Supreme Court Dismisses Assessee Bank's Appeal in Income-Tax Case on Taxability of Dividend Income Received After Merger of State. Dividend Encashed in Taxable Territories After Merger, Not Deemed Paid on Declaration Date Under Section 16(2) of Income-tax Act, 1922, Thus Taxable in Year of Receipt.

Income-tax assessment dispute regarding taxability of dividend income received by a bank after the merger of the State of Benares with the Indian Union.

The assessee bank sought a declaration that the dividend income of Rs. 69,000 was exempt from tax under section 14(2)(c) of the Income-tax Act, 1922, or alternatively, that it was not taxable as it was deemed received when the bank was a non-resident.

The Income-tax Officer treated the dividend income as taxable for the assessment year 1950-51, leading to the bank challenging the assessment.

The Income Tax Officer taxed the dividend; the Appellate Assistant Commissioner and the Income Tax Appellate Tribunal upheld the tax; the Allahabad High Court in a reference answered against the assessee, leading to this appeal by special leave.

Whether the dividend income was exempt from tax under section 14(2)(c) of the Income-tax Act, 1922, as it accrued in an Indian State before the merger of the State of Benares with India? Whether the dividend must be deemed to have been received by the assessee on the date of declaration, i.e., July 25, 1949, making the assessee a non-resident and hence not liable to tax?

The appellant argued that under section 14(2)(c), as it stood, the dividend accruing in an Indian State was exempt unless received in British India, and that the bank was a non-resident at the time of accrual. The appellant further contended that under section 16(2), dividend is deemed received on the date of declaration, so it should be taxed in the year of declaration when the bank was non-resident. The respondent contended that after the merger, the State of Benares became part of taxable territories, and the dividend was received there, so the exemption under section 14(2)(c) did not apply. The respondent argued that under section 16(2), dividend is taxable only when paid, and payment occurred upon encashment on December 31, 1949, thus taxable in the assessment year 1950-51.

Under section 16(2) of the Income-tax Act, 1922, dividend income is taxable in the year in which it is paid, credited or distributed, or deemed to be so, and 'paid' means when the company discharges its liability and makes the amount unconditionally available to the member entitled thereto, not when declared. Exemption under section 14(2)(c) is inapplicable if the income is received in the taxable territories, even if it accrued in an Indian State, once the territory of the Indian State has become part of the taxable territories by merger.

The expression 'paid' in s. 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 s. 16(2) when the Company discharges its liability and makes the amount of dividend unconditionally available to the member entitled thereto. 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 s. 14(2)(c) of the Indian Income-tax Act, 1922, before it was omitted ... it was not exempt from liability to payment of tax.

The assessee, Benaras State Bank Ltd., declared dividend of Rs. 69,000 for the year ended December 31, 1949. The Income-tax Officer brought the dividend to tax for assessment year 1950-51. The assessee appealed to the Appellate Assistant Commissioner and then to the Income-tax Appellate Tribunal, both of which upheld the tax. The assessee sought a reference to the Allahabad High Court under the Income-tax Act. The High Court answered the question of law against the assessee. The assessee then appealed to the Supreme Court by special leave.

• Indian Income-tax Act, 1922: 2(14-A), 14(2)(c), 16(2), 4(1)(a), 4(1)(b)(ii)