Kerala H.C : Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that only the discounted value of the gross dividend declared by Nirlon Synthetic Fibres & Chemicals Ltd. on 30th Sept., 1975, but failing due on 5th July, 1976, and 5th July, 1977, was includible and not the net dividend ?

Counsel Appeared

N. Srivinasan & P. Krishnamoorthy, for the Assessee : P. K. Ravindranathan Menon, for the Revenue

T. KOCHU THOMMEN, J.:

The following three questions have been, at the instance of the assessee, referred to us by the Tribunal, Cochin Bench :

“1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that only the discounted value of the gross dividend declared by Nirlon Synthetic Fibres & Chemicals Ltd. on 30th Sept., 1975, but failing due on 5th July, 1976, and 5th July, 1977, was includible and not the net dividend ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the tax deducted at source from the dividends cannot be excluded in determining the market value of the deferred dividends declared ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the interest due and payable by Nirlon Synthetic Fibres and Chemicals Ltd. on the deferred dividend on 5th July, 1976, and 5th July, 1977, under the provisions of the Companies (Temporary Restrictions on Dividends) Amendment Act, 1975, was an asset held by the assessee on the valuation date and, therefore, includible in the net wealth at a discount ?

Question No. 2 is covered by our judgment in I.T.R. No. 190 of 1982 (Her Highness Setu Parvati Bayi, Maharani of Travancore vs. CWT (1988) 170 ITR 197) and it is accordingly answered in the negative, that is, in favour of the assessee and against the Revenue.

As regards the other two questions, certain facts have to be noticed. The Companies (Temporary Restrictions on Dividends) Act, 1974 (Act No. 35 of 1974), imposed under s. 4 a ban for a period of two years from 6th July, 1974, on the distribution of dividends in excess of, in the aggregate, the” distributable profits ” of the company for the relevant financial year. Any distribution in excess of what was stipulated under s. 4 was declared under s. 5 to be void. This Act was amended by the Companies (Temporary Restrictions on Dividends) Amendment Act, 1975 (Act No. 28 of 1975), stating that it would be lawful for the company to declare dividend for any financial year exceeding, in the aggregate, its” distributable profits ” for that financial year, provided, however, that thedividends so declared should not be distributed for a period of two years from 6th July, 1974. The declared dividend becomes distributable on the expiry of two years together with” interest thereon at the rate of eight per cent per annum, in two equal annual instalments, the first of which shall become due and payable on the date on which the said period of two years expires “. This means that the first instalment of interest becomes due and payable on the expiry of the period of two years from the appointed day when the declared dividend also becomes distributable. The second instalment of interest becomes due and payable only at the end of one year from the date on which the period of two years expires.

Because of the restrictions imposed by Act No. 35 of 1974, as amended by Act No. 28 of 1975, the company declared dividends for the years relevant to the assessment years in question, but withheld payment for a period of two years from 6th July, 1974. The company also paid interest in two instalments, first on the expiry of the period of two years and the second on the expiry of another year.

The WTO treated the gross dividend declared by the company as part of the “net wealth” of the assessee. This was confirmed in appeal by the AAC. However, on further appeal by the assessee, the Tribunal held that it was not the total dividend that was includible in the net wealth of the assessee, but only the discounted value of the gross dividend. The reasoning of the Tribunal is what is stated at page 28 of the paper book : “…What we have to evaluate, therefore, is the value of the right to receive the deferred dividends and the interest on the respective valuation dates. The present value of the right to receive an amount in future would certainly be lower than the amount itself, in that a discount will have to be allowed. In a case like this, adoption of a broad figure of discount, we consider, would meet the requirements of the case instead of entering into an involved calculation. We, therefore, direct that the discount to be given is 15 per cent of the gross amount of dividend remaining unpaid on each of the valuation dates as also in respect of the first instalment of interest which is due but remaining unpaid. On the second instalment of interest which is due and remaining unpaid, the discount would be 20 per cent”

The Tribunal appears to have had in mind the principle of evaluating the dividend on an actuarial basis, when, in lieu thereof, it adopted a rough and ready method. Any discount, for this purpose, in our view, whether calculated on an actuarial basis or on a rough and ready method to achieve approximately the same result, finds no justification in the provisions of the WT Act. Pursuant to the amendment of Act No. 35 of 1974 by Act No. 28 of 1975, it was perfectly within the right of the company to declare dividends. The company declared dividends, but deferred the payment as required by the provisions of Act No. 28 of 1975. The dividends had thus accrued. It was a right to receive payment of the dividend which had accrued in favour of the assessee for the relevant year, although the payment of the dividend was deferred to a future date. As stated by the Supreme Court in CWT vs. Vysyaraju Badreenarayana Moorthy Raju (1985) 152 ITR 454, whatever be the system of accounting, an accrued right was a part of the net wealth of the assessee. This is what the Court stated (p. 456) :

” The system of accounting, mercantile or cash or hybrid, is of no relevance for the purpose of determining the assets of the assessee. That appears to be plain from the definition of `net wealth’ which speaks of `the aggregate value … of all the assets’. ……..”

Accordingly, we are of the view that the total declared dividend, as reduced by the taxes deducted at source, was includible in computing the net wealth of the assessee. However, in so far as the Revenue has not challenged by seeking a reference of a specific question as regards the finding of the Tribunal that the gross dividend had to be discounted to evaluate the present value, we decline to answer question No. 1, for the point arising from the order of the Tribunal in regard to discounting requires, for the reasons stated by us, reconsideration by the Tribunal.

We now come to question No. 3. We have already stated that the first instalment of interest became due and payable only at the end of two years as provided under s. 5A of the Act No. 28 of 1975. Likewise, the second instalment of interest became due and payable at the end of three years. It was not only the Payment of interest that was deferred to the date on which the respective period expired, but the accrual of interest itself was deferred. That was the legislative intent when the section states ” shall become due and payable”. Accordingly, question No. 3 is answered in the negative, that is, in favour of the assessee and against the Revenue. We direct the parties to bear their respective costs in these tax referred cases.

A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Tribunal, Cochin Bench.

[Citation : 170 ITR 202]