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Benares State Bank Ltd. v. Commissioner Of Income Tax, Lucknow .
Factual and Procedural Background
The assessee-bank, whose accounting year is the calendar year, had its registered office in the erstwhile State of Benares. On July 25, 1949, Benares Glass Works Ltd. declared a dividend and issued cheques amounting to Rs 69,000 in favour of the bank. Whether the dividend warrants were actually delivered to the bank on August 3, 1949 was left unproved in supplementary fact-finding proceedings. The cheques were in fact encashed by the bank on December 31, 1949. Meanwhile, the State of Benares merged with the Indian Union on December 1, 1949 and became part of the taxable territories (State of Uttar Pradesh). The income-tax authorities assessed the dividend in the assessment year 1950-51. The bank appealed, contending that the dividend was exempt because it had accrued while the bank was a non-resident entity located in an Indian State.
Legal Issues Presented
- Whether the dividend income became taxable only when it was “paid, credited or distributed” on December 31, 1949, or whether it should be deemed to have been received on July 25, 1949 (the date of declaration).
- Whether, by virtue of the then-existing Section 14(2)(c) of the Indian Income-tax Act, 1922, dividend income accruing in an Indian State before its merger was exempt from Indian income-tax when assessed in the year 1950-51.
Arguments of the Parties
Bank’s Arguments
- The bank was a non-resident when the dividend accrued; therefore, under Section 14(2)(c) the income was not taxable because it accrued in an Indian State and was allegedly “received” there before merger.
- The dividend should be deemed to have been received on the date of declaration (July 25, 1949), not on the date of encashment (December 31, 1949).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| J. Dalmia v. Commissioner of Income-tax | Dividend is taxable in the year it is “paid, credited or distributed,” not merely when declared; “paid” means the company has discharged its liability and made the amount unconditionally available to the shareholder. | The Court followed this ruling to hold that the dividend became taxable only when the cheques were encashed on 31 December 1949. |
| CIT v. Laxmidas Mulraj Khatan (Bombay High Court) | Held that dividend income accrues to the shareholder on the date of declaration. | The Supreme Court noted that this Bombay decision had been overruled by J. Dalmia and therefore declined to follow it. |
Court’s Reasoning and Analysis
The Court first accepted the Tribunal’s supplementary finding that there was no proof of delivery of dividend warrants to the bank on August 3, 1949. Consequently, the factual basis for treating the dividend as received before merger was absent.
Invoking Section 16(2) of the 1922 Act, the Court reiterated that dividend income is taxable only when it is “paid, credited or distributed,” relying on the Supreme Court’s earlier pronouncement in J. Dalmia. Because the cheques were encashed on December 31, 1949—after Benares had merged with India—the receipt occurred within the “taxable territories.”
Even assuming the dividend had “accrued” in an Indian State, Section 14(2)(c) exempted such income only if it was neither received nor deemed to be received in the taxable territories in the relevant previous year. Here, actual receipt in those territories on December 31 nullified the exemption. Hence, under Section 4(1)(a) the income was properly assessable in the assessment year 1950-51.
Given this conclusion, the Court found it unnecessary to decide whether the bank, if still a non-resident on July 25, 1949, could nevertheless be taxed under Section 4(1)(b)(ii).
Holding and Implications
Appeal Dismissed with Costs.
As a direct consequence, the dividend income remained taxable in assessment year 1950-51. The judgment reaffirms the principle that dividend is chargeable to tax only upon payment, credit or distribution, consolidating the authority of J. Dalmia; no new legal doctrine was created but an attempted exemption under Section 14(2)(c) was definitively rejected in comparable circumstances.
J.C Shah, Acting, C.J— By order, dated August 23, 1968, we called for a supplementary statement on the issue whether dividend warrants were delivered by the Glass Works to the Bank on August 3, 1949. The Tribunal has submitted a statement of the case that the only relevant facts proved are that the dividend was declared on July 25, 1949 and the Bank encashed the dividend warrants on December 31, 1949. The appeal must therefore be decided on the footing that the dividend warrants were handed over to the Bank by the Glass Works on August 3, 1949, is not proved.
2. The material facts which have a bearing on the point in issue are these. The year of account of the Bank is the calendar year. The State of Benares in which the Bank had its registered office merged with the Indian Union on December 1, 1949. The Glass Works declared a dividend at a General Meeting on July 25, 1949. Cheques for Rs 69,000 issued by the Glass Works in favour of the Bank in payment of the dividend were encashed by the Bank on December 31, 1949.
3. The dividend received by the Bank has been brought to tax in Assessment Year 1950-51. Counsel for the Bank urged that the Bank cannot be assessed to tax in respect of dividend accruing to it at a time when the Bank was a non-resident. It is urged that by virtue of Section 14(2)(c) of the Income Tax Act, 1922, as then in force, the income received by the Bank was not liable to be taxed. At the relevant time, Section 14(2) (c), read as follows:
“(2) The tax shall not be payable by an assessee—
* * *
(c) in respect of any income, profits or gains accruing or arising to him within an Indian State, unless such income, profits or gains are received or deemed to be received in or are brought into the British India in the previous year by or on behalf of the assessee. or are assessable under Section 12-B or Section 42.”
By the Adaptation of Laws Order, 1950, the words “an Indian State” were substituted by the words “-a Part D State”, and the words “British India” were substituted by the words “taxable territories”. Section 2(14-A) — (which was also incorporated by the Adaptation of Laws Order, 1950, with effect from April 1, 1950) insofar as it is material provides:
“‘taxable territories’ means—
(a) * * *
(b) as respects any period after the 14th day of August, 1947, and before the 26th day of January, 1950. the territories for the time being comprised in the Provinces of India, but excluding the merged territory of Cooch-Behar,
* * *
Provided that the taxable territories shall be deemed to include—
(a) the merged territories—
(b) as respects any period after the 31st day of March. 1949, for any of the purposes of this Act, and
(c) * * *”
4. The State of Benares after merger on December 1, 1949, with the Dominion of India formed part of the State of Uttar Pradesh and was on that account part of the taxable territories by virtue of the definition contained in Section 2(14-A) of the Indian Income Tax Act. Assuming that the dividend accrued within an Indian State, it was received by the Bank in the taxable territories on December 31, 1949, and by the express words contained in Section 14(2)(c) of the Indian Income Tax Act, 1922, before it was omitted by the Taxation Laws (Extension to Jammu and Kashmir) Act, 1954, it was not exempt from liability to payment of tax even if the right thereto had accrued to the Bank in an Indian State.
5. It was then urged that the dividend must be deemed to have been received by the Bank on July 25, 1949 — the day on which it was declared and on that date the Bank being a non-resident it could not be brought to tax. But under Section 16(2) of the Indian Income Tax Act, 1922, the dividend income was taxable only in the year in which it was paid, credited or distributed, or was deemed to be paid, credited or distributed. This Court observed in J. Dalmia v. CIT that the expression “paid” in Section 16(2) does not contemplate actual receipt of the dividend by the member: in general, dividend may be said to be paid within the meaning of Section 16(2) when the company discharges its liability and makes the amount of dividend unconditionally available to the member entitled thereto. It was also held that the Act does not make dividend Income Taxable in the year in which it becomes due; it is taxable only in the year in which it is paid, credited or distributed. The Court overruled the decision of the Bombay High Court in CIT v. Laxmidas Mulraj Khatan in which it was held that when dividend is declared, liability arises on the part of the company to make that payment to the shareholder and with regard to the shareholder when the income represented by that dividend accrues or arises to him, and that the fact that the actual payment of the income is deferred is immaterial and irrelevant.
6. In the present case there is no evidence that before December 31, 1949, dividend was paid, credited or distributed to the Bank. By virtue of Section 4(1)(a) of the Income Tax Act, 1922, the income was held properly taxable in Assessment Year 1950-51. It is unnecessary therefore to consider whether even if the Bank was a non-resident on July 25, 1949, by virtue of Section 4(1)(b)(ii) it was liable to be taxed in respect of the dividend income in the year of assessment 1950-51.
7. The appeal fails and is dismissed with costs including the costs of the hearing at which the order calling for a supplementary statement was made.
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