Commissioner of Income Tax vs South Arcot Electricity Distribution Company Ltd.

Ramanujam, J.—The Assessee in this case is an Electricity Distribution Company by name M/s. South Arcot Electricity Distribution Co., Ltd. Madras. The Board of Directors of Company by a metting held on 25th April, 1957 declared an interim dividend at 6 1/2 per cent on ordinary shares. The aggregate amount of such dividend came to Rs. 1,08,797. By the same resolution, they had also declared a final dividend of 3 per cent on first preference shares and 5 1/2 percent on second preference shares. The amount of dividend on such preference shares came to Rs. 40,000. Thus in all an aggregate amount of Rs. 1,48,797 was declared as dividend. After the declaration of the dividends as aforesaid, the undertaking of the Company was taken over by the Government under the provisions of the Madras Electricity Supply Undertakings (Acquisition) Act, 1954. As a result thereof, the undertaking came to be vested in the Government with effect from 1st June,1957. Consequent to the said take over of the undertaking,under Section 6 of the said Act all the property of the undertaking including all its liabilities became vested in the Government. At the time of computation of the compensation payable to the Company for the taking over of the undertaking, the Government took up the stand that the liability of the Company for payment of dividends to its share-holdres need not be compensated while the Company insisted on payment of the compensation for the liability to pay dividends to its share-holders which bad been declared long before the undertaking was taker over. The dispute was referred to arbitration and the award of the arbitrator was to the effect that the State Electricity Board was bound to pay compensation in relation to the liability undertaken by the Company for payment of the dividends to the share-bolders. The award of the arbitrator was contested before this Court in Original Petition No. 217 of 1963 and Origin .1 Petition Nos. 20 and 37 of 1964. The Court held that the Electricity Board is bound to compensate for the liability incurred by the Company in respect of the interim dividend declared on 25th April, 1957. The matter was taken up further by way of appeal by the Electricity Board to a Division Bench of this Court. Pending the appeal, the Electricity Board was directed by the Court to deposit the entire sum of Rs. 1,48,797 which was the amount in dispute between the parties, with the Central Bank of India. Accordingly, the said amount was deposited by the Electricity Board with the Central Bank of India. The deposit was renewed and when ultimately the appeal filed by the Electricity Board was dismissed, the amount deposited with the Bark became payable to the Company. The Company, in fact, withdrew the amount deposited with the Central Bank of India pending the appeal, along with the accrued interest, and later on the Company paid the aggregate sum of Rs. 1,48,797, by way of dividends to the sh"ue-holdeis. But the amount received by them by way of interest on the deposit was not distributed to the share-holders but retained by the Coampany.

For the accounting year ending 31st March, 1973, the Company through its liquidator filed a return, showing a loss of Rs. 30,583. While considering the said return, the income tax Officer held that a sum of Rs. 8,928 which has been received as interest from the Central Bank of India on the deposit of Rs. 1,48,797 should be taken as the Assessee''s income and brought to tax. The income tax Officer completed the assesment on the basis that the sum of Rs. 8,928 was one of the items of income of the Assessee during the assessment year. The Assessee took the matter in appeal to the appellate Assistant Commissioner, who, however, accepted the Assessee''s case and deleted the sum of Rs. 8,928 holding that the intrest accruing on the deposit could not be treated as the income of the Assessee-Company.

Aggrieved against the decision of the Appellate Assistant Commisioner, the Revenue took the matter in further appeal to the Tribunal. The Tribunal accepted the view taken by the Appellate Assistant Commissioner and held that the interest amount could not be assessed as the income of the Assessee. Aggrieved against the decision of the Tribunal, the Revenue obtained a reference on the following question of law:

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the interest income of Rs. 8,928 received from the Central Bank, Madras, on the deposit of Rs. 1,48,797 was not assessable to tax in the bands of the Assessee for the assessment year 1973-74.

From the facts set out above and in the face of the question referred, the substantial point for consideration is as to whether the interest amount could be assessed as the income of the Assessee. The Tribunal has taken the view that the amount of Rs. 1,49,197 deposited by the State Electricity Board does not represent the funds of the Assessee and therefore the interest which bad accrued in respect of the said deposit could never be the income of the Assessee. Thus, according to the Tribunal, as interest had not accrued on any funds belonging to the Assessee, the same could never become the income of the Assessee and, inasmuch as the interest was paid by the Central Bank on the amount which never belonged to the Assessee it is clear that the interest income had not accrued to the Assessee and as such the interest income could not be assessed in the hands of the Assessee ever if it has been retained by the Assessee. The question is, whether the view taken by the Tribunal that the amount deposited does not belong to the Assessee, could legally be sustained.

After hearing the counsel on either side and after due consideration of the case, we are of the view that the view taken by the Tribunal is erroneous. It is well-established that once the Assessee-Company declares the dividend, the liability to pay the dividend becomes a debt and this debt was in existence on the date of the take-over of the undertaking. It cannot be disputed that under basis A of Section 5 of the Madras Electricity Supply. Undertakings (Acquisition) Act, 1954, all the properties of the Assessee including its liabilities had vested in the Government by virtue of Section 6. The Assessee''s liability to pay dividends to the share-holders, which has become a debt, has also vested in Government. When the Government raised a dispute that it is not liable to pay compensation in relation to the Assessee''s liability to pay dividends to its share-holders, which has become a debt, their contention was not accepted by the Arbitrator, a single Judge of this Court and ultimately by the Division Bench of this Court. When the appeal was pending before the Division Bench of this Court, a sum of Rs. 1,48,797 was deposited as per the direction of the Court. Subsequently, the appeal by the Electricity Board has been dismissed and therefore the sum of Rs. 1,48,797, which, was deposited as compensation, has become payable to the Company When once the sum of Rs. 1,48,797, which was deposited by the Electricity Board has taken as having been paid as part of the general compensation, which the Government has to pay to the Company for the acquisition of the undertaking it should be taken to belong to the company. It is to be remembered that there was privity between the share-lolders and the Government which acquired the undertaking and the liability it pay dividends is only on the Company and not on the Government. The liability of the Government is only to pay compensation to the company in relation to all the assets and liabilities taken over by them. The Government is not under liability to pay the dividends to the share-holders, as that liability is entirely with the Company. In this situation, we do not see how the sum of Rs. 1,48,797 deposited by the Electricity Board can be said to be an amount not belonging to the Company. Once the said sum is treated as part of the general compensation payable for the acquisition of the. undertaking, then it will continue to belong to the Company, though the said amount stood deposited in the Central Bank as per the direction of this Court. The said sum of Rs. 1,48,797 has earned the disputed interest amount of Rs. 8,928. Once it is held that the sum of Rs. 1,48,797 belonged to the Company as part of its general compensation payable by the Government, the interest accrued thereon also belonged to the Company. Therefore the view taken by the Tribunal that the sum of Rs. 1,48,797 deposited by the Government pending appeal before this Court, does not belong to the Company and therefore the interest amount also does not belong to the Company cannot be legally supported.

The view taken by us gets support from the decision of the Supreme Court in The General Assurance Society Ltd. Vs. The Life Insurance Corporation of India, . In that case, the following passage in Palmer''s Company Law twentieth edition, at page 625 was referred to with approval:

Where a dividend is delcared and becomes payable, it is a debt-in England as will be explained in the following section a specifically debt-and each share-holders is entitled to sue the Company for his proportion. Until the dividend is declared and payable, the share-holder has no right to sue.

The following observations of Romer J., in In re, Seven and Wye Seven Bridge Railway Co. (1896) I Ch. 559, 564, 565. have also been referred;

In the first place, they contend that the Company was in the position of a trustee for them of these dividends. In any judgment, this was not so. The declaration that the dividend was payable did not make the company a trustee of it for the share-holders. (page 565).

The dividends in question were declared and became payable more than twenty years before the present claims were made, and constituted debts due to the share-holders for which they could have sued at law, as was pointed out by Lindlay L.J., in the passage in bis treatise on company law (page 437), which was cited in the argument before me (page 564).

Having regard to the above observations which make it clear that the company is not in the position of a trustee so far as the dividends declared are concerned to the share-holders and that as soon as the dividends are declared, the company becomes a debtor and the share-holders become creditors in relation to the dividend declared. The share-holders of the company in the present cases were only in the position of creditors in respect of the dividends declared in their favour and the amounts representing the dividend continued to be part of the assets of the company which were taken over by the Government under the Acquisition Act. It is not in dispute that in the present case the dividend amounts have not been paid by the company and the company''s assets to that extent got released from the liability to pay the same before taking over of the undertaking. Thus, the legal position is that the amount equivalert to the dividends declared continued to be part of the assets of the company, while the dividends continued to be the company''s debts. In view of this position, the amount deposited by the Governmert as part of the compensation with the Bank continued to be the fund of the company and the view of the Tribunal that the amount deposited by the Government in favour of the company is not part of its assets is obviously erroneous.

Since the entire order of the Tribunal is based on this erroneous assuumption that the amount deposited did not belong to the company and, therefore, the interest accrued thereon also will not belong o the Assessee-company, the same stands vitiated. In this view of the matter we have to answer the reference in the negative and in favour of the Revenue.

The learned Counsel for the Assessee-Company contends that even assuming that the interest accrued on the amount deposited by the Government is an income in the hands of the Assessee-company, it is a windfall and will amount to a casual income which is not assessable to tax. This question does not appear to have been urged before the Tiibunal and there is no reference to this aspect by the Tribunal. Since this question does not arise out of the order made by the Tribunal, we refrain from expressing any opinion on the same.

In the result, We answer the reference in the negative and in favour of the Revenue. The Revenue will be entitled to its costs.