# SUPREME OOURT FEPORTS [1963] KISHINCHAND CHELLARAM v. COMMISSIONER OF INOOME-TAX CENT HAL BOMBAY '

- **Citation:** [1963] 2 S.C.R. 268
- **Court:** Supreme Court of India
- **Decided:** 1963
- **Bench:** S. K. Das, M. liIDAYATULLAH, J.C. Shah
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/supreme-oourt-feports-1963-kishinchand-chellaram-v-commissioner-of-inoome-tax-2685
- **Pages:** 10

## Headnote

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 Appellate
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.
The tribunal held that what was paid and received as
dividend could not by a sub5equent resolution of the company
he treated as paid othcrwi1e than as dividend. The Higlli
·~ ;
I
'1
•
'J
\
·,
•
I
I
2 S.C.R.
·SUPREME COURT REPORTS
269
Court agreed with the Tribunal observing that assessment for
each year is self-contained and
subs.equent
events cannot
justify modification of the assessment.
\
The assessee came up in. appeal to the Supreme Court,
\
Held, that if the directors of the company have deliber•
alely paid or negligently been instrumental in paying dividends
\ out of capital they may have, in an action by the company or
1 if the company is being wound up at the instance of' the
1
liquidator, to compensate the company for loss occasioned by
' their wrongful or negligent conduct.
In Mntter of The Union Bank, Allahabad Ltd.
(1925)
I.L. R. 47 All. 669 approved.
Held, further, in ascertaining whether liability to pay
. income tax on dividend arose, a resolution of the company
' whereby payments made to the shareholders as dividends are
',to be treated as loans cannot retrospectively alter the charact-
. er of the payment and thereby exempt it from liability which
has already atta~hed thereto.
Held, also, the payment made as dividend by a comp·
any to its share holders does not lose the character, of dividend merely because it is paid out of capital. Under the Income Tax Act, liability to pay tax attaches as soon as dividend
is paid, credited or distributed or is declared. The Act does
not contemplate an enquiry whether the dividend is properly·
paid, credited or distributed before liability to pay tax attaches
thereto.
C.rvn. APPELLATE JURISDICTION : Civil Appeal
Nos. 462 to 465 of 1960.
Appeals from the judgment and order dated
September 26, 1955, of the Bombay High Court
I. T. R. No. 22 of 1955.
,
K. N. Rajagopal Sastri, J. K. Hiranandi and
N.H. Hingorani for the appellants.
N. D. KarkhAnis and D. Gupta for the respondents.
1962. April 19. The Judgment of the Court
was delivered by ..
Kishinc

## Text

268
SUPREME OOURT FEPORTS [1963]
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 Appellate
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.
The tribunal held that what was paid and received as
dividend could not by a sub5equent resolution of the company
he treated as paid othcrwi1e than as dividend. The Higlli
·~ ;
I
'1
•
'J
\
·,
•
I
I
2 S.C.R.
·SUPREME COURT REPORTS
269
Court agreed with the Tribunal observing that assessment for
each year is self-contained and
subs.equent
events cannot
justify modification of the assessment.
\
The assessee came up in. appeal to the Supreme Court,
\
Held, that if the directors of the company have deliber•
alely paid or negligently been instrumental in paying dividends
\ out of capital they may have, in an action by the company or
1 if the company is being wound up at the instance of' the
1
liquidator, to compensate the company for loss occasioned by
' their wrongful or negligent conduct.
In Mntter of The Union Bank, Allahabad Ltd.
(1925)
I.L. R. 47 All. 669 approved.
Held, further, in ascertaining whether liability to pay
. income tax on dividend arose, a resolution of the company
' whereby payments made to the shareholders as dividends are
',to be treated as loans cannot retrospectively alter the charact-
. er of the payment and thereby exempt it from liability which
has already atta~hed thereto.
Held, also, the payment made as dividend by a comp·
any to its share holders does not lose the character, of dividend merely because it is paid out of capital. Under the Income Tax Act, liability to pay tax attaches as soon as dividend
is paid, credited or distributed or is declared. The Act does
not contemplate an enquiry whether the dividend is properly·
paid, credited or distributed before liability to pay tax attaches
thereto.
C.rvn. APPELLATE JURISDICTION : Civil Appeal
Nos. 462 to 465 of 1960.
Appeals from the judgment and order dated
September 26, 1955, of the Bombay High Court
I. T. R. No. 22 of 1955.
,
K. N. Rajagopal Sastri, J. K. Hiranandi and
N.H. Hingorani for the appellants.
N. D. KarkhAnis and D. Gupta for the respondents.
1962. April 19. The Judgment of the Court
was delivered by ..
Kishinchond
Chtlltwam
v.
Commf•sioner Of
Incom11 .. t•x,
Centr.Z Bombay
1912
KUliinchbctl
C!Jtlla1oz
••
C•mmi•1itm#r of
Tn&tn111-la11t
Gt trol Bomi•y
210
SUPREME OOURT REPORTS [1963]
SHAH, J.-This is a. group of appeals a.gs.inst
orders pa.seed by the High Court of Bombay in
Income Tax Reference under s. 66( l) of the Indian
Income Ta.x Act.
Chellsons Ltd. a Private Company wa.s incorporated in April 1941.
The shareholders or the
company a.t the ma.teria.I time were Kishinchand
Chellaram holding 6 shares and Shewakram Kishinchand, Lokumal Kishinchand and i\Iurli Ta.hilram
each holding three shares. Kishinchand, Shewakram and Lokumal were directors of the company.
At a General meeting of the shareholders of the
company held on July 10, 1943, it was resolved to
declare dividend at "60 per cent on the shares"
of the company and for the purpose of that of
declaration the profits of the year 1941-43 were
included in the profit of the year 19-12-43.
Pursuant to this resolution, Rs. 46,000/- were credited in
the books of the company to the account of Kishinchand
Chellaram
on March 31,
1944
and
Rs. 23,000/- Wflre credited to each of the other three
ahoreholders.
Another meeting of the shareholders
was held on July 15, 1944, and it was resolved to
declare dividend at "60 per cent on the shares" out
of the profit of the company for 1943-44. Pursuant
to
this
resolution, on September 29,
1944,
Rs. 30,000/- were credited in the company's books
of account to Kishinchand and Rs. 15,000/- were
credited to the accounts of each of the other there
shareholders.
In their respective returns· for the assessment
year 1945-46, Kishinchand, Shewakram, Lokumal
and Murli-who will hereinafter be collectively called
the assessees-included the amounts credited to
them in the company's books of account a.s divi·
dends for the three years 1941-42 to 1943-44. On
December 4, 1947, at a.n Extraordinary Ge.aeral
Meeting another resolution purporting to reverse
tho earlier .resolutions dated July 10, 1943 and Jul:v
I
2 S.C.R.
SUPREME OOURT REPORTS
271
15, 1944, w&e passed by the company. The resolut-
•' r ion read as follows:-
..
\
' "The notice dated 25th November, 1947
calling the Extraordinary
General Body
Meeting for today, was placed on the table.
"Whereas the sum of Rs. 1,90,000 paid to
the shareholders during the year 1944-45 as
per details given below viziltr. Kishinchand
Chellaram
Kr. Shewakram
Kishincliand
Mr. Lokumal
Kishincband
Kr. Murli
Tahilram
Total
--
I For' I
I
, I
1941-42 1942-43 1943-44 Total
10,000 36,000 30,000 76,000
5,000 18,000 15,000 38,000
5,000 18,000 15,000 38,000
5,000 18,000 15,000 38,000
25,000 90,000 75,000 190,000
was sanctioned by the General Body inadvertently without taking into consideration the
Company's liability for taxation, including
E. P. T. and all the shareholders having been
fully. apprised of the bona fide mistake it is
hereby unanimously resolved that such dividend inadvertently paid be considered as loan
to such individual shareholders, and be paid
back to the Company forthwith, and the consideration of any div~dend to the shareholder
be deferred to ,the ne:xt Annual General-Meeting. The adjustment in this regard will not·
1901
Kishinclumd
Clul!.,•m
••
Commissioner of
JneorrU-t<U
Cenlral Bombq
Sh•h .1.
K i"""""°"4
0..U...•m
...
Commirftonn •J
1--
CNr•I B•m/Joy
8/WJ.
272
SUPREME OOURT REPORTS [1963)
be made in the books of the Company WI on
6th April, 1947."
•-.
Even though this resolution was p&BBed,
1 and the
proceedings for IM!SCssment before the Income Tax
Offi "Jer weore not diRposed of the a.ssesseeR did not
file revised returns excluding the amounts credited
as dividend, nor did they claim before the Income
Tax Officer that th•JSe amounts not being income
were not liable t-0 tax.
By his order dated January I, 1950, the Income Tax Officer brought the income returned by
the asso88ees including the amounts credited to
t.hem as <lividends for the three years to tax. In
appeals to the Appollate Assistant CommiBSioner,
the assessee~ contend<'d that the amounts credited
by the Company to their accounts in respect of the
years 1941-42, 1942·43 and 1943.44 were not, in
view of the subsequent resolution, liable to be taxed
as dividend income. The Appellate Assistant
Commissioner rejected this pica. The assessees
then appealed to the
Appellate
Tribunal and
contended that the dividends for
the three
years in
question were declared 0ut of capi-
..
'
tal and such declaration of dividend being .under
the Indian Companies Act invalid, in the &88eSSment the amount.P credited to their accounts as
dividepd should be excluded. The Income Tax
Appellate Tribunal held that the dividends in r011pect of the yea.rs 1941-42 and 1942-43, having been
received before the year of account relevant to
the year of assessment 1945-46, wore not liable to
L
be taxed in that year. But the Tribunal confirmed
the orders of assessment as to the dividend for the
year 1943-44, ·because, in their view, the resolution
declaring dividend could not be reversed by a
resolution at a subsequent Genera.I Meeting after
the dividenda had been paid. At the instanoe of )
,,
.,
\
2 S.C.R.
SUPREME COURT REPORTS
273
the assessees the Appellate , Tribunal referred in
each of the four cases the following two questions:-
(1) Whether the shareholders of the company
at the meeting held on December 4, 1947
could reverse the resolutions pa8sed on
July 10, 1943 and July 15, 1944 ?
(2) Whether the sum of Rs ............... received
by the assessee .......... ., ... as dividend in
the account year 1944-45' relevant for the
assessment year 1945-46 has been lawfully
taxed in the assessment year 1945-4 6 ? If
not, could onlJ the dividends that could
have been paid out of the profits or a
part thereof be taxed in the assessment
year 1945-46 ?
(In each set of questions the appropriate amount received and the
name of the assessee was incorporated in the second question).
The Tribunal observed in the order of reference ,
that the Income Tax Department challenged the
correctness of the claim made by the shareholders
that dividend was paid without making provision
for payment of tax, but they did not desire to go
into accounts to ascertain whether provision for
tax was made, as "the parties at the time of the
hearing of the appeals proceeded on the footing
that, no such provision was made. Even if provision
was made, it makes no difference in so far as the
Department is concerned. The question is whether
any divident has been declared out of capital and
that question will have to be examined at the time
of passing the order under Section 66 (5) of the Act,
in view of question No. 2."
The High , Court declined to answer the
first question because in their view it was unnecessary, and answered the first pa.rt· of the second
1962
Kuhinl;hand
Chdlarmn
v.
Commiasi,mer of
..-]n(fJme-lax
Qntrol Bom'ba.1
S/,,,h J.
I
Jr~
CAdl#o'"
..
Con.mi1sirnur ef
]~e lo.I'
Cmtrol Bntb•.1
Sboh J,
\
274
SUPREME OOURT REPORTS [1003]
question in the affirmative, and beld that the
second part did not on that view a.rise for de<Jision.
Against the order of the High Court these four
appeals have been preferred by tho a.aseaaeee .
The only question m"terial to these appeals
which was argued by the assessees before the
Tribunal was whether it waB competent to the
company by a. subsequent resolution to reverse an
earlier resolution declaring the dividend. The
Tribunal held that the earlier resolution could not
be rev1irsed by a. subsequent resolution, and t.herefore what was paid and received as dividend could
not by a. subllllquent resolution of the company be
treated as paid otherwise than as dividend. The
High Court held that the a.sseBBments were properly
made by the Income Tax Officer. Tney observed
that the assessment of an asseBBee for each year is
self-contained and subsequent events cannot justify
modification of the assessment.
Section 16(2) provided (in so far as it is material) that "for the purposes of inclusion in the total
income of an a.sseBBee any dividend shall be deemed
to be income of the previous year in which it is
paid, credited or distributed or deemed to have
been paid, credited or distributed to him. x x x".
It is common ground that on July 15, l!J44 dividend
was declared by a resolution of the company and
the amounts payable to
the aBBessees
were,
in
fact, credited
on
September
29,
1944,
in the
accounts
maintained by the company,
to oaoh of
the
shareholders
as
dividend.
The a.mounts
were
therefore
declared
as
dividend, treated a.a dividend and received by the
a.ssessees as dividend. The assessees included the
dividends so credited to their a.ooounts in the
returns: It may be a.ssnmed that the company
failed to provide for payment of tax before declaring dividend and that a.fter providing for payment
of ta.I, the net profi'8 of the company may not havo
·,
..
..
/
,.
t
2 S.d.R.'
SUPREME COURT REPORTs
275
been sufficient to justify declaration of dividend at
60% of the value of the shares. On that assumption
it may be inferred that the dividend or a part
thereof was in $ruth. paid out of the capital of the
compa.ny. Payment of dividend otherwise than
out
of
profiltfl
of the
year,
or
.other
undistributed profits
was
at
the
material
time prohibited by Art. 97 of Table A of the
Indian Companies Act, 1913 as
amended by
Act. XXXII of 1936 read with s. 17 (2) of the Act;
and therefore such payment may be regarded as
unlawful. If the Directors of a company have deliberately paid or negligently been instrumental in
paying dividend out of ca.pita! they may have, in an
action by the company-or if the company is being
wound up at the instance of the Liquidator-to com·
pensa.te the company for Joss occasioned by their
wrongful or negligent conduct. (In the matter of
The Union Bank Allahabad Ltd. ('). In this case we
are not concerned with the validity of the distribution of dividend, or the liability of the directors
arising out of improper distribution of dividend.
We. are concerned 'with the true character of the
payment made on September 29, 1944, to the
aBSeB!lees. If dividend is declared and the amount
is credited or paid to the share-holders as dividend
oa.n the character of the credit or payment be
altered by a subsequent resolution so as to alter the
incidence of ta.x which attaches to that amount?
·~
By virtue of s .. 16(2) the liability to pay ta:i:
attaches as soon as dividend is paid, credited or dititributed or deemed to have been paid, credited or
distributed to the shareholders and the Income Tax
Act <ionta.ins no provision for altering the incidence
or liability to pay ta.x on the dividend, merely
because it is found that in declaring dividend and
\. paying it the company violated a. prohibition
(I) (192$) J.l.,R, 47 All. li69.
1151
KisfiWllod
ci..u. ....
••
Camml.JJlo<ur •J -
c..utal· llltd!ld7
-
B/rah3.
l96Z --
Kis~Vuhan.J.
Chellaram.
v.·
Com111 isaiom,. 1f
· Income-la%'
C~nCrol Bomboy
Shah I.
'
276
SUPREME COURT REPORTS [1963]
relating to payment of dividend in the Indian Companies Act.
·
It is not: necessary to consider in this case
whether the shareholders may be compelled by the
company to refund the amount improperly paid as
dividend out of capital. Even if the shareholders
agree to ·refund the amounts received by them as
dividend the original character of the receipt as
dividend is. not thereby. altered.. In ascertaining .
whether liability to pay Income-tax on dividend·
arose, a resolution of the company whereby payments made to the.ehareholders as dividend are to
be ·treated as loans cannot retrospectively alter
the character of the payment and thereby exempt
it from liability which has already attached thereto.
Before this Court two contentions were raised
by counsel for the assesses· i (I) that on the amount
received by each of the assessees · tax was not
exigible because it was not dividend at all, and
{2) that what was declared and paid as dividend
ceased to be such by · virtue of the subsequent
resolution. . The first plea was not raised before
the Tribunal, and on the question as framed it did
not arise for decision on a reference under s. 66 of
the Indian Income Tax Act.
Tho jurisdiction of
the High Court under s. 66
being advisory, they
were concerned to give their opinion on questions
which fairly arose out of the order of the Tribunal,
and were in fact raised and referred .. The question
whether the payment made . by the Company was
not in the nature of dividend not having fairly
arisen out of the order of the Tribunal; it cannot
be raised in this Court as it could not in the High
____ Court. In any event, we are of the opinion that
payment made as dividend by a company to its
shareholders does not. lose that character merely
. because it is paid out of capital. Under the Income -
· Tax Act, liability to pay tax attaches as soon as
dividend is .:paid, cndited or distributed or is so
' '
\
2 s.c.R.
SUPREME COURT REPORTS
277
declared. The Act does not contemplate an enquiry
whether the dividend is properly paid credited or
distributed before liability to pay· Tax attaches ,
thereto.
The answer to the second contention for
reasons already set out by us must be in the
negai;ive.
The appeals therefore fail and are . dismissed.
In the circumstances of the case there will be no
order as to costs.
AppeaJ,s dismiased.
THE COLLECTOR OF CUSTOM8, MADRAS
v.
K. GANGA SETTY
(B. P. SINHA, 0. J .• P. B. GAJENDRAGADKAR, K. N.
WANCHOO, N . .RAJAGOPALA AYYANGAR and
' T. L. VENKATARAMA AIYAR, JJ.)
High, Oourt--Decision of Otl8toms A.utlwritits-Oonatruction of entiries in tariff Schedt1k-Jt1risdiction to interfere-
"Feed oats" u,sed horse feed-Whether falls withi,. "folder"
or "grain"-lmport Trade Control Schedule, Part JV.Item
Nos. 32 and 42-Specific Relief A.ct, 1877 (1 of 1877). •. 46
Item 42 of Part IV of the Import Trade Control Schedule
-permitted "fodder ..... " to be imported'Without a special import
licence from a soft Currency area ... Item 32 of the same Schedule related to "grain .... "and included oats;· and a licence
was necessary for importing goods covered by this item. The
respondent imported from Australia, without a liccncc,.goods
described as "feed·oats" for feeding race horses. He claimed
that the goods were covered by Item 42 and could be imported
without a licence. The customs authorities held that the goods
were "grains" within the meaning of Item 32 which could not
be imported without a licence, confiscated the goods and im;
posed a penalty in lieu of confiscation. The . respondent
moved the High Court for the issue of a writ of mandamus
under s, 45 specific Relief Act. The High Court held that the
11/U
---.
lfUloin</rJMd
c.wu.... ..
v. '
c-i•......,.,
.....,...,.,.
C..Wd Bomb111
8,.,,, J.
1952
A/Jf'il 19.