9911796707
TMI Blog1963 (10) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1955. By an assessment order dated the 7th July, 1960, the total income of the petitioner was assessed at ₹ 48,21,860 and the amount of tax payable thereon was determined at ₹ 22,94,400. After adjusting payments of ₹ 14,00,000 made under sections 18A and 23B, the net demand payable arrived at was ₹ 8,93,658. Subsequently, by an order under section 35 of the Act dated the 9th August, 1960, the net demand payable was reduced to ₹ 8,84,505. The rectification made was not accepted by the petitioner and an appeal against that order is said to be pending. As penal interest was also levied, a revision against the latter order was filed before the Commissioner under section 33A, the prayer being for remission of penal interest under section 18A(6). This revision also is said to be pending. The Income-tax Officer subsequently discovered that the rebate of corporation tax had not been reduced by the amount which was calculated on the excess of dividend declared over 6% of the paid up capital as required by the second proviso (i)(b) of Paragraph D, Part II, First Schedule, to the Finance Act of 1956. A notice was thereupon issued under section 35 of the Act to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot; Therefore, the "paid up capital" for purpose of calculating the rebate that has to be reduced under the second proviso (1)(b) to the said Paragraph D has to be that capital which carries "a dividend at a fixed rate". The question that has to be determined is as to what exactly is the capital which can be said to be entitled to a dividend at a fixed rate? The relevant portion of the second proviso to the said Paragraph D runs: "Provided further that-- (i) the amount of the rebate under clause (i) or clause (ii), as the case may be, of the preceding proviso shall be reduced by the sum, if any, equal to the amount or the aggregate of the amounts, as the case may be, computed as hereunder... (b) in addition, in the case of a company referred to in clause (ii) of the preceding proviso which has distributed to its shareholders during the previous year dividends in excess of six per cent. of its paid up capital, not being dividends payable at a fixed rate-- On that part of the said dividends which exceeds 6 per cent. But does not exceed 10 per cent. Of the paid up capital at the rate of 0-2-0 per rupee. The petitioner company had issued three kinds of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment off of arrears of dividend, whether declared or not, up to the commencement of winding up on such preference shares in accordance with the provisions of sub-clause (1) hereof shall be applied firstly in payment off of the capital and dividend, if any, declared and in arrears, at the commencement of winding up, on the ordinary shares and the balance, if any shall be distributed to the holders of the preferred ordinary shares and ordinary shares rateably." It will be noticed that though the preference shares are cumulative, there is no express provision regarding the preferred ordinary shares. This would mean that if in any year there is no surplus left after the preference shareholders had been paid their fixed dividend of 6%, the preferred ordinary shareholders would not be entitled to get dividend at the fixed rate of 4% and, as it is not cumulative, the right to receive it would not be carried forward. Only if there is a sufficient surplus left after paying the preference shareholders that the preferred ordinary shareholders have to be paid, if possible at a rate up to 4%. Along with this, if any surplus is still left over, they will share rateably with the ordinar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be deemed to be preference capital, notwithstanding that it is entitled to either or both of the following rights, namely:-- (i) that, as respects dividends, in addition to the preferential right to the amount specified in clause (a), it has a right to participate, whether fully or to a limited extent, with capital not entitled to the preferential right aforesaid; (ii) that, as respects capital, in addition to the preferential right to the repayment, on a winding up,....it has a right to participate, whether fully or to a limited extent,...." Sub-section (2) of section 85 deals with the second kind of share capital, i.e., "equity share capital". This means, with reference to any such company, all share capital which is not preference share capital. Sub-section (3) provides that the expression "preference share" and "equity share" shall be construed accordingly. Therefore, broadly speaking, within the framework of preference share capital and equity share capital, there are various modes of participating in the profits. In Palmer's Company Precedents, sixteenth edition, Part I, at least ten different modes of participating in the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me that there is no real ambiguity about it at all, and that there is nothing logically wrong in that conclusion....In my judgment, therefore, 'ordinary preferred stock' is a sub-class of ordinary stock which has some preference or priority over another sub-class of ordinary stock." It is manifest that "preferred ordinary shares" in the present case are nothing but a sub-class of equity shares which have some preference or priority over those shares. They have no concern with "preference shares", which carry a fixed rate of dividend. The preferred ordinary shares fall within the category or class called equity shares but having certain priority in special circumstances, when participating in profits with the equity shareholders. With this background, the position under the Companies Act of 1956 may now be examined in order to determine the precise point which arises here, whether the capital of ₹ 1 crore, 57? lakhs relating to preferred ordinary shares in the present case carry dividends at a fixed rate within the meaning of the Explanation to Para. D and whether the dividends thereon were payable at a fixed rate within the meaning of the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are entitled to a dividend at a "fixed" rate or that the dividend was payable at a "fixed rate". It is true that as between equity shareholders and preferred ordinary shareholders dividend to the latter has to be paid first before the balance, if any, is again equally divided between ordinary shareholders and the preferred ordinary shareholders. In these circumstances, without doing violence to the language of the articles of association, it is not possible to hold that preferred ordinary shares carry a fixed rate of 4 per cent. dividend. The words "entitled" and "payable" in the Explanation to the second proviso to clause (i)(b) convey the same meaning. "Entitled", means entitled in law, i.e., something which could be enforced in law. "Payable" similarly means payable in accordance with law. It is impossible for any preferred shareholder to claim that he shall be paid each year, regardless of the profits made by the company, dividends at the rate of 4 per cent. If such a position could never be taken up by a preferred ordinary shareholder, then it necessarily follows that such share does not carry a fixed rate of divid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordinary shares 11,81,250 13,12,500 Less 6% on ₹ 17,50,000 (2,75,000 ordinary shares). 1,05,000 Excess dividend on which rebate has been reduced by the I.T.O. 12,07,500 The interpretation placed by me on the Explanation to the 2nd proviso to clause (i)(b) of Paragraph D is not only in consonance with common sense but will permit comparison of like with like. This will require the exclusion from the paid up capital only the preference share capital of ₹ 35,00,000 and from the total dividend paid, the dividend at the fixed rate of 6 per cent. which that capital of ₹ 35,00,000 carries and on that basis the excess dividend will be worked out. In the present case there is no dispute as to the total amount of dividend which was paid and which was ₹ 21,52,500. The excess dividend paid on the principles determined above would work out as follows: Rs. Rs. Total dividends 21,52,500 Less:-- Dividend on 35,0000 preference shares (Rs. 35,00,000) at the fixed rate of 6% 2,10,000 Balance being dividend at no fixed rate on preferred ordinary and ordinary shares: Dividend on 15,75,000 preferred ordinary shares (Rs. 1,57,50,000) at the rate of 4% 6,30,000 a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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