court. It is accepted by the assessee that the accounts of the company are made up according to the mercantile system. It is not also denied before us that the credit of the proportionate amount of dividend to each one of the shareholders in the accounts of the company operated as an admission of liability of the company towards the shareholders. But what is contended for is that the declaration of interim dividend does not create a debt enforceable by a shareholder and that it is open to the general body, if it differs from the shareholders, to rescind the declaration of interim dividend by the board of directors and even recall the amounts if they had been actually distributed to the shareholders. On the other hand, on behalf of the Commissioner, the argument is that, having regard to the powers conferred upon the board of directors, there was a valid declaration of the dividend in favour of the shareholders and this declaration, the more so when it was followed by thenecessary credit entries made in the accounts of the shareholders, amounted to a distribution, inasmuch as a right was conferred upon the shareholder to recover this amount.
4. Under the Finance Act of 1955, the rate of income-tax leviable in the case of every company was 4 annas in the rupee and a rebate of 1 anna per rupee was allowed on the amount of the excess, where the total income, as reduced by 7 annas in the rupee and by the amount, if any, exempt from income-tax, exceeded 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. The expression used in connection with the dividends was ' any dividends declared '. No rebate was contemplated under that Finance Act in respect of super-tax. In the Finance Act of 1956, the rate of income-tax on companies was 4 annas in the rupee with no relate thereon. But supertax at the rate of 6 annas 9 pies in the rupee on the whole of the total income of the company was leviable, and in the case of a company of the class to which the assessee belongs, a rebate of 4 annas per rupee of the total income was allowed. It is this rebate that is curtailed in cases where there has been a distribution of dividend to the shareholders in excess of 6 per cent. of the capital. The relevant part of the provision reads:
' Provided further that-
(i) the amount of the rebate..... of the preceding proviso shall be reduced by the sum ..... computed as hereunder:--.....
(b) in addition, in the case of a company referred to in Clause (ii) of the preceding proviso which has distributed to its shareholders, during the previous year dividends in excess of 6 per cent. of its paid-up capital, not being dividends payable at a fixed rate-- .....'
5. It is the expression that occurs in this proviso ' which distributed to its shareholders ' that calls for an interpretation.
6. At the outset it may be stated that this is a company which has adopted Table A in the Schedule to the Companies Act of 1913. The relevant articles of that Table provide that the company in general meeting may declare dividends, but no dividend shall exceed the amount recommended by the board. The board may from time to time pay to the members such interim dividends as appear to it to be justified by the profits of the company. It is undeniable that the board of directors is competent to declare dividends without reference to the general body if the payment of such interim dividends appear to be justified by the profits of the company. In the present case, the board of directors did resolve to pay this interim dividend of Rs. 42,500, and further carried into effect their resolution by crediting the accounts of the shareholders with the proportionate amount of dividend payable to each of them. Prima facie, it would appear that such action taken by the board of directors amounts to a distribution. But the learned counsel for the assessee contends that the action taken by the directors is only provisional subject to a -possible revocation by the general body and for that reason it cannot be said that there has been distribution of the dividend.
7. In In re Severn and Wye and Severn Bridge Railway Company, the effect of the declaration of a dividend by a company came to be considered. It appearedthat dividends had been declared and credited to the accounts of the shareholders and had remained unclaimed for a long number of years. On the liquidation of the company on its amalgamation with another company under Act of Parliament, the liquidators sought for a determination of the question whether the unclaimed dividends should be paid to the legal personal representatives of the shareholders or whether the sums could be treated as part of the general assets of the new company available for distribution among its preference and ordinary shareholders. This was opposed by the personal representatives of the shareholders contending that the company was in the position of a trustee for them and that the Statute of Limitations on which the company relied would not apply. Romer J. observed :
' The dividends in question were declared and became payable more than 20 years before the present claims were made, and constituted debts due to the shareholders for which they could have sued at law. . . .'
8. Dealing with the argument that the company had become a trustee, the learned judge said :
'The declaration that the dividend was payable did not make the company a trustee of it for the shareholders. Nor did the company or its successor, the amalgamated company constituted by the Act of 1879, ever constitute itself a trustee. In the books of the two companies an account was kept as of a liability in respect of the unclaimed dividends. But the entry in the books of a debtor of a liability to a creditor does not constitute the debtor a trustee of the amount of that liability for the creditor.'
9. The ratio of this decision is to our minds that on and after the declaration of the dividend by a competent authority the company becomes the debtor of the shareholder and the shareholder is entitled to institute an action for payment of the dividend.
10. In Lagunas Nitrate Co. Ltd. v. Schroedar and Co. and Schmidi, the case of a declaration of an interim dividend by the directors arose. What happened therein was that the directors resolved that an interim dividend should be declared payable on a certain date. Prior to that date, the directors, on the advice of their counsel, decided that the payment of the dividend should be postponed pending the termination of certain litigation. In the meantime, the amount of the interim dividend was transferred to a separate account and kept with the bankers. That amount was offered as a mortgage security to those bankers and when the company sought to obtain repayment of the balance of that amount after discharging the mortgage, the bank declined to do so, alleging that that part of the sum in deposit with them belonged to the shareholders of the company. Joyce J., in dealing with the matter, referred to Lindley and Buckley on Company Law and took it as the accepted position that where a dividend is declared, it becomes a debt due from the company to the shareholders. Dealing with the payment of an interim dividend, the learned judge took the view that there is no reason to hold that the board of directors could not, acting bona fide, reconsider its decision as to whether the interim dividend should be paid at all.
11. The learned judge pointed out that the board had a discretion to take the decision on the question of payment of interim dividend having regard to the position of the company and that it was competent to the board to reconsider the matter and decide against the payment of interim dividend. This decision has been relied upon by the learned counsel for the assessee in support of his argument that, though there was no doubt a resolution of the board of directors, that by itself would not amount to the creation of an enforceable right on the part of the shareholders, subject, as the decision of the board was, to what the general body might decide. This decision does not go to that extent. What it decides is merely that the board could reconsider the matter acting bona fide in the interests of the company. An important feature of that case was that there was no specific appropriation of the funds for the purpose of making the payment and that is referred to by the learned judge.
12. In the present case, however, it is not the contention of the assessee that the resolution of the board of directors was in any way improper or that there were not sufficient profits to justify the declaration of the interim dividend. Nor is it denied that the accounts of all the shareholders were credited with the various amounts, a feature which, in the light of the decision in In re Severn and Wye and Severn Bridge Railway Company, [1896] 1 Ch. D. 559., would create a right in the shareholder to sue for the amount on that day.
13. In Dalmia v. Commissioner of Income-tax, ., a different aspect of the matter was considered. The board of directors declared an interim dividend and issued dividend warrants to the assessee on December 28, 1950. This date fell within the assessee's accounting period, 1st October, 1950, to 30th September, 1951. The amount of dividend was held to be assessable in the assessment year 1952-53. That decision was undoubtedly correct if regard is had to the date on which the dividend warrants were issued. But the contention of the assessee was that, since declaration of the interim dividends was on 30th August, 1950, it fell within the earlier accounting period and should be brought to tax only in the assessment year 1951-52. This contention was repelled, reliance being placed upon the two decisions we have cited above. The learned judges of the Punjab High Court thought that the expression 'declare', appearing in the relevant article in Table A conferring the power on the directors to declare interim dividend, did not stand on the same footing as the declaration at the company's general meeting. Considering that the directors could rescind the earlier resolution declaring an interim dividend before it was actually paid, the learned judges came to the conclusion that the relevant date for the purpose of considering the assessability was the date on which the dividend warrants were issued. The question was considered from a different angle in Commissioner of Income-tax v. Laxmidas Mulraj Khatau, [1948] 16 I.T.R. 248.. It is not necessary to refer in detail to the facts. The decision was that, as soon as the dividend was declared, that dividend became the income of the assessee and that it was the date of the declaration that was relevant for the purpose of deciding in which year the assessee was to be assessed in respect of that income.
14. We are unable to accept the argument of the counsel for the assessee that the declaration of the interim dividend on the 28th December, 1955, did not, in the circumstances of the case, amount to a distribution of the dividend. Had the matter rested only with the resolution of the board of directors to that effect, it is possible that the contention of the assessee might have some substance. But when the resolution was followed up by actual credits of the amounts made in the accounts of the shareholders and a consequent acceptance of liability by the company together with the creation of a right in the shareholders to sue for the amounts, it would be hardly consistent with the facts to hold that there was no distribution. It is not the complaint that the company did not have sufficient profits to justify the declaration of the interim dividend or that the board was not competent to do so. Taking all of these circumstances into consideration, we are of the view that the Finance Act of 1956 did apply and that the reduction of the rebate for the reasons stated was fully authorised. The question is accordingly answered in favour of the department which would be entitled to its costs. Couusel's fee Rs. 250.