Sections 212
to 215
Other matters relating to balance sheet, etc.
[1950]
20 Comp Cas 225 (
v.
New Akot
Ginning and Pressing
Vivian
Bose, C.J.,
and
Mangalmurti, J.
Appeal
No. 91 of 1945
J.R. Chandurkar
with T.B. Pendharkar, N.B. Chandurkar,
and G.R. Mudholkar, for the appellant.
R.S. Dabir, V.L. Oke with Y.V. Jakatdar, for the respondent.
Bose, C.J.—This is a plaintiff's appeal in a
suit for recovery of Rs. 1,03,988 being Rs. 79,519-12-9 principal and Rs.
24,463-4-0 interest on a deposit which the plaintiff made with the defendant.
The defendant is a ginning and pressing
factory. According to the plaintiff the company was obliged to finance cotton traders
who sent their cotton to the factory for ginning and pressing, otherwise it was
not possible to get their custom. In order to do this the company had to borrow
money. This money was borrowed from the plaintiff, among others, and the
plaintiff sues for the amount which he says is due to him. The plaintiff
asserts that the company had the authority to borrow for the purpose aforesaid.
The borrowing was made under the following circumstances.
The plaintiff acted as the company's banker
and lent the company money from time to time. The money so lent was placed by
the company in a current account and latter transferred to a fixed deposit
account. These deposits were cashed in or renewed from time to time. The
latest, on which the suit is based, was for the sum set out above and was made
on the 15th January, 1940. It is evidenced by a fixed deposit receipt Exhibit
P-1.
We find this difficult to follow. If the
plaintiff was the company's banker then either the plaintiff would lend money
to the company as and when desired or, he would keep the company's money with
him in his bank for the convenience of the company. If it was a case of the
company keeping its money with the plaintiff then the deposit would be by the
company and not the plaintiff, and the person entitled to sue for its return
would be the company. If the deposit was made with money borrowed by the
company from the plaintiff then the plaintiff's right would be to recover his
loan. On the other hand if the plaintiff were depositing money with the company
normally the company would be in the position of banker, and not the plaintiff.
It is not easy to see how the plaintiff was placing money with the company in
fixed deposit in his capacity as the banker. The plaintiff might be described
as the defendant's financier but hardly as its banker.
It is evident from P.W.1 Thombre
that the moneys lent by the plaintiff from time to time actually passed hands
and were kept with the defendant and not with the plaintiff. He says he
sometimes accompanied the secretary of the company when he went to the
plaintiff for taking the money borrowed by him and tells us, "The
secretary used to agree with the plaintiff when borrowing money from him to pay
back the amount on demand. The amounts borrowed from the plaintiff used to be
credited either into the current accounts or in the deposit account…….. With
respect to the amounts deposited in the 'deposit accounts' the plaintiff had to
make a demand after the general meeting and then if the funds were available he
used to be paid off and if they were not available a fresh deposit receipt used
to be passed to him by the company." The plaintiff also admits as P.W. 3
that "All the loans given by me to the company were advanced in cash by
me."
In the circumstances we find it difficult to
see where the relation of banker and customer comes in if the plaintiff was the
banker, as he says he was in his plaint. We feel the plaintiff has taken up
this position to try to bring his case within Article 60 of the Limitation Act.
However, even if the plaintiff was not a banker that would not necessarily
preclude him from being a depositee within the
meaning of Article 60 of the Limitation Act if the transaction was really of
that nature.
Exhibit P-1 purports to be a deposit receipt
and if the parties deliberately chose to consider the transaction a deposit and
not a loan then we would find it difficult to hold that it was not intended to
be a deposit. It is true that "the mere use of the term deposit cannot
alter the substance of the transaction" (U.N. Mitra's
Laws of Limitation and Prescription, 6th edition. Volume II, page 1202), but as
the dividing line between a deposit and a loan is so fine, and as the
difference must to a large extent depend upon the intention of the parties, the
fact that they agree to regard their act as a deposit is of importance.
However, that in itself would not necessarily attract
Article 60.
The main ground of attack is that the
borrowing was ultra vires. The defendant company
admits that the plaintiff and others did make certain advances to the company
but it says that these have all been repaid. But that apart, the defendant
contends that the borrowing was ultra vires. To
determine this it will be necessary to look to the Memorandum and Articles of
Association.
The objects of the company are there set out
to be to gin and press cotton. In order to achieve these objects the company is
given power either to purchase ginned or unginned
cotton [clause 3 (e)] or "to give money for the purchase of goods… or
other articles required for all or any of the above works of the company or to
give money as advance for the said goods." [Clause 3 (i)]. And in order to be able to give the money for
this purpose the company is authorised "to
borrow money on……receipts passed for deposits or by opening a current account
in the creditors's shop……or in any other way". [clause 3 (h)].
We hold on this that the company was authorised to borrow money for the purpose of advancing it
to traders.
The next question is whether it could borrow
from one of its own directors. It is admitted that the plaintiff was the
managing director at the date of the deposit in suit. The law as to this is set
out in Ghosh's Indian Company Law (7th edition),
pages 223 and 224.
The main rule is that "a director is precluded
from dealing on behalf of the company with himself and from entering into
engagements in which he has a personal interest conflicting or which may
possibly conflict with the interest of those whom he is bound by fiduciary duty
to protect." (Page 267 Ibid).
But despite, this, if the contract is for the
benefit of the company it would be upheld. But most of that is beside the point
because, as Ghosh says at page 268, "Modern
articles usually authorise directors to make
contracts in which they are personally interested, on disclosing their interest
to their fellow directors……but the terms must be strictly complied with."
We think such a provision is unnecessary in
India because Section 91-A (1) of the Companies Act contemplates a position in
which directors are interested in contracts made with the company, and all that
is required is that three should be a full and frank disclosure of the nature
of their interest. We hold therefore that a company is entitled to borrow money
from one of its own directors. But that is subject to the fundamental position
that the director, even though disclosing his interest, does not take undue
advantage of his position because, fundamentally, the position of a director is
very like that of a trustee. He occupies a fiduciary position and so the
transaction must be fair and proper.
* * *
We come next to the question of limitation. As
we said at the beginning of this judgment, the fact that the parties choose to
call the transaction a deposit and not a loan has importance. But before
Article 60 can apply not only must the transaction be a deposit but there must
be in addition, "an agreement that it shall be payable on demand.” Exhibit
P-1 negatives such an agreement for it is not payable on demand. It is payable
on a fixed date 12 months hence. The whole point of the deposit, according to
the plaintiff, was to save the company the inconvenience of having to pay out
large sums of money on demand. That being so, Article 60 cannot apply for, as
U.N. Mitra tells us in his Law of Limitation and
Prescription (6th edition), Volume II, page 1201, on the authority of Bank of
Upper India v. Arif Husain.
"Fixed deposits in banks, not being payable on demand, are not governed by
this article. Article 115 may apply to such deposits where on expiry of the
term the amount would become payable as money lent." We hold therefore
that the limitation was three years commencing from the 31st July, 1940. As the
suit was filed on the 16th June, 1944, it is prima facie barred by time.
The plaint relies on the following matters for
saving limitation:—
(1) an acknowledgment contained in
Exhibit P-42, a resolution of the Board of Directors dated the 20th May, 1941;
(2) the company's
balance sheets for 1940-41 and 1941-42 and 1942-43;
(3) an application by the plaintiff for
liquidation made under Section 162 of the Indian Companies Act. The plaintiff
contends that section 14 of the Limitation Act is called in to play and saves
limitation.
The fourth ground set out in the plaint was
abandoned before use.
Considering Exhibit P-42
first. That does not save
limitation for two reasons. The first is that it is not an acknowledgment of
liability. One Pandurang Hadole
informed the Board of Directors that a sum of Rs. 67,939 was due to the
plaintiff in July, 1936, and that the directors had offered to settle the debt
for Rs. 65,000. The plaintiff was again told to make a choice so that the
matter could be placed before the general body of shareholders. This is not an
acknowledgment of liability. It merely asks the plaintiff to determine his
attitude so that the matter can be placed before another body which would
decide the question.
In the second place, even if it is an
acknowledgment, it refers to the debt of Rs. 67,939 due in July, 1936. As
Exhibit P-42 is dated 1941 it is beyond time because, before an acknowledgment
can operate to save limitation it must be made before the limitation expires.
Turning next to the balance
sheets. The mere signing
of a balance sheet by a director does not operate to save limitation because
the director in drawing up a balance sheet does not do so with the intention of
acknowledging liability but under a duty where he is bound to set out, among
other things, the claims made on the company. It is then for the directors, and
later for the company, to pass on these claims and either accept them or reject
them [See Ghosh's Company Law, 7th edition, page 392.
See also Kandasami Reddi v.
Suppamntal].
Actually no balance sheets were filed till
1945 though they were expressly relied on in the plaint. Then on the 28th
April, 1945, the plaintiff applied to file the balance sheet of 1940-41. He expressly
stated that he did not want to adduce any oral evidence to prove it. In view of
that he was allowed to file it. But it transpired later that a balance sheet
does not prove itself, therefore the plaintiff made another application on the
nth July, 1945, for permission to file a copy from the Registrar and contended
that this proved itself. This document was rejected as filed too late. Both
have been refiled here.
Section 13(3) of the Indian Companies Act
requires a copy of the balance sheet to be sent to every member at least 14
days before the meeting and Section 134(1) requires another copy to be sent to
the Registrar after the general meeting of the shareholders. It is evident from
the Act itself that these are copies and not originals and there is nothing in
the Act which makes these copies admissible in evidence. On the contrary
Section 131(2) enacts that the original shall be open to inspection by any
member of the company. Therefore we are relegated to the ordinary law of
evidence.
Section 65 of the Evidence Act sets out the
cases in which secondary evidence is admissible. It was argued that this falls
under clause (e)—"when the original is a public document within the
meaning of Section 74" because Section 74 states that the following are
public documents, namely, "(2) public records kept in
The argument is not well founded. Section 65
applies Section 74 only when the original is a public document. It would, for
example be absurd to contend that a private sale deed or mortgage can be proved
by the production of a certified copy obtained from the Sub-Registrar's office
and nothing more.
We suspect these copies were produced at a late stage of the case on purpose and consider that the objection to the admissibility of these copies is not a mere technicality.
It will be recollected that a directors'
meeting was called for the 27th April, 1941, (Exhibit D-88), and that all that
was done on that day was to accept the plaintiff's resignation as Chairman and
appoint another in his place. Thereupon a second meeting was called for the
17th May, 1941, (Exhibit D-89), and had to be adjourned for want of a quorum.
The adjourned meeting was held on the 20th May, 1941, (Exhibit P-42) but no
balance sheet was passed. Thereupon a general meeting of the shareholders was
called for the 16th November, 1941, to pass the balance sheet. This also had to
be adjourned to the following day for want of a quorum (Exhibit D-90). At the
adjourned meeting the shareholders then present refused to pass the accounts
(Exhibit D-91). It was not till some five weeks later, namely on the 30th
December, 1941, that the rival faction met and passed the accounts (Exhibit
P-63). But this meeting, as has already been pointed out, purports to be a
continuation of the meeting of the 16th November, 1941, which had to be
adjourned for want of a quorum. It does not purport to be a fresh meeting
freshly convened after due notice etc.
Now under Article 58 of the Articles of
Association a meeting which is adjourned for want of a quorum has to meet on
the following day. It cannot meet on any other date. The reason for this is
simple. If there is no quorum there can be no valid meeting, therefore the
persons present cannot transact any business and cannot even adjourn their own
meeting Unless their Articles provide otherwise the only way in which they can
validly meet again is by convening a fresh meeting after due issue of a fresh
set of notices. Therefore, if the Articles provide that the adjourned meeting
shall be held on the following day it must be the following day or nothing. As
Exhibit P-63 purports to be a record of the adjourned meeting it is prima facie
valueless because the meeting was held five weeks later and not on the
following day. We cannot presume that the meeting was validly called afresh
because on the face of it the document describes the meeting as the adjourned
meeting. In the circumstances the impugned balance sheets were rightly
rejected. They do no prove themselves, and, so far as the record goes, it would
appear that they were validly rejected by the shareholders on the 17th
November, 1941, (Exhibit D-91), and have never been validly passed since. For
these reasons we hold that these balance sheets do not operate as
acknowledgments within the meaning of Section 19 of the Limitation Act. The
other balance sheets of 1941-42 and 1942-43 have not been filed. We hold
therefore that the claim is barred by limitation.
A point of estoppel
was argued. But there can be no estoppel here because
the plaintiff knew all the facts and himself brought about most of the
transactions by being present at the meetings, and in many cases acting as
Chairman.
* * * *
As regards the question of limitation, we
omitted by a slip to give a decision on the arguments advanced regarding
Section 14 of the Limitation Act. The contention was that the plaintiff made an
application to the Court under the Indian Companies Act for liquidation on the
16th June, 1941. This was dismissed on the 16th June, 1944. He contends that
that proceeding was founded upon the same cause of action. With that we do not
agree.
In the first place the liquidation proceedings
have not been filed. We have neither the application nor the order before us.
All we have is an admission of the defendants when called upon to admit facts
that an application for liquidation was made on the 16th June, 1944, and that
the defendants in the liquidation proceedings as well as here are the same.
There is no admission that the cause of action is the same. They were called upon
to admit that fact but did not do so. It was therefore incumbent on the
plaintiff to prove it if he wished to rely on that for bringing his claim
within limitation.
The grounds on which a company can be wound up
are set out in Section 162 of the Indian Companies Act. There are a number of
them. Even if it be assumed that the application was under
Section 162(v), namely that the company was unable to pay its debts. Section 162(1) shows that the expression "unable to pay its
debts" embraces three distinct concepts. There is nothing to show
that the application was confined to this particular debt. But even if it was,
the cause of action in winding up proceedings under Section 163(1) is the
inability of the company to pay its debts and not, as here, the recovery of the
debt. The question of recovery does not arise until the winding up order has
been made and a liquidator appointed. It is at that stage that the claims
against the company are enquired into and decided. Therefore the cause of
action in those proceedings and the cause of action here were not the same. It
follows that Section 14 is not attracted.
The appeal fails and is dismissed with costs.
The cross-objection was not pressed and is also dismissed with costs.
Sections 216
and 217
Board’s report, etc.
[1981] 51 COMP. CAS. 513 (MAD)
HIGH COURT OF
(Full Bench)
v.
Commissioner of Income-Tax
M.M. ISMAIL, C.J.
NATARAJAN, SETHURAMAN,
M.A. SATHAR SAYEED AND VENUGOPAL, JJ.
Tax Case No. 497 of 1976 (ReFerence No. 370 of
1976).
DECEMBER 16, 1980
S. Swaminathan for the Appellant.
J. Jayaraman and Mrs. Nalini
Chidambaram for the Respondent.
(September 2, 1980)
V. Ramaswami, J.—The following question has been referred at
the instance of the assessee :
"Whether,
on the facts and in the circumstances of the case, Rs. 18,64,065 which was
distributed as dividend to the shareholders of the assessee-company
should be excluded in the computation of the capital for ascertaining the
'statutory deduction' for the purpose of assessment under the Companies
(Profits) Surtax Act, 1964, for the assessment year 1970-71?"
Since we are
referring this matter to a Full Bench, we feel that it is not necessary to set
out the facts or the arguments in detail. Suffice it to state that the learned
counsel for the assessee relied on a Full Bench
judgment in Madras Motor and General Insurance Co. Ltd. v. CIT [1979] 117 ITR
534 (Mad) as concluding this question. In this decision, this court considered
the scope of r. 1, Second Schedule, to the Companies (Profits) Surtax Act,
1964. Since the assessee, in that case, was an
insurance company, the argument on behalf of the revenue based on Expln. II to r. 1 was not considered and no definite answer
was given. In the present case, since the assessee is
not an insurance company, the computation of the capital will have to be done
with reference to the Explanation. Though the Full Bench decision related to an
insurance company, as if the principle laid down in that judgment was
applicable even to non-insurance companies, a Division Bench, without going
into the Explanation, simply purported to apply the principle in the decision
in India Motor Parts & Accessories Ltd. v. CIT [1981] 130 ITR 311 (Mad). It
may also be mentioned that there was an earlier Bench judgment in Madras Auto
Service v. CIT [1978] 112 ITR 540 (Mad), which held that a provision for
dividends cannot be considered to be a general reserve either on principle
or on the provisions of the Companies Act. But this decision was neither
noticed by the Full Bench nor by the Division Bench. But even if it is to be
treated as a general reserve whether in view of the Explanation to r. 1 of the
Second Schedule to the Surtax Act, it will have to be excluded for the purpose
of computation of the capital is the question that will have to be directly
decided in this case. But having regard to certain observations made in the
Full Bench judgment, we feel that this issue is better decided by a Full Bench
rather than by a Division Bench.
We, accordingly, direct that the papers may be placed
before My Lord the Chief Justice for posting this particular case before a Full
Bench.
(December 1, 1980)
M.M. Ismail, C.J.—This matter comes before us on a reference made by a
Division Bench of this court (V. Ramaswami and Balasubrahmanyan JJ.) by an order dated 2nd September,
1980. The learned judges were of the view that having regard to certain
observations made in the judgment of a
Full Bench of this court in Madras Motor and General Insurance Co. Ltd.
v. CIT [1979] 117 ITR 534, it was better that the issue was decided by a Full
Bench rather than by a Division Bench.
After having heard the case fully, we are clearly of
the opinion that certain observations contained in the Full Bench judgment of
this court referred to above, namely,
Madras Motor and General Insurance Co. Ltd. v. CIT [1979] 117 ITR 534
require reconsideration. In view of this, we direct the case to be posted
before a Fuller Bench.
The judgment of the court was delivered by
Ismail, C.J.—The case originally came up for
disposal before a Division Bench of this court consisting of V. Ramaswami J. and Balasubrahmanyan
J. The learned judges by an order dated 2nd September, 1980, referred the case
to a Full Bench, since they were of the view that having regard to certain
observations contained in the judgment of a Full Bench of this court in Madras Motor and General
Insurance Co. Ltd. v. CIT [1979] 117 ITR 534, it was better that the
issue was decided by a Full Bench rather than by a Division Bench.
Pursuant to this order of reference, the case came
before a Full Bench of this court consisting of the Chief Justice, Sethuraman J. and M. A. Sathar Sayeed J. The Full Bench was of the view that certain
observations contained in the Full Bench judgment of this court referred to
above required reconsideration. In view of this, the Full Bench referred this
case to a Fuller Bench by an order dated 1st December, 1980. That is how the
case has come up for disposal before this Bench.
The Income-tax Appellate Tribunal, Madras Bench
"B", under s. 18 of the C. (P.) S.T. Act, 1964, read with s. 256(1)
of the I.T. Act, 1961, referred the following question for the opinion of this
court:
"Whether, on the facts and in the circumstances
of the case, Rs. 18,64,065, which was distributed as dividend to the
shareholders of the assessee-company should be
excluded in the computation of the capital for ascertaining the 'statutory
deduction' for the purpose of assessment under the Companies (Profits) Surtax
Act, 1964, for the assessment year 1970-71?"
The assessee is a private
limited company carrying on the business of passenger and goods transport. It
filed its return showing a deficit of chargeable profits under the C. (P.) S.T.
Act, 1964, hereinafter referred to as "the Act", for the assessment
year 1970-71. The Surtax Officer, by his order dated 24th February, 1971,
determined the taxable profits as Rs. 3,33,973 and
levied a surtax of Rs. 83,493. In doing so, he computed the "chargeable
profits" as Rs. 17,80,500 and the "statutory
deduction" as Rs. 14,46,527. In computing the statutory deduction, the Surtax
Officer noticed that the assessee-company had shown
its capital as Rs. 1,93,61,011 which included Rs.
25,45,923 transferred to the general reserve account. He also noticed that such
transfer had been made by the board of directors of the assessee-company
on August 30, 1969, that is, long after the first day of the chargeable
accounting period, which was April 1, 1969. He held that such transfer made on
August 30, 1969, could not have retrospective effect, in view of the decision
of this High Court in CIT v. Vasantha Mills Ltd.
[1957] 32 ITR 237. Consequently, he computed the capital under the Second
Schedule of the Act as Rs. 1,44,65,274 after deducting the aforesaid sum of Rs.
25,45,923 and a further sum of Rs. 23,49,841, the latter being the deduction
made under r. 4 of the Second Schedule of the Act, with which we are not
concerned in this case.
Aggrieved by such assessment, the assessee-company
preferred Surtax Appeal No. 1/1971-72 to the AAC of Surtax,
The only contention raised by the department in the
appeal before the Tribunal was that the sum of Rs. 18,64,065 being the amount
distributed as dividend could not be taken as reserve and, hence, it should not
be included for the computation of capital for the ascertainment of the
"statutory deduction". The basis of the contention was that when the
general body approved the recommendations made by the board of directors for
the distribution of the dividend at the meeting held on September 30, 1969, the
approval related back to the first day of the accounting year in view of the
decision of the Supreme Court in CIT v. Mysore
Electrical Industries Ltd. [1971] 80 ITR 566, referred to already. Accepting
this contention, the Tribunal rejected the claim of the assessee-company.
It is the correctness of this conclusion that is
raised in the present reference in the form of the question which we have
extracted in the beginning of this judgment.
We shall first consider the question referred to this
court with reference to the admitted facts and the relevant statutory
provisions. The admitted facts are as follows: For the assessment year 1970-71,
the assessee-company showed in its balance-sheet that
it had created a general reserve of Rs. 25,45,923. In
the balance-sheet itself it was stated :
"No appropriation has been made for dividend on
shares. Dividend when declared will be paid out of the general reserve".
This balance-sheet was signed by the directors on
August 30, 1969. However, the report of the board of directors accompanying the
balance-sheet for the purpose of being placed before the general body meeting
of the company was dated September 1, 1969. In that report, among others, the
directors stated as follows :
"Subsequent to the signing of the balance-sheet,
your directors thought it desirable to recommend a dividend at 15% for the year
ended 31-3-1969 from out of the profits of that year, absorbing a sum of Rs.
18,64,065 subject to deduction of tax, on the paid-up capital of the company,
viz., Rs. 1,24,27,100. Sanction may please be accorded for payment of dividend
out of general reserve, if the recommendation is approved, and the dividend
declared at the ensuing annual general meeting".
The general body meeting took place on September 30,
1969, and the general body approved the aforesaid recommendation of the board
of directors and, consequently, Rs. 18,64,065 was
distributed as dividend.
The Act was enacted to impose a special tax on the
profits of certain companies. Section 2(5) of the Act defines the expression
"chargeable profits" as meaning :
"the total income of an assessee
computed under the Income-tax Act, 1961 (43 of 1961), for any previous year or
years, as the case may be, and adjusted in accordance with the provisions of
the First Schedule".
Section 2(8) defines the expression "statutory
deduction", which as it stood at the relevant time, is as follows:
" 'statutory deduction' means an amount equal to
ten per cent, of the capital of the company as computed in accordance with the
provisions of the Second Schedule, or an amount of two hundred thousand rupees,
whichever is greater : "
There are two provisos to this definition, which it
is unnecessary to refer to for the purpose of this case.
Section 4 of the Act is the charging section and the
same reads as follows :
"Subject to the provisions contained in this
Act, there shall be charged on every company for every assessment year
commencing on and from the first day of April, 1964, a tax (in this Act
referred to as the surtax) in respect of so much of its chargeable profits of
the previous year or previous years, as the case may be, as exceed the
statutory deduction, at the rate or rates specified in the Third
Schedule".
Rule 1 of the Second Schedule, referred to in s. 2(8)
of the Act, so far as the same is relevant, as it stood at the relevant time,
reads as follows :
"1. Subject to the other provisions contained in this Schedule, the capital of a company shall be the aggregate of the amounts, as on the first day of the previous year relevant to the assessment year, of—
(i) its paid-up share capital;
(ii) its reserves, if any, created under the proviso (b) to
clause (vib) of sub-section (2) of section 10 of the
Indian Income-tax Act, 1922 (11 of 1922),
or under sub-section (3) of section 34 of the Income-tax Act, 1961 (43 of
1961);
(iii) its other reserves as reduced by the amounts
credited to such reserves as have been allowed as a deduction in computing the
income of the company for the purposes of the Indian Income-tax Act, 1922 (11
of 1922), or the Income-tax Act, 1961 (43 of 1961):......
Explanation.—For
the removal of doubts it is hereby declared that any amount standing to the
credit of any account in the books of a company as on the first day of the
previous year relevant to the assessment year which is of the nature of item
(5) or item (6) or item (7) under the heading 'RESERVES AND SURPLUS' or of any item under the heading 'CURRENT LIABILITIES AND PROVISIONS' in
the column relating to 'LIABILITIES' in
the 'FORM OF BALANCE-SHEET' given
in Part I of Schedule VI to the Companies Act, 1956 (1 of 1956), shall not be
regarded as a reserve for the purposes of computation of the capital of a
company under the provisions of this Schedule".
Section 209
and the following sections of the Companies Act, 1956, that is, Act 1 of 1956,
deal with the accounts of a company and the profits, and, among others, provide
for the preparation of the balance-sheet and profit and loss account. Section
210(1) of the said Act states :
"At
every annual general meeting of a company held in pursuance of section 166, the
board of directors of the company shall lay before the company—
(b) a
balance-sheet as at the end of the period specified in sub section (3); and
(c) a
profit and loss account for that period."
Section 217(1) of the said Act reads as follows
:
"There
shall be attached to every balance-sheet laid before a company in general
meeting, a report by its board of directors, with respect to—
(a) the
state of the company's affairs;
(b) the
amounts, if any, which it proposes to carry to any reserves in such
balance-sheet;
(c) the
amount, if any, which it recommends should be paid by way of dividend;
(d) material
changes and commitments, if any, affecting the financial position of the
company which have occurred between the end of the financial year of the
company to which the balance-sheet relates and the date of the report."
Section 220 of the said Act deals with the obligation of the directors
to file the copies of balance-sheet and profit and loss account before the
Registrar of Companies, after the same have been laid before the annual general
meeting of the company. Sub-section (2) of s. 220 states that if
the annual general meeting of a company before which a balance-sheet is laid as
aforesaid does not adopt the balance-sheet, a statement to that effect and of
the reasons therefor shall be annexed to the
balance-sheet and to the copies thereof required to be filed with the
Registrar.
Against the above facts and the background of the
statutory provisions, we shall now consider the question referred to this
court, without reference to any decided cases.
Section 217(1) of the Companies Act makes it clear
that when the balance-sheet accompanied by a report of the board of directors,
containing the allocation of certain amount towards reserves out of the surplus
profits, is placed before the company in a general meeting, the board of
directors is merely proposing that figure as the amount to be kept as reserve.
Similarly when, in its report, the board of directors recommends a particular
amount to be paid by way of dividend, as the language of the section itself
shows, it is only a recommendation which the company in the general meeting may
or may not accept. Notwithstanding the fact that s. 217(1) of the Companies
Act, 1956, uses the word "proposes" in cl.
(b) thereof and uses the word "recommends" in cl.
(c) thereof, in our opinion, there is no difference between the two, because
the idea of a proposal contemplates somebody else accepting or not accepting
it, just as the very idea of recommendation contemplates somebody else
accepting and acting upon it or not accepting it. Therefore, when in this case
the balance-sheet showed a sum of Rs. 25,45,923 as a
general reserve, it was no more than a proposal by the board of directors made
to the general body of the company for setting apart that amount as a general
reserve. From this point of view, it is in no way different from the recommendation
of the board of directors contained in the report dated September 1, 1969, to
the general body for declaring dividend at 15% accounting for a sum of Rs. 18,64,065.
Mr. S. Swaminathan, learned
counsel for the assessee-company, conceded before us that
the fact that the balance-sheet was signed by the directors on August 30, 1969,
and the report of the directors was dated September 1, 1969, that is, the next
working day (August 31, 1969), being a holiday, will not have any consequence,
since the balance-sheet as well as the report accompanying the balance-sheet
was placed before the general body only on September 30, 1969. In view of this,
on the application of the provisions contained in s. 217(1)(b)
and (c) of the Companies Act, 1956, the position is this, namely, that it is
only when the general body adopts the balance-sheet and the report of the board
of directors, that a reserve is created and dividend is declared. Applying this
to the facts of this case, it is clear that on September 30, 1969, the company
at its general body meeting approved the proposal of the board of directors to
create a reserve of Rs. 25,45,923 and out of the same to declare a dividend of
Rs. 18,64,065 leaving a net reserve of Rs. 6,81,858 only. Since the approval of
the proposal to create a reserve and the approval of the recommendation to
declare a dividend took place at the same meeting of the general body, it would
be an empty formality to hold that the company at its general body meeting
first approved the proposal of the board of directors to create a reserve of
Rs. 25,45,923 and thereafter approved the
recommendation of the board of directors to declare a dividend of Rs.
18,64,065. On the other hand, it will be in accordance with not only the letter
but also the spirit of the law that the action of the company in its general
meeting in approving the creation of a reserve as well as the recommendation
for declaring dividend is one only and consequently the creation of a reserve
and the declaration of dividend takes place simultaneously with the result that
as far as the creation of a reserve is concerned, what springs from the action
of the company at its general body meeting is the creation of a reserve of Rs.
6,81,858 only.
The further contention of Mr. Swaminathan,
learned counsel for the assessee-company, is that
under art. 107 of the articles of association of the assessee-company,
the board of directors had the authority to set aside and transfer to the
reserve fund such sum as it thought proper out of the profits of the company,
that for the accounting year in question the assessee-company
had made a surplus profit of Rs. 78,95,923, that the
board of directors in exercise of the authority available to it under art. 107
transferred to the general reserve of Rs. 25,45,923 out of the aforesaid
surplus by signing the balance-sheet on August 30, 1969, that the moment the
board of directors signed the balance-sheet on August 30, 1969, the general
reserve of Rs. 25,45,923 had been created and by virtue of this position, automatically
the said reserve became reserves under cl. (iii) of
r. 1 of the Second Schedule to the Act and that the fact that on September 30,
1969, the general body declared a dividend of Rs. 18,64,065 out of Rs.
25,45,923 would not in any way affect the position that a general reserve had
already been created in a sum of Rs. 25,45,923. In other words, the argument of
Mr. Swaminathan is that the board of directors had
complete and decisive authority to create a general reserve under art. 107 of
the articles of association of the assessee-company
and that the moment it had shown the said sum of Rs. 25,45,923 as a general
reserve in the balance-sheet signed by the directors on August 30, 1969, the
creation of the reserve had become final and irrevocable and the fact that the
general body meeting held on September 30, 1969, declared a dividend of Rs.
18,64,065 out of the said reserve would not affect the position for the purpose
of the Act.
We are unable to accept this contention, having
regard to the specific language contained in s. 217(1)(b)
and (c) of the Companies Act, 1956. We are of the opinion that, having regard
to the language contained in s. 217(1)(b) of the Companies Act, 1956, the
authority competent to create a general reserve under the Companies Act, 1956,
is only the general body, though the general body acts on the proposals made by
the board of directors. Article 107 of the articles of association of the assessee-company does not in any way affect the position.
As a matter of fact, Table A found in Sch. I annexed to the Companies Act, 1956, contains a model
cl. 87 on which art. 107 of the articles of
association of the assessee-company is stated to have been based. Clause 87 of Table A reads as
follows:
"87. (1) The board may, before recommending any
dividend, set aside out of the profits of the company such sums as it thinks
proper as a reserve or reserves which shall, at the discretion of the board, be
applicable for any purpose to which the profits of the company may be properly
applied, including provision for meeting contingencies or for equalising dividends; and pending such application, may, at
the like discretion, either be employed in the business of the company or be
invested in such investments (other than shares of the company) as the board
may, from time to time, think fit.
(2) The board may also carry forward any profits which it may
think prudent not to divide, without setting them aside as a reserve".
Section 9 of the Companies Act, 1956, reads as follows :
"9. Save as otherwise expressly provided in the Act—
(a) the provisions of this Act shall have effect notwithstanding any thing to the contrary contained in the memorandum or articles of a company, or in any agreement executed by it, or in any resolution passed by the company in general meeting or by its board of directors, whether the same be registered, executed or passed, as the case may be, before or after the commencement of this Act; and
(b) any provision contained in the memorandum, articles, agreement or resolution aforesaid, shall, to the extent to which it is repugnant to the provisions of this Act, become or be void, as the case may be".
Consequently, it is clear that no clause contained in
Table A of Sch. I to the
Companies Act, 1956, or no article contained in the articles of association of
any company can override the provisions contained in s. 217 of the Companies
Act, 1956. Even if cl. 87 of Table A of Sch. I to the Companies Act, 1956, or any article in the
articles of association of any company is couched in a wide language in this behalf, it is the duty of the court to read the said clause
or article consistent with the statutory provisions. If such a harmonious
reading is not possible, the clause in Table A or the relevant article
contained in the articles of association of a company will have to yield to the
provisions contained in the statute. Hence, simply as a matter of construction
of the relevant statutory provisions, we are of the opinion that there is no
complete and irrevocable creation of a reserve, the moment the board of
directors signs the balance-sheet showing a particular amount as having been
carried towards reserve, and the reserve is created finally only when the
company's general body adopts the balance-sheet and the report of the board of
directors.
Mr. Swaminathan stresses
the fact that in this case the board of directors has not set apart any amount
towards proposed dividend in the balance-sheet itself and that it has only
referred to the figure recommended to be declared as dividend in its report. In
our opinion, this does not make any difference, since, as we have pointed out
already, both of them will have to be placed together before the general body
and the general body has to adopt the same. The moment it is adopted, the
contents of the balance-sheet as well as the proposal or recommendation
contained in the report of the board of directors will constitute appropriation
of the surplus profits. Thus, it is clear that when the company, in its general
body meeting held on September 30, 1969, adopted the balance-sheet and the
report of the directors, it declared a dividend of Rs. 18,64,065 out of the
surplus profits of Rs. 25,45,923, leaving only a sum of Rs. 6,81,858 to be
taken to the general reserve. It is not the case of the assessee-company
that simply because the general reserve was "created" by the board of
directors on August 30, 1969, by showing the figure of Rs. 25,45,923
in the balance-sheet as on March 31, 1969, and signing the same, it will not be
referable to or relate back to 1st April, 1969, the first day of the previous
year relevant to the assessment year 1970-71. On the other hand, it is the case
of the assessee-company that by reason of the
judgment of the Supreme Court in CIT v.
Mysore Electrical Industries Ltd, [1971] 80 ITR 566
(to which we shall ourselves refer later in the course of the judgment),
the "creation" of the reserve on August 30, 1969, will relate back to
1st April, 1969. If so, the question being not one of form, but of substance,
the general reserve that was created as a result of the action of the company
in its general meeting held on September 30, 1969, was the general reserve of
Rs. 6,81,858 only and naturally that will relate back to 1st April, 1969. It is
not the particular form that is adopted or the particular procedure that is
followed which will determine the real nature of a transaction. In fact, no
amount of ingenuity or jugglery in the procedure followed can conceal the real
nature of a transaction. Logically speaking, out of the surplus profits, the
amount recommended to be paid to the shareholders by way of dividend must be
first set apart before a reserve can be created, because the amount payable by
way of dividend is a sum of money that will go out of the coffers of the
company, while the amount set apart by way of reserve will remain with the
company itself. Reversing this logic, if any company first attempts
to set apart the surplus profits as a general reserve and thereafter out of
that general reserve declares a certain amount by way of dividend payable
to the shareholders, that sequence itself cannot affect or alter the real
nature of the transaction. In this particular case, as we have already pointed
out, the balance-sheet was signed by the board of directors on August 30, 1969,
and their report was dated September 1, 1969. In this report, they stated :
"Subsequent to the signing of the balance-sheet,
your directors thought it desirable to recommend a dividend at 15% for the year
ended March 31, 1969, from out of the profits of that year, absorbing a sum of
Rs. 18,64,065, subject to deduction of tax, on the paid up capital of the
company, viz., Rs. 1,24,27,100".
This will give an impression that there was a
sequence of two events, namely, first, signing of the balance-sheet and
thereafter the board of directors thinking it desirable to recommend a
dividend. The attempt that was made by this procedure was to create an
impression as if the general reserve was first created and only thereafter the
recommendation for payment of dividend out of the general reserve was made. But
that attempt cannot succeed in this case, because the very statement contained
in the balance-sheet, which we have extracted already, namely, "No
appropriation has been made for dividend on shares. Dividend when declared will
be paid out of the general reserve", clearly establishes that even when
the board of directors signed the balance-sheet on August 30, 1969, they did
think of recommending to the general body, declaration of dividend. It is in
view of this only that Mr. S. Swaminathan, learned
counsel for the asses-see-company, represented to us that he was not advancing
any argument based upon the general reserve being created on August 30, 1969,
and the recommendation for declaration of dividend being made on the next
working day, namely, September 1, 1969.
So far we have approached this question without any
reference whatever to any decided case, but solely on the basis of the
statutory provisions contained in the Act and the Companies Act, 1956. Even for
the conclusion which we have reached, namely, that having regard to the
language of s. 217(1)(b) of the Companies Act, 1956, a reserve is created only
by the general body at its meeting, we find support in the decision of the
Bombay High Court in CIT v. Aryodaya Ginning and Manufacturing
Co. Ltd. [1957] 31 ITR 145 (Bom), which was referred
to with approval by the Supreme Court in CIT v. Mysore
Electrical Industries Ltd. [1971] 80 ITR 566. In CIT v. Aryodaya
Ginning and Manufacturing Co. Ltd. [1957] 31 ITR 145 (Bom),
the assessee was a limited liability company. The
company made up its accounts at the end of December every year. For the year
ending 31st December, 1948, the directors made certain appropriation of the
profits of that year and the profits brought forward from the previous year and
allocated certain amounts to the reserve fund and dividend reserve fund. At a
general meeting held on June 27, 1949, the company accepted the recommendation
of the directors and adopted the balance-sheet. In the assessment of the
company to the business profits tax for the chargeable accounting period
January 1, 1949, to March 31, 1949, under the Business Profits Tax Act, 1947,
the company claimed that the amounts allocated to the reserve fund and the
dividend reserve fund should be taken into account in computing its capital for
the purpose of abatement, inasmuch as those reserves appeared in the
balance-sheet as on December 31, 1948. The contention of the department was
that as the reserves were not sanctioned by the shareholders till 27th June,
1949, they could not be treated as reserves for the chargeable accounting
period of January 1, 1949, to March 31, 1949. The Bombay High Court observed
(p. 150):
"Now, there is no doubt in this case that these amounts—and
we will deal for the time being only with the reserve with regard to the
amounts appropriated to the reserve fund and the dividend reserve fund—did
constitute reserves. The only question is as to the date when they constituted
reserves. It is undoubtedly true that the function of the directors under the
Companies Act is to make a recommendation as to how the profits should be
distributed or allocated and it is the right of the shareholders ultimately to
decide at a general meeting. There were profits made by this company at the end
of 31st December, 1948, and those profits were in the sum of Rs. 28,94,946-11-0
and these profits had to be dealt with by the directors and in respect of them
recommendation had to be made by the directors, and the company law provides
that dividend must be declared out of these profits after all the necessary
appropriations have been made, and, therefore, the directors proceeded to make
the appropriations and the appropriations included the taking of a sum of Rs.
11,08,000 to the reserve fund and a sum of Rs. 1,50,000 to the dividend reserve
fund. Now, when this recommendation came before the shareholders at the general
meeting, what the shareholders accepted and adopted in the form of a resolution
was that these amounts should constitute reserves as of the 31st December,
1948. The fallacy underlying the Commissioner's contention is that these
amounts constituted reserve as of the 27th June, 1949, when the resolution was
passed. Although the resolution was passed on the 27th June, 1949, the
resolution obviously had a retrospective effect and it referred to the profits
of the year ending on 31st December, 1948, to the appropriations to be made in
the balance-sheet as of the 31st December, 1948, and the reserves that should
be constituted and shown in the balance-sheet as of the 31st December, 1948.
When we look at the balance-sheet of the year ended on 31st December, 1948,
these amounts are shown respectively in the reserve fund and the dividend
reserve fund. Therefore, the shareholders by passing a resolution on the 27th
June, 1949, did not decide that these amounts should constitute reserves as
from that date, but they accepted the recommendation of the directors that
these amounts should constitute reserves of the company as of the 31st
December, 1948".
After the above observation, there follows the
following paragraph, which is of immediate relevance to the point which we have
just dealt with (p. 151):
"The Advocate-General says that there must be
someone with the requisite authority who can decide that a certain amount
should constitute reserve. The directors under the Companies Act do not have
the requisite authority, only the shareholders have it, and till somebody has
decided to this effect no part of the profits can become reserves. Now, that
proposition is perfectly sound, but in advancing that argument what is
overlooked is that the body of shareholders who are the persons with the
requisite authority do not merely determine that a certain amount should
constitute reserve, but they also determine and have the necessary authority
for determining that that amount should constitute reserve as from a particular
date, and in this case there is no doubt that the general meeting of the
shareholders was considering the accounts for the year ended 31st December,
1948, and passing resolution with regard to those accounts".
This passage is decisive on the question as to who is
the authority competent to create "reserves" and shows that it is the
general body of a company that has competency to create "reserves".
The above judgment of the
This decision of the Bombay High Court, namely, CIT
v. Aryodaya Ginning and Manufacturing Co. Ltd. [1957]
31 ITR 145 (Bom) was referred to with approval by the
Supreme Court in CIT v. Mysore Electrical Industries
Ltd. [1971] 80 ITR 566, as stated already. As a matter of fact, when summarising the facts of that case, the Supreme Court
specifically referred to the directors making only a recommendation for the
purpose of creating a "reserve".
No decided case was brought to our notice approaching
this question regarding the construction of the relevant provisions of the Act
from the angle from which we have approached, namely, the authority or the body
under the Companies Act, 1956, competent to create a "reserve" and
when the company in its general meeting adopts the balance-sheet signed by the
board of directors and the report of the directors appended thereto, the
declaration of the dividend and the creation of the reserve are effected
simultaneously by the general body, which is competent to act with reference to
both.
We shall now consider the question from another point
of view. Even assuming that the entire sum of Rs. 25,45,923
is "reserve" within the scope of r. 1(iii) of the Second Schedule to
the Act, yet by the operation of the Explanation to that rule, the sum of Rs.
18,64,065 recommended for declaration of dividend will cease to be part of that
reserve. It was not disputed before us that the sum of Rs. 18,64,065
came out of the sum of Rs. 25,45,923 shown as "reserve" in the
balance-sheet signed by the directors on August 30, 1969. We have already
extracted the Explanation to r. 1 of the Second Schedule to the Act. That
Explanation makes it clear that for the purpose of computation of the capital
of a company under the provisions of the Second Schedule, certain amounts
standing to the credit of any account in the books of a company as on the first
day of the previous year relevant to the assessment year which are of the nature
mentioned in the Explanation shall not be regarded as a reserve. The
Explanation refers to item (5) or item (6) or item (7) under the heading
"Reserves and Surplus" or of any item under the heading "Current
Liabilities and Provisions" in the column relating to
"Liabilities" in the "Form of Balance-sheet" given in Pt. I of Sch. VI to the Companies Act, 1956
(1 of 1956). Section 211(1) of the Companies Act, 1956, states :
"Every balance-sheet of a company shall give a
true and fair view of the state of affairs of the company as at the end of the
financial year and shall, subject to the provisions of this section, be in the
form set out in Part I of Sch. VI, or as near thereto
as circumstances admit or in such other form as may be approved by the Central
Government either generally or in any particular case; and in preparing the
balance-sheet due regard shall be had, as far as may be, to the general
instructions for preparation of balance-sheet under the heading 'Notes' at the
end of that part".
In the form of balance-sheet as Pt.
I in Sch. VI to the Companies Act, 1956, under the
heading "Current Liabilities and Provisions", there are 13 items, the
first 7 items being under the sub-heading "A. Current Liabilities"
and the remaining 6 items being under the sub-heading "B.
Provisions". The 9th item is "Proposed dividends"
"Notes" at the end of Pt. I of Sch. VI to
the Companies Act, 1956, contains the following, among
others:
"General
instructions for preparation of balance-sheet.—(a) The information
required to be given under any of the items or sub-items in this form, if it
cannot be conveniently included in the balance-sheet itself, shall be furnished
in a separate Schedule or Schedules to be annexed to and to form part of the
balance-sheet. This is recommended when items are numerous".
Thus, it will be seen that under s. 211(1) of the
Companies Act, 1956, read with the form of balance-sheet in Pt. I of Sch. VI to the said Act, a balance-sheet should contain
"Proposed dividends" as an item under the heading "Current
Liabilities and Provisions". Whether the failure to include such item will
impose any liability on the board of directors is a different matter. What is
relevant for the purpose of the point under consideration is, that the statute
contemplates showing the amount representing the proposed dividend as an item
under the heading "Current Liabilities and Provisions", particularly
under the sub-heading "B. Provisions". The Explanation states that
such item shall not be regarded as a reserve for the purpose of computation of
the capital of a company under the provisions of the Second Schedule to the
Act.
In a case like the present one,
where the board of directors have not shown the amount of proposed dividend in
the balance-sheet itself, the question for consideration is, what is the legal
consequence. In order to meet such contingency, the Explanation to r. 1
of the Second Schedule to the Act takes care to say "any amount standing
to the credit of any account in the books of a company as on the first day of
the previous year relevant to the assessment year which is of the nature of
item (5)......or of any item under the heading 'Current Liabilities and
Provisions'". The Explanation deliberately does not say, "any amount
standing to the credit of any account in the books of a company as on the first
day of the previous year relevant to the assessment year, which is an item
under the heading 'Current Liabilities and Provisions'". The use of the
expression, "of the nature" occurring in the Explanation is significant.
In this particular case, if the balance-sheet was prepared by
the assessee-company in the form of balance-sheet
given in Pt. I of Sch. VI to the Companies
Act, 1956, the board of directors should have shown the sum of Rs. 18,64,065 as item 9 under the heading "Current
Liabilities and Provisions". Their deliberate omission to show the said
amount in that manner cannot affect the legal consequences flowing from the
Explanation. As a matter of fact, the Explanation is in the nature of a proviso
or exception to r. 1 providing that certain amounts shall not be regarded as
reserve for the purpose of computation of the capital of a company under the
provisions of the Second Schedule to the Act. The Explanation from its very
nature can come into operation only if the amount in question falls under r.
1(iii) of the Second Schedule to the Act as a reserve. Inasmuch as the
Explanation has the effect of cutting down the scope of reserves under r.
1(iii) the same will not come into operation if the particular amount does not
fall within the scope of r. 1(iii) at all. Hence, even assuming that the sum of
Rs. 18,64,065 forming part of the sum of Rs. 25,45,923
constitutes a "general reserve" under r. 1(iii) of the Second
Schedule to the Act, still by operation of the Explanation, the said amount,
namely, Rs. 18,64,065 shall not be regarded as a reserve for the purpose of
computation of the capital of the assessee-company in
the present case. Hence, looked at from any point of view, it necessarily
follows that the assessee-company is not entitled to
include the sum of Rs. 18,64,065 in the computation of its capital for
ascertaining the statutory deduction.
So far, we have considered the question as purely one
of interpretation of the statutory provisions. In view of this and in view of
the fact that no decided case cited before us has approached this question from
this angle, strictly it may not be necessary to refer to any decided case.
However, having regard to the fact that the matter has come before this Bench
of five judges only because of certain observations contained in the Full Bench
judgment of this court in Madras Motor and General Insurance Co. Ltd. v. CWT
[1979] 117 ITR 534, already referred to, we shall briefly note the decisions
which have a bearing on this question and which have been cited at the Bar.
We shall first note two decisions of the Supreme
Court, one arising under the W.T. Act and the other arising under the Act. The
decision arising under the W.T. Act is Kesoram
Industries and Cotton Mills Ltd. v. CRT [1966] 59 ITR 767 (SC). In that case,
the Supreme Court was considering the provisions of the W.T. Act, 1957, and as
to what constituted a debt for the purpose of ascertaining the net wealth. The
Supreme Court observed (p. 772):
"The second question does not call for a
detailed scrutiny. Under section 2(m) of the Wealth-tax Act, 'net wealth' means
the amount by which the aggregate value computed in accordance with the
provisions of the said Act of all the assets of the assessee
on the valuation date is in excess of the aggregate value of all the debts owed
by the assessee on the said date. The directors of
the assessee-company showed in the profit and loss
account a sum of Rs. 15,29,855 as the amount of dividend proposed to be
distributed for the year ending March 31, 1957; but the said dividend was
declared by the company at its general body meeting only on November 27, 1957.
The question is whether the amount set apart as dividend by the directors was a
debt owed by the company on the valuation date.
The directors cannot distribute dividends but they
can only recommend to the general body of the company the quantum of dividend
to be distributed. Under section 217 of the Indian Companies Act, there shall
be attached to every balance-sheet laid before a company in general meeting a
report by its board of directors with respect to, inter alia,
the amount, if any, which it recommends to be paid by way of dividend. Till the
company in its general body meeting accepts the recommendation and declares the
dividend, the report of the directors in that regard is only a recommendation
which may be withdrawn or modified, as the case may be. As on the valuation
date nothing further happened than a mere recommendation by the directors as to
the amount that might be distributed as dividend, it is not possible to hold
that there was any debt owed by the assessee to the
shareholders on the valuation date".
We are of the opinion that the said decision of the
Supreme Court does not have any direct bearing on the question we are
considering. In the present case, we are not considering the question as to
what constitutes a debt and we are considering only as to what constitutes a
reserve. Since under the W.T. Act, the value of all the debts owed by the assessee on the valuation date has to be deducted from the
value of all the assets of the assessee on that date,
the question that had to be considered by the Supreme Court was whether the
dividend which was declared by the assessee-company
subsequent to the valuation date could be said to be a debt owed by the company
on the valuation date. That is not the position in the present case.
The next decision of the Supreme Court is CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566,
mentioned already. That decision was directly concerned with the interpretation
of certain provisions of the Act. In that case, the directors of the assessee-company on 8th August, 1963, out of the profits of
the year ending 31st March, 1963, appropriated several sums for different
purposes. The items appropriated which came up for consideration before the
Supreme Court were : (i) Rs.
2,56,000 as plant modernisation and rehabilitation
reserves; (2) Rs. 1,00,000 as loan redemption reserves, and (3) Rs. 89,557 as
development rebate reserve. These were three of the items of reserve which the
directors of the assessee-company in their report to
the general body of the shareholders proposed as appropriations out of the
profits of the year ending on 31st March, 1963. The contention of the revenue
was that these appropriations having been made on 8th August, 1963, could not
be treated as components of capital "as on the first day of the previous
year", that is, the 1st April, 1963, in terms of r. 1 of the Second.
Schedule to the Act and that these could only be taken into consideration in
the subsequent year commencing on 1st April, 1964, on the ground that on 1st
April, 1963, they only formed a part of the mass of undistributed profits, no
portion of which had been earmarked or set apart for any particular purpose.
The Supreme Court, after extracting r. 1 of the Second Schedule to the Act,
rejected this contention. The Supreme Court observed (p. 569):
"It is well known that the accounts of the
company have to be made up for a year up to a particular day. In this case that
day was the 31st March, 1963. If it was reasonably practicable to make up the
accounts up to the 31st March, 1963, and present the same to the directors of
the respondent on April 1, 1963, they could have made up their minds on that
day and declared their intention of appropriating the said and other sums to
reserves of different kinds. But the fact that they could not do so for the
simple reason that the calculation and collection of figures of all the items
of income and expenditure of the company for the year ending March 31, 1963,
was bound to take some time cannot make any difference to the nature or quality
of the appropriation of the profits to reserves as determined by the directors
after the first of April, 1963. Their determination to appropriate the sums
mentioned to the three separate classes of reserves on the 8th August, 1963,
must be related to the 1st of April, 1963, i.e., the beginning of the accounts
for the new year and must be treated as effective from that day".
It is in that context only the Supreme Court referred
to with approval the decision of the Bombay High Court in CIT v. Aryodaya Ginning and Manufacturing Co. Ltd. [1957] 31 ITR
145, already drawn attention to. Even the learned counsel for the assessee-company relied on this decision for the purpose of
contending that the general reserve of Rs. 25,45,923
shown in the balance-sheet signed by the board of directors on August 30, 1969,
should be related to 1st April, 1969. However, when we asked the learned
counsel as to why the dividend declared by the general body of the company on
September 30, 1969, cannot similarly relate back to 1st April, 1969, the only
answer of the learned counsel was that the decision of the Supreme Court in CIT
v. Mysore Electrical Industries Ltd. [1971] 80 ITR
566 was concerned with "reserve" and the principle of that decision
cannot be applied to a "liability" like declaration of dividend. We
are unable to accept this contention. As a matter of fact, on the reasoning of
the Supreme Court in CIT v. Mysore Electrical
Industries Ltd. [1971] 80 ITR 566, even the fact whether a company had made a
profit or suffered a loss can be ascertained only subsequent to 31st March or
1st April of the year, because the calculation and the collection of figures of
all the items of income and expenditure of the company will certainly take
time. If a company has branches at different places, all the dealings of these
branches will have to be pooled for the
purpose of finding out whether the company has made a profit or suffered a
loss. Therefore, even the fact whether a company has made a profit or suffered
a loss can be ascertained only very much later than the 1st April of a year. If
so, we are unable to make a distinction between the creation of a reserve and a
declaration of a dividend with reference to relation back to the first April of
the year in question. In our opinion, the fact that the declaration of dividend
creates a liability on the part of the company towards its shareholders does
not in any way affect the question. By holding that the declaration of dividend
will relate back to the 1st day of April, the court is not affecting the rights
and liabilities between the company and its shareholders with reference to the
dividend. It is merely adopting a practical and common-sense approach for the
purpose of computation of the capital under the Second Schedule to the Act, and
any such relation back will not affect the inter se rights and obligations
between the company and its shareholders. This conclusion of ours is
independent of the conclusion we have already reached, namely, that the
creation of a reserve and declaration of dividend take place simultaneously
and, therefore, the real reserve is the surplus profits proposed to be taken to
the reserve by the board of directors minus the amounts recommended by the
board of directors for declaration of dividend.
As far as
this court is concerned, there are two direct decisions dealing with the
question. One is Nagammal Mills Ltd. v. CIT [1974] 94
ITR 387 (Mad). In that case, the assessee-company
made a profit of Rs. 9,91,092 for the year ending on
30th April, 1961. The balance of profit brought forward from the earlier year
was Rs. 2,12,352. The board of directors in their
report dated November 12, 1961, to the shareholders recommended a dividend of
Rs. 31,465 on preference shares and a dividend of Rs. 3,12,020
on ordinary shares, totalling Rs. 3,43,485. in computing the capital as on May 1, 1961, under r. 1 of
the Second Schedule to the Act, the assessee claimed
among others that the said sum of Rs. 3,43,485 should be treated as reserve.
The Tribunal, relying on the decision of the Supreme Court in CIT v. Century
Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499, held that on May 1,
1961, the whole of the profits of the company remained unappropriated
to any specific account or specific purpose and no reserve has been created out
of the profits by the board of directors or by the general body of
shareholders, and, therefore, they cannot be treated as reserves contemplated
by r. 1 of the Second Schedule. Dealing with this conclusion of the Tribunal,
this court observed (p. 390):
"Before
considering each of the four items, provision for bonus, dividend, taxation and
development rebate reserve, it is necessary to consider in the first instance
the correctness of the reasoning of the Tribunal holding that there is no
appropriation made by the competent authority as on May 1, 1961; and,
therefore, the sums cannot be treated as reserves. Though the appropriation is
made by the company subsequent to the close of the earlier year, it relates
back to the first day of the accounting year, that is, May 1, 1961, in this
case, as the words 'as on' occurring in rule 1 of Schedule 2 indicate that
though the appropriation has been made actually on a later date, it is as on
the first day of the previous year [vide CIT v. Mysore
Electrical Industries Ltd. [1971] 80 ITR 566 (SC)]. The position is different
in the case reported in Century Spinning and Manufacturing Co.'s case [1953] 24
ITR 499 (SC), which dealt with the provision of rule 2(1) of Schedule II of the
Business Profits Tax Act of 1947, which used the words 'on the first day of the
accounting period' as distinguished from the words 'as on' used in rule 1 of
Schedule II of the Super Profits Tax Act with which we are concerned.
Therefore, the view taken by the Tribunal that the appropriation came to be
made subsequent to the first day of the previous year and, therefore, it should
be taken that on the relevant date the profits have not been appropriated for
any particular purpose cannot, therefore, be accepted. Though the appropriation
came to be actually made by the company on November 12, 1961, it should be
deemed to relate back to the first day of the previous year".
With regard
to the sum of Rs. 3,43,485 set apart for payment of
dividend, this court observed (p. 391 of 94 ITR):
"Coming
to the provision for dividend of Rs. 3,43,485 it is
seen that the said dividend has actually been paid out by the company to its
shareholders. Though the same was set apart for a specified purpose, it cannot
be said to be available for the future use of the company so as to partake the
character of capital. The said sum set apart for payment towards a specific
liability cannot be said to be a reserve for future use of the company. This sum, has, therefore, to be treated as not a reserve".
The second
decision is Madras Auto Service v. CIT [1978] 112 ITR 540 (Mad). In the said decision,
which was rendered by two of us (Ismail J., as he
then was, and Sethuraman J.), the question that came
to be considered was whether the sum of Rs. 7,44,000,
representing proposed dividends, could not be taken into account for the
purpose of computation of capital of the assessee-company
under the Second Schedule to the Super Profits Tax Act, 1963. The Bench
referred to the earlier decision of this court in Nagammal
Mills Ltd. v. CIT [1974] 94 ITR 387, and held that the amount of Rs. 7,44,000
representing the proposed dividends could not be taken into account for
computation of the capital. The learned counsel who appeared for the assessee in that case and who is also appearing for the assessee-company in the present case argued that the
decision of this court in Nagarmmal Mills Ltd. v. CIT
[1974] 94 ITR 387 required reconsideration in the light of the decision
of the Supreme Court in Kesoram Industries and Cotton
Mills Ltd. v. CWT [1966] 59 ITR 767, already referred to. After referring to
the decision of the Supreme Court in Kesoram
Industries and Cotton Mills Ltd. v. CWT the Bench observed (p. 543):
"Thus, it is clear that what the Supreme Court
was considering in that case was whether the amount set apart for proposed
dividend constituted a debt due by the company to its shareholders or not. We
are of opinion that such a provision, which has been held to be not a debt,
does not automatically become a reserve for the
purpose of the present case. Therefore, in our veiw,
the earlier decision of this court on this point does not require any
reconsideration.
We may also point out that section 211 of the
Companies Act, 1956, refers to the form of balance-sheet and the contents and
form of the profit and loss account contained in Schedule VI, Parts I and II of
the Act. With regard to the form of the balance-sheet, there are separate heads
under the major head of 'Liabilities', one such head being 'Reserves and
Surplus' and the other head being 'Current Liabilities and Provisions'. There
is a sub-head 'B. Provision'. Immediately under this sub-head 'B. Provisions',
we have two items, 'provision for taxation' and 'proposed dividends'. Thus, it
will be clear that under the Companies Act, these two are treated as different
from reserves and are treated only as provisions. The relevancy of our
reference to the Companies Act, 1956, acquires further strength in view of the
fact that Schedule VI to the Companies Act is actually referred to in the
Explanation to rule 1 under the Second Schedule to the Companies (Profits)
Surtax Act, 1964".
The next decision is that of the Bombay High Court in
CIT v. Bharat Bijlee Ltd.
[1977] 107 ITR 30. The two questions which the Bombay High Court had to
consider in the said decision were :
"1. Whether, on the facts and in the circumstances
of the case, the dividend reserve was a reserve includible in the computation
of capital of the assessee-company as contemplated
under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act,
1964?
2. If the answer to question No. 1 is in the
affirmative, whether the dividend reserve includible in the computation of
capital of the assessee-company as on July 1, 1964,
was in the amount of Rs. 5,90,000 or in the amount of Rs. 3,60,000?"
In that case, the balance-sheet of the company for
the year ending June 30, 1964, showed an item of dividend reserve under the
head "Reserves and surplus". The relevant part of the balance-sheet
was as under:
|
"Reserves and surplus |
|
|
|
|
Rs. |
Rs. |
|
Dividend reserve : as per last account |
3,45,000 |
|
|
Less :
Transferred to profit and loss account for dividend for 1962-63 |
1,90,000 |
|
|
|
1,55,000 |
|
|
Set aside this year |
4,35,000 |
|
|
|
|
5,90,000". |
The directors
in their report dated October 22, 1964, stated that after transferring an
amount of Rs. 4,35,000 to the dividend reserve the
balance to be carried forward was Rs. 1,941. The directors recommended that a
dividend of Rs. 8 per share on the 20,000 old equity shares (subject to
deduction of tax) and a dividend of Rs. 7 per share on the 10,000 new equity
shares (subject to deduction of tax) aggregating to Rs. 2,30,000 be paid out of
the dividend reserve. The dividend as recommended by the board of directors......was
approved of by the shareholders at the annual general meeting and ultimately
was paid to them. The question arose before the taxing authorities as to what
was the capital employed in the business on the relevant date, namely, July 1,
1964. It was contended on behalf of the assessee-company
that the entire dividend reserve amount of Rs. 5,90,000
as on July 1, 1964, was a reserve includible in the computation of capital for
the surtax assessment year 1966-67. In the alternative, it was contended that
in any case the balance of Rs. 3,60,000 in the dividend reserve account, after
excluding the sum of Rs. 2,30,000 recommended by the directors for the payment
of dividends for the year ended June 30, 1964, was dividend reserve and that
such amount of Rs. 3,60,000 formed part of the capital of the assessee-company as on July 1, 1964, for the purposes of
surtax assessment for the assessment year 1966-67. The Tribunal took the view
that on the first day of the previous year, that is, as on July 1, 1964, the
balance-sheet clearly showed the said sum of Rs. 3,60,000 as constituting part
of the dividend reserve, the amounts in question having been duly transferred
from profits to reserve in the earlier years by the authorities of the company
competent to do so and that the sum of Rs. 2,30,000 earmarked for payment of
dividends was not a reserve as on July 1, 1964, but the balance amount of Rs.
3,60,000 in the dividend reserve account was a reserve includible in the
computation of capital as on July 1, 1964, for surtax purposes for the
assessment year 1966-67. It was contended on behalf of the assessee
before the High Court that as a sum of Rs. 1,55,000
was already standing to the credit of the dividend reserve account, only a sum
of Rs. 75,000 should be treated as being available from the current profits for
payment of the sum of Rs. 2,30,000 as proposed dividend and, therefore, a sum
of Rs. 5,15,000 should be regarded as includible in the computation of capital
for the purpose of surtax. The High Court rejected this contention. The High
Court pointed out thus (pp. 34, 35) :
"For the year ending June 30, 1964, the
directors had recommended an aggregate amount of Rs. 2,30,000.
No independent provision was made for payment of this amount but it was stated
in the report that the said amount will be paid out of the dividend reserve.
Out of the profits or income for the year ending June, 30, 1964, a sum of Rs. 4,35,000 was directed to be appropriated towards the dividend
reserve account. Thus, the whole of the sum of Rs. 2,30,000
could come out of the said amount and the balance will be credited to the
dividend reserve account so as to be added to the amount of Rs. 1,55,000
already standing to the credit of the dividend reserve account. From the
commercial point of view if any amount is required for incurring any
expenditure or making any disbursements in a current year, then ordinarily the
same will come out of the income of the company if it is available and only if
it is insufficient then the past savings will be resorted to for the purpose of
incurring the expenditure or making disbursements. In the present case, there
is no doubt that, ordinarily, if the current profits are sufficiently
available, then the same will be utilised for the
purpose of payment of the dividend and, looked at from that point of view, the
sum of Rs. 2,30,000 should be regarded as having been paid out of the sum of
Rs. 4,35,000. The aggregate amount thus standing to the credit of the dividend
reserve account would be Rs. 3,60,000 after payment of
the dividend amount of Rs. 2,30,000. Thus, our answers to the questions
referred are as under :
Question No. 1 is answered in the affirmative, but
the quantum of the amount which should be treated as reserve includible in the
computation of capital of the assessee-company will
depend upon the facts of the case.
Question No. 2. The dividend reserve includible in
the computation of the capital of the assessee-company
as on July 1, 1964, was the amount of Rs. 3,60,000".
Thus, it will be seen, that in this case, it was
assumed on both sides that the dividend paid during the year of account will
not form part of the reserve and the only question was whether that dividend
should be adjusted exclusively against the amount set apart during the year of
account or should be first adjusted against the amount already standing to the
credit of the dividend reserve and the excess only being adjusted against the
dividend reserve created for the year of account.
Similar is yet another decision of the Bombay High
Court in CIT v. Marrior (
"Such a contention could be accepted only if the
directors in the report had specifically stated that for the purpose of payment
of dividend recommended by them the past balance standing to the credit of
general reserve was only to be utilised for the
payment of such dividend, However, the directors have merely stated that the
dividend recommended by them if approved by the shareholders at the annual
general meeting to be held on March 25, 1970, will be paid out of general
reserve. Ordinarily, from the common sense point of view and looking at the
matters commercially, if the current income is sufficient to meet the expenses
to be incurred and for disbursement to be made in respect of that year, the
said current income should be utilised for the
discharge of such expenses and disbursement and the past savings would not be
touched unless it is expressly otherwise stated while doing so".
For this conclusion, the court relied on its decision
in CIT v. Bharat Bijlee
Ltd. [1977] 107 ITR 30 (Bom) referred to already.
Consequently, this decision does not take the matter any further.
Yet another Bench decision of the same High Court consisting
of the same two judges rendered on July 29, 1976, is CIT v. Hindustan Sugar
Mills Ltd. [1977] 107 ITR 659, 660 (Bom). In that
case also, the question referred to the court were :
"Assessment year 1965-66 :
Whether, on the facts and in the circumstances of the case, the dividend
reserve of Rs. 17,25,000 as on July 1, 1963, was includible in the computation
of capital of the assessee under rule 1 of the Second
Schedule to the Companies (Profits) Surtax Act, 1964, for the assessment year
1965-66?
Assessment year 1966-67 :
Whether, on the facts and in the circumstances of the case, the general reserve
to the extent of Rs. 18,35,715 as on July 1, 1964, was includible in the
computation of capital of the assessee-company under
rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, for
the assessment year 1966-67?"
The court pointed out that so far as the reference
was concerned, the facts need not be stated because the principles on the basis
of which the questions were to be answered had been fully laid down in more
than one decision of that court decided that day and a few days earlier. The
court stated:
"For the assessment year 1965-66, the crucial
date is July 1, 1963. It is clear from the balance-sheet and profit and loss account
for the year ending June 30, 1963, that the sum of Rs. 17,25,000
is appropriated from the current profits to the dividend reserve account and
out of that the sum of Rs. 17,15,715 is directed to be paid as dividend in the
same year. Thus, the sum of Rs. 17,15,715 which is the
proposed dividend will not be includible in the computation of capital and only
the balance of Rs. 9,285 will be treated as capital for the purpose of the
Surtax Act. Therefore, our answer to question No. 1 is that out of an amount of
Rs. 17,25,000, the sum of Rs, 9,285 as on July 1,
1963, was includible in the computation of capital for the assessment year
1965-66, under rule 1 of the Second Schedule to the Companies (Profits) Surtax
Act, 1964.
So far as the assessment year 1966-67 is concerned,
instead of transferring the amount to the dividend reserve, the amount of Rs.
25,00,000 was transferred to the general reserve and
the sum of Rs. 18,35,715 was directed to be paid as dividend for the same year
from the amount standing to the credit of the general reserve. It is clear that
the nomenclature given to an account is not conclusive. The sum of Rs. 18,35,715 was the proposed dividend in relation to the year
ending June 30, 1964, and it is not includible in the computation of capital of
the assessee-company. Thus, our answer to question
No. 2 is that the general reserve to the extent of Rs. 18,35,715 as on July 1,
1964, was not includible in the computation of capital of the assessee-company but the sum of Rs. 6,64,285 as on July 1,
1964, was includible in the computation of capital of the assessee-company
under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act,
1964, for the assessment year 1966-67".
Thus, it will be clear that the basis of the
conclusion as set out in this particular decision directly supports the
conclusion we have reached.
Mr. S. Swaminathan, learned
counsel for the assessee-company, placed strong
reliance on three decisions, one of the Bombay High Court in CIT v. Indian
Smelting & Refining Co. Ltd. [1977] 107 ITR 793, the second of the Gujarat
High Court in CIT v. Mafatlal Chandulal
& Co. Ltd. [1977] 107 ITR 489 and the third of the Andhra Pradesh High
Court in Super Spinning Mills Ltd. v. CIT [1979] 120 ITR 512. In our opinion,
none of these decisions supports the contention of the learned counsel for the assessee-company. In the decision in CIT v. Indian Smelting
& Refining Co. Ltd. [1977] 107 ITR 793 (Bom), the
facts have not been fully set out. The judgment opens up by stating
:
"The Tribunal in this case has taken the view
that 'general reserve' should not be reduced by the amount of dividend declared
while computing the capital under the Surtax Act, 1964, as it cannot be said to
relate back to the first day of the accounting year. The question is raised
with a view to challenge the correctness of this finding".
The court referred to the decisions of the Supreme
Court in Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53; 39
Comp Cas 410, Purshottamdas
Thakurdas v. CIT [1963] 48 ITR (SC) 206 and CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566, and
considered the distinction between the conceptions of "provision" and
"reserve". The court pointed out that when there was no liability on
the last day of the year, the question of making a provision would not arise.
The court also referred to its earlier decision in CIT v. Aryodaya
Ginning and Manufacturing Co. Ltd. [1957] 31 ITR 145, already referred to, and
pointed out (pp. 795, 796 of 107 ITR):
"This decision of this High Court cannot be
attracted for application to the facts of the present case, because in the
present case no amount whatsoever has been set apart even for dividend reserve.
Actually, except for a bare recommendation in the directors' report for
declaration of dividend, no amount is set apart for payment of the said amount.
In such a case, if and when the shareholders decide at an annual general
meeting to declare dividend, the dividend shall have to be paid out of the
general reserves. The liability to pay the dividend will arise only from and
after the date of the resolution of the shareholders at the general meeting and
it will be payable only from such date as may be specified in the resolution.
When dividend is payable out of general reserves if declared by the
shareholders at a general meeting, there is no question of making any provision
for a known or anticipated liability and it is not possible for us to take the
view that the amount to be paid pursuant to the resolution of the directors to
declare a dividend should be treated as a provision or should be deducted from
the amount of general reserve for the purpose of determining the capital under
the Surtax Act, 1964. As the liability will arise prospectively, it can never
relate back to the first day of the accounting year. Thus, in our opinion, the
Tribunal was right in taking the view that the amount of dividend declared at a
future date when the general meeting was held ought not to be deducted from the
general reserves for the purposes of computing the capital under the Surtax
Act, 1964".
We are of the opinion that this decision cannot be of
any assistance whatever to the assessee-company in
the present case. In the first place, that decision was rendered obviously on
an application for a direction to the Tribunal to refer the case to the High
Court and, therefore, the decision itself does not refer to the facts of the
case. Secondly, the court distinguished its earlier decision in CIT v. Aryodaya Ginning and Manufacturing Co. Ltd. [1957] 31 ITR
145 (Bom) only on the ground that no amount
whatsoever had been set apart even for dividend reserve and that actually
except for a bare recommendation in the directors' report for declaration of
dividend, no amount was set apart for payment of the said amount. However, the
facts of the present case are different. As we have pointed out already, in
their report dated September 1, 1969, the directors actually recommended the
distribution of dividend in a sum of Rs. 18,64,065 and
the fact that this amount was mentioned only in the directors' report and not
in the balance-sheet will not affect the position. Further, this decision of
the Bombay High Court, namely, CIT v. Indian Smelting & Refining Co. Ltd.
[1977] 107 ITR 793, was rendered on June 18, 1976, by the same two learned judges of that High Court,
namely, Kantawala C.J. and Tulzapurkar
J., as he then was, who rendered the decision in CIT v. Bharat
Bijlee Ltd. [1977] 107 ITR 30 (Bom)
on July 28 and 29, 1976 and the decision in CIT v. Marrior
(India) Ltd. [1977] 107 ITR 35 (Bom) on July 29,
1976, and the decision in CIT v. Hindustan Sugar Mills Ltd. [1977] 107 ITR 659
on July 29, 1976, and, therefore, it cannot be assumed that the learned judges
were contradicting themselves and in the later three decisions they took a view
different from the one which they had taken in this decision rendered on June
18, 1976, without even referring to the same in their later decisions.
The decision
of the Gujarat High Court relied on by the learned counsel for the assessee-company, as already stated, is CIT v. Mafatlal Chandu Lal & Co. Ltd. [1977] 107 ITR 489. In that case, the
following two questions were referred to the court:
"1. Whether, on the
facts and in the circumstances of the case, the sum of Rs. 3,31,069
standing in the provision for taxation account on December 31, 1961, was
includible in computing the capital of the company for the purposes of the
Super Profits Tax Act, 1963?
2. Whether, on the facts
and in the circumstances of the case, the sum of Rs. 2,13,600
standing in the proposed dividend account on December 31, 1961, was includible
in computing the capital of the company for the purposes of the Super Profits
Tax Act, 1963?"
In that
decision the court elaborately discussed the difference between the conceptions
of "provision" and "reserve" and referred to certain text
books on Accountancy and Modern Company Law and various decisions of the
Supreme Court as well as other High Courts in the country, including the
decision of the Supreme Court in CIT v. Mysore
Electrical Industries Ltd. [1971] 80 ITR 566. The court pointed out (p. 517):
"It is
clear that, so far as provision for taxation reserve, namely, Rs. 3,31,069 is concerned, the amount was set apart for meeting
liabilities known to exist and it was a provision as distinguished from a
reserve. Different considerations will, however, apply so far as the amount of
Rs. 2,13,600 is concerned. This amount was standing to
the 'proposed dividend' account of December 31, 1961. In view of the decision
of the Supreme Court in Mysore Electrical Industries Ltd.'s case [1971] 80 ITR 566, it is obvious that though
the resolutions of the board of directors of the company in general meeting
were passed subsequently, those resolutions relate back to December 31, 1961.
The decision of the Bombay High Court in Aryodaya
Ginning and Manufacturing Company Ltd.'s case [1957]
31 ITR 145, clearly shows that when directors make certain appropriations of
the profits for the year under consideration and the profits brought forward
from the previous year and allocate certain amounts to the dividend reserve
fund the amount in the dividend reserve fund must be taken into account in
computing the capital for the purpose of rule 1 of Schedule II to the Act of
1947. It is clear that the question that we have to ask ourselves is whether at
the end of the calendar year, that is, as on December 31, 1961, the amount of
Rs. 2,13,600 was set apart for a specific purpose to be put to use in future.
That is the ratio of the Supreme Court decision in Century Spinning and
Manufacturing Company Ltd.'s case [1953] 24 ITR 499,
which has been applied in subsequent cases. As Shah J. pointed out in Standard
Vacuum Oil Company's case [1966] 59 ITR 685 (SC), in its ordinary meaning, the
expression 'reserve' meant something specifically kept apart for future use or
for a specific occasion. The accounting practice followed by the company has to
be taken into account and the requirement of statute which the assessee-company is required to follow have also to be
borne in mind. It is because of this account-keeping practice that the statute
imposes upon the assessee-company under the Indian
Companies Act, 1956, particularly the form of the balance-sheet, that this
distinction between 'provision' and 'reserve' also becomes material for the
purpose of finding out what exactly constitutes 'reserve' under rule 1 of
Schedule II to the Act of 1963. It is true that though the Indian Companies Act
was in force when the Act of 1963 was enacted, there is no reference in the
definition section to the Companies Act, 1956, but in view of the decision of
the Supreme Court in Standard Vacuum Oil Company's case [1966] 59 ITR 685 (SC),
it is really not necessary that there should have been any such reference in
the definition section because the requirement of the statute which the company
is required to follow in its account-keeping practice have to be taken into
consideration while considering this question of reserve". (Underlining
is ours)
After
referring to the Guide to Company Audit, 3rd Edn., 1972, published by the
Research Committee of the Institute of Chartered Accountants of India, the
court proceeded to observe :
"It is
true, as Mr. Kaji has contended, in the light of the
decisions of the Supreme Court discussed above, that it is the substance and
not the form that matters and if there is no existing liability as at the date
of the balance-sheet, that is, December 31, 1961, in the instant case, the
amount set apart for the dividend cannot be said to be an amount set apart for
meeting a present liability. Though, therefore, under the Companies Act, the
proposed dividend has to be shown under the heading ' Provisions ', in
substance, it amounts to a 'reserve' as known to accountancy practice which has
been approved by the Supreme Court in Metal Box Company of India Ltd.'s case [1969] 73 ITR 53 (SC). Under these
circumstances we must hold that the amount of Rs. 2,13,600 standing in the
proposed dividend accounts as on December 31, 1961, was includible in computing
the capital of the company but the amount of Rs. 3,31,069 standing in the
'provision for taxation account' as on December 31, 1961, was not includible in
computing the capital of the company".
With great
respect to the learned judges who decided this case, we are not able to agree
with their reasoning or conclusion. The sentence underlined by us in
the portion of the judgment extracted above will clearly show that the court
was confusing between "allocation to a dividend reserve fund" and
"amount set apart for payment of the proposed dividend". The second
question referred to the court, as we have extracted already, deals with the
amount standing in the proposed dividend account, while the Bombay High Court
in CIT v. Aryodaya Ginning and Manufacturing Co. Ltd.
[1957] 31 ITR 145 was dealing with allocation to a dividend reserve fund. As a
matter of fact, in CIT v. Aryodaya Ginning and
Manufacturing Co. Ltd. [1957] 31 ITR 145, the company had made a profit of Rs.
28,56,997-14-2 for the year 1948, and there was a carry forward in the the profit and loss account from the preceding year
amounting to Rs. 37,948-11-9. The total profit available with the company as at
31st December, 1948, was appropriated by the assessee-company
in the following manner :
|
|
Rs. |
A. |
P. |
|
"To
Depreciation fund |
2,25,000 |
0 |
0 |
|
Towards
provision for income-tax, corporation tax and business profits tax |
12,50,000 |
0 |
0 |
|
To Reserve
fund |
11,08,000 |
0 |
0 |
|
To Dividend
reserve fund |
1,50,000 |
0 |
0 |
|
To Dividend
payments |
67,812 |
8 |
0 |
|
To Charity
account |
5,000 |
0 |
0 |
|
To carry
forward to next year's account |
89,134 |
1 |
11”. |
From
the above, it will be clear that there were two appropriations, one to
"dividend reserve fund" and the other to "dividend
payments". The items that were the subject-matter of controversy were only
three, namely: (1) the sum of Rs. 12,50,000 set apart
towards provision for income-tax, corporation tax and business profits tax; (2)
the sum of Rs. 11,08,000 set apart towards "reserve fund"; and (3)
the sum of Rs. 1,50,000 set apart towards "dividend reserve fund".
There was no controversy with regard to the sum of Rs. 67,812-8-0 set apart
towards "dividend payments". The judgment points out (p. 149):
"The company's
contention was that the paid-up capital should be increased by the amount of
reserves which had been constituted by the recommendation made by the
directors and accepted by the shareholders and the company made this claim in
respect of the three amounts of Rs. 12,50,000, Rs.
11,08,000 and Rs. 1,50,000. The Tribunal accepted the contention of the assessee-company with regard to the reserve fund of Rs. 11,08,000 and dividend reserve fund of Rs. 1,50,000. With
regard to the provision for payment of tax the view taken by the Tribunal was
that that was a provision made for a liability and did not constitute a
reserve, but it made a recommendation to the ITO that if the amount set apart
to meet this liability exceeded the actual liability, then to the extent of the
excess the amount should be treated as reserve. The Commissioner has now come
on this reference and the question that has been submitted to us for our
consideration is whether the two sums of Rs. 11,08,000
and Rs. 1,50,000 constitute a reserve as of the 1st January, 1949. The rival
contentions are that as this was a reserve that appeared in the balance-sheet
as of the 31st December, 1948, it was a reserve on the 1st January, 1949, and
must be taken into account in computing the capital according to the provisions
of the Business Profits Tax Act. The contention of the Commissioner on the
other hand is that this reserve was not sanctioned till the 27th June, 1949,
and, therefore, prior to that date it could not be looked upon as
reserve".
Thus, it will be seen that in Aryodaya
Ginning and Manufacturing Co. Ltd.'s case [1957] 31
ITR 145 (Bom), the present question regarding the
character of the amount set apart for payment towards the proposed dividend did
not come up for consideration. On the other hand, the subject-matter of
consideration was something different, namely, amount set apart towards the
dividend reserve fund. The second question that came to be considered on the
basis of the rival contention was whether the creation of the reserve related
back to 1st January, 1949, or not, when the general body meeting of the company
at which the balance-sheet and the directors' report were adopted took place
only on June 27, 1949. Hence, the above decision cannot be said to have decided
the present question in favour of the assessee-company.
As a matter of fact, a Bench of this court consisting of two of us (Ismail J., as he then was, and Sethuraman J.) in Addl. CIT v. Thirumagal Mills Ltd. [1977] 108 ITR 236 considered the distinction between "provision" and "reserve" according to the principles of accountancy and statutory provisions and held that an appropriation towards "dividend equalisation reserve" is a "reserve" and not a "provision". We are merely referring to this only for the purpose of emphasising the difference between the amount set apart towards "dividend reserve fund" and the amount set apart towards "payment of the proposed dividend".
Further, the Gujarat High Court in the decision in
question, namely, CIT v. Mafatlal Chandulal
& Co. [1977] 107 ITR 489 had not given full effect to the decision of the
Supreme Court in Mysore Electrical Industries Ltd.'s case [1971] 80 ITR 566. The Supreme Court had held
that when the resolution of the general body meeting creating a reserve out of
the profits of a company for the concerned year will relate back to the first
day of the succeeding year, there is no justification on principle for holding
that the resolution of the same general body meeting of the company regarding
declaration of dividend will not have such an effect. As we have pointed out
already, the fact that the reserve will remain in the coffers of the company
and the dividend will go out of the coffers of the company to the shareholders
and, consequently, when the company decides to declare a dividend, it
undertakes an obligation towards the shareholders, will not in any way affect
the position, because the relation back in question either with regard to
"reserve" or with regard to declaration of dividend is solely for the
purpose of computation of the capital under the Second Schedule to the Act and
not for any other purpose.
The next decision relied on by Mr. S. Swaminathan, learned counsel for the assessee-company,
is that of the High Court of Andhra Pradesh in Super Spinning Mills Ltd. v. CIT
[1979] 120 ITR 512. In that case also, the question referred to the High Court
was:
"Whether, on the facts and in the circumstances
of the case, the Tribunal was justified in law in holding that (for the
purposes of computing capital under the Companies (Profits) Surtax Act, 1964,
for the assessment year 1971-72) the general reserve of the assessee-company
of Rs. 28,43,948 as on April 1, 1970, should stand reduced by Rs. 4 lakhs, being the dividend declared for year ended March 31,
1970, at the annual general meeting held on 26th August, 1970?"
In this case also, the Bench of the Andhra Pradesh
High Court elaborately referred to the various decisions of the Supreme Court
and other High Courts and the distinction between "provision" and
"reserve". After extracting a passage from the judgment of the
Supreme Court in Mysore Electrical Industries Ltd.'s case [1971] 80 ITR 566, the Bench proceeded to state
(p. 524 of 120 ITR):
"Patently this principle of relating back cannot
be applied to the sum of Rs. 4,00,000 in this case. It
formed part of the general reserve and there was no indication in the
balance-sheet or any designation of the nature of the amount. There was no
setting apart of that amount to any particular head.
There was no known liability on the date of the
commencement of the accounting year for distribution of dividends. In so far as
the general reserves are concerned it was not reasonably practicable for the
directors to make up the accounts to declare their intention of appropriating
the said and other sums of reserves of same kinds. There was no known or
ascertainable liability in respect of dividends on the date of the preparation
of the balance-sheet. Therefore, the subsequent recommendation of the board of
directors to pay dividends to the shareholders to the tune of Rs. 4,00,000 and the subsequent endorsement by the general body
of shareholders would not have any effect of dating back the dividends to the
date of the preparation of the balance-sheet. Indeed there was no indication of
any appropriation in the balance-sheet. In such a case how could there be
relating back to something which was not even in any embryonic form? I,
therefore, hold that the subsequent declaration of dividends from out of the
general reserve cannot be related back to the date of the balance-sheet. The
true nature and character of the entry in the balance-sheet is patently one of
'reserve' and not of 'provision'. The amount of general reserve, not to speak
of the later declaration of a sum of Rs. 4,00,000
towards dividends from out of the general reserve, was not set apart to meet
any liability, contingency, commitment or diminution in value of assets known
to exist at the time of the balance-sheet. The board of directors and the
general body of the shareholders may or may not declare any dividends. As on
the date of the balance-sheet there was no known liability of which the amount
cannot be determined with substantial accuracy so that it could be accepted as
a 'provision'. For these reasons, I hold that for the purpose of computing
capital under the Companies (Profits) Surtax Act, 1964, for the assessment year
1971-72, the general reserve of the assessee-company
of Rs. 28,43,984 as on April 1, 1970, shall not stand reduced by Rs. 4,00,000
and that the Tribunal was not justified in holding otherwise".
With great respect to the learned judges, we are not
able to share their view. In the first place, it was not clear as to why the
principle of "dating back" cannot be applied to the sum of Rs. 4,00,000, namely, the amount declared by way of dividend.
Secondly, the learned judges repeatedly refer to dating back to "the date
of preparation of balance-sheet". As a matter of fact, whatever is found
in the balance-sheet has necessarily to relate back to an earlier date and
every balance-sheet deals with the position of the company as on the last day
of the year for which the balance-sheet is prepared and the date of the
preparation of the balance-sheet as such has no significance. Even the reserves
shown in the balance-sheet will date back to the first day of the year.
Thirdly, even assuming that the date of the preparation of the balance-sheet
has any significant part to play, we are unable to hold that the question of
paying dividend was not even in embryonic form on the date of the preparation
of the balance-sheet. We have already shown that the requirement of the company law is that the balance-sheet should
be accompanied by a report of the board of directors and also as to what that
report should contain. As a matter of fact, the report of the board of
directors is generally dated on the same date, when the balance-sheet is
signed. At any rate, as far as the present case is concerned, we have already
extracted as to what were contained in the balance-sheet regarding the dividend
and what the board of directors recommended to the general body regarding the
declaration of dividend in their report dated September 1, 1969. Consequently,
the question of payment of dividend was very much in evidence on the date of
preparation of the balance-sheet.
There is yet
another feature with reference to this decision of the Andhra Pradesh High
Court, namely, Super Spinning Mills Ltd. v. CIT [1979] 120 ITR 512. In that
case, the Tribunal, whose decision was reversed by the High Court, followed an earlier
decision of the Andhra Pradesh High Court in Vazir
Sultan Tobacco Co. Ltd. v. CIT [1974] 96 ITR 248. The Andhra Pradesh High Court
in Super Spinning Mills Ltd. v. CIT [1979] 120 ITR 512 referred to the said
decision in Vazir Sultan Tobacco Co. Ltd.'s case [1974] 96 ITR 248 (AP) and tried to distinguish
the same. The relevant portion of the judgment dealing with Vazir
Sultan Tobacco Co. Ltd.'s case [1974] 96 ITR 248 (AP)
is as follows (p. 520 of 120 ITR):
"This
court considered the question at some length in Vazir
Sultan Tobacco Co. Ltd. v. CIT [1974] 96 ITR 248 (AP). It was a case which
arose under the Super Profits Tax Act of 1963, and the question was that the
provisions of certain amounts, (1) for taxation, (2) for retirement gratuity,
and (3) for dividends, should be considered as 'reserves' within the meaning of
Sch. II to the S.P.T. Act, so that they could be
considered for determination of the company's capital. The learned judges held
that the amount set apart for tax liability was a 'provision' and not a
'reserve' because it was set apart to meet a known liability, the quantum of
which, on that date, could not be determined with substantial accuracy and that
the amounts retained for gratuity were set apart in respect of liabilities
known on the date of the balance-sheet. The learned judges further pointed out
that the liability to pay the dividends was existing
on the date of the balance-sheet and that the amount which was set apart
specifically for the payment of dividends is a 'provision' and not a 'reserve'.
It was made clear that the terminology given by the assessee-company
to the items is not a decisive factor for deciding the question whether the
items constitute 'reserve' or 'provisions'. Since what we are considering in
this case is one of dividends, that part of the decision in Vazir
Sultan Tobacco's case [1974] 96 ITR 248 (AP), which relates to the amount set
apart for dividends is material. There, the directors of the assessee-company had recommended the payment of the amount
as dividends. The learned judges proceeded to point out that it had not
been shown that the directors had rescinded the recommendation to pay it as
dividends. Subsequent events proved that the recommendation of the directors
was ratified by the shareholders in which eventuality the shareholders would be
entitled to enforce the payment of the dividends against the company. Since the
amount had been set apart specifically for the payment of dividends, the
learned judges opined that the amount thus set apart was a 'provision' and not
a 'reserve'".
However, we are of the view that it is not possible
to distinguish Vazir Sultan Tobacco's case [1974] 96
ITR 248 (AP), in the manner in which the subsequent Bench attempted to do. The
question referred to the court in that case, namely, Vazir
Sultan Tobacco's case [1974] 96 ITR 248 (AP) was :
"Whether, on the facts and in the circumstances
of the case, the provision, (a) for taxation of Rs. 33,68,360,
(b) retirement gratuity, Rs. 9,08,106; and (c) dividends, Rs. 18,41,820, could
be treated as reserves for computing the capital for the purpose of super
profits tax under the Second Schedule to the Super Profits Tax Act, 1963, for
the assessment year 1963-64?"
The Bench, after elaborately considering the
provisions of the Act, the Companies Act, the conceptions of
"provision" and "reserve" and various decisions of the
Supreme Court and other High Courts, held as follows, with regard to the
dividend of Rs. 18,41,820 mentioned in the question (p. 260):
"Then we come to the amount set apart for
dividends. The directors of the assessee-company had
recommended the payment of that amount as dividends. It has not been shown that
the directors have rescinded their recommendation to pay it as dividends.
Subsequent events may prove that the recommendation of the directors may be
ratified by the shareholders. In such an event, the shareholders would be
entitled to enforce the payment of the dividends against the company. Since,
however, the liability to pay the dividends was existing on the date of the
balance-sheet, and the amount has been set apart specifically for the payment
of dividends, it is, in our opinion, a 'provision' and not a 'reserve' ".
However, the High Court of Andhra Pradesh in Super
Spinning Mills' case [1979] 120 ITR 512 itself stated that the correctness of
the decision in Vazir Sultan Tobacco's case [1974] 96
ITR 248 (AP) was doubted and consequently another Division Bench referred the
problem to a Full Bench and the Full Bench of the Andhra Pradesh High Court in
Hyderabad Asbestos Cement Products Ltd. v. C7T[1976]
105 ITR 822 resolved the problem. In that case, the Andhra Pradesh High Court
had to consider a provision made for "breakages and damages on sales"
and "provision for contingencies
and bonus". The Full Bench also elaborately went into the difference
between the conceptions of "provision" and "reserve" and
referred to the decisions of various courts. With regard to the Division Bench
decision in Vazir Sultan Tobacco's case [1974] 96 ITR
248, the Full Bench observed (p. 833 of 105 ITR):
"Before
proceeding to consider the various decisions of the High Courts in India cited
by both the parties, it would be appropriate to deal with the decision of this
court in Vazir Sultan Tobacco Company Ltd. v. CIT
[1974] 96 ITR 248, and see whether it runs counter to the decision of the
Supreme Court in Kesoram Industries and Cotton Mills
Ltd. v. CWT [1966] 59 ITR 767. The said case arose under the provisions of the
Super Profits Tax Act and the question was whether the provision made by the
company for, (a) taxation, (b) for retirement gratuity, and (c) for dividend,
could be treated as reserves in computation of capital for the purpose of the
said Act. The court referred to the definition of the expressions 'provision'
and 'reserves' in the Companies Act and then made a specific reference to the
relevant observations of the Supreme Court reported in Metal Box Company of
India Ltd. v. Their Workmen [1969] 73 ITR 53.
Thereafter, the court referred to the various decisions of the Supreme Court
including Kesoram Industries and Cotton Mills Ltd. v.
CWT [1966] 59 ITR 767 and CIT v. Century Spinning and Manufacturing Co. Ltd.
[1953] 24 ITR 499, and held at page 259 of [1974] 96 ITR 248 (AP), as follows:
'Apart from
that, the liability to pay income-tax is a present liability though it becomes
payable at a future point of time when it is quantified in accordance with the
ascertainable data. That liability, on the first day of the accounting year, is
known, but the amount of that liability cannot be determined on that date with
substantial accuracy. (See Kesoram
Industries and Cotton Mills Ltd. v. CWT [1966] 59 ITR 767 (SC)).
Therefore, the amount set apart for tax liability is a "provision"
and not a "reserve", because it is set apart to meet a known
liability, the quantum of which, on that date, cannot be determined with
substantial accuracy.'
What Mr. Srinivasamurthy contends is that the principle set out
above, within quotes, is not supported by the decision of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. CWT [1966] 59
ITR 767. However, on closer examination, we noticed that the reference to Kesoram Industries and Cotton Mills Ltd. v. CWT [1966] 59
ITR 767 (SC) was really a mistake and that the court was really referring to the
case of Metal Box Company of India Ltd. v. Their Workmen
[1969] 73 ITR 53 (SC). This is evident from the fact that the language
and the expressions used in the said paragraph are the same which are employed
in the case of Metal Box Company of India Ltd. v. Their
Workmen [1969] 73 ITR 53 (SC). In fact, the words 'substantial accuracy'
are taken from the decision of the Supreme Court in
Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53 and that the
said expression does not occur in the case of Kesoram
Industries and Cotton Mills Ltd. v. CWT [1966] 59 ITR 767 (SC). We presume that
it was either a typographical or an accidental mistake that the reference was
made to Kesoram Industries and Cotton Mills Ltd. v.
CWT [1966] 59 ITR 767 (SC), while really intending and referring to the case of
Metal Box Company of India Ltd. v. Their Workmen [1969] 73
ITR 53 (SC). In this view, the very basis of the argument that the
observations made in the decision of this court in Vazir
Sultan Tobacco Co. Ltd. v. CIT [1974] 96 ITR 248 run counter to the decision of
the Supreme Court in Kesoram Industries and Cotton
Mills Ltd. v. CWT [1966] 59 ITR 767 (SC), disappears and we see no conflict
whatsoever between both the decisions. In fact, the decision of this court is
wholly consistent with the principle of the decision in Metal Box Company of
India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC) as well as CIT v. Century
Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499 (SC), and, applying the
said principles, the Bench had come to the conclusion that the provisions for
taxation, retirement gratuity and dividends arc provisions and not ' reserves'
for the purpose of the Super Profits Tax Act".
Thus it will
be seen that the Full Bench of the Andhra Pradesh High Court really approved
the decision of the Division Bench of that court in Vazir
Sultan Tobacco's case [1974] 96 ITR 248 (AP), and if so, with great respect to
the learned judges of the Andhra Pradesh High Court, who decided the Super
Spinning Mills Ltd's case [1979] 120 ITR 512 (AP),
there was no justification for taking a view different from the one taken in Vazir Sultan Tobacco's case [1974] 96 ITR 248.
The last
decision cited is that of a Full Bench of this court in Madras Motor and
General Insurance Co. Ltd. v. CIT [1979] 117 ITR 534, which has occasioned the
constitution of this larger Bench. One difficulty in understanding that
decision is that it has not given the facts of the case fully. Three questions
were referred to the court for three assessment years as follows
:
"Assessment
year 1965-66 : Whether, on the facts and in the circumstances of the case, it
has been rightly held that the sums of Rs. 91,510, Rs. 2,40,197, Rs. 19,03,252,
Rs. 24,36,239 and Rs. 6,42,524 representing the premium deposits, unearned
premium, provision for outstanding claims, provision for taxation and proposed
dividends, respectively, did not fall under rule 2(i)
of the Second Schedule to the Companies (Profits) Surtax Act, 1964?
Assessment year 1966-67: Whether, on the facts and in
the circumstances of the case, it has been rightly held that the sums of Rs.
3,34,756, Rs. 1,70,463, Rs. 41,36,469, Rs. 17,21,932, Rs. 8,00,000 and Rs.
82,333 representing the premium deposits, unearned premium, provision for
outstanding claims, provision for taxation, proposed dividends and balance in
the profit and loss account, respectively, did not fall under rule 2(i) or rule 2(ii) of the Second Schedule to the Companies
(Profits) Surtax Act, 1964?
Assessment year 1967-68 : Whether, on the facts and in
the circumstances of the case, it has been rightly held that the sums of Rs.
93,250, Rs. 2,25,067, Rs. 25,17,281, Rs. 13,97,886, Rs. 7,48,110 and Rs. 7,071
representing the premium deposits, unearned premium, provision for outstanding
claims, provision for taxation, proposed dividends and balance in the profit
and loss account, respectively, did not fall under rule 2(i)
or rule 2(ii) of the Second Schedule to the Companies (Profits) Surtax Act,
1964?"
The said judgment extracted r. 2 of the Second
Schedule to the Act with the Explanations, which is as follows:
"2. Where a company owns any assets the income
from which in accordance with clause (iii) or clause (vi) or clause (viii) of
rule 1 of the First Schedule is required to be excluded from its total income
in computing its chargeable profits, the amount of its capital as computed
under rule 1 of this Schedule shall be diminished by the cost to it of the said
assets as on the first day of the previous year relevant to the assessment year
in so far as such cost exceeds the aggregate of—
(i) any moneys borrowed (other than the
debentures referred to in clause (iv) or moneys referred to in clause (v) of
rule 1) and remaining outstanding as on the first day of the said previous
year; and
(ii) the amount of any fund, any surplus and any such reserve as
is not to be taken into account in computing the capital under rule 1.
Explanation 1.—A paid up share capital or reserve
brought into existence by creating or increasing (by revaluation or otherwise) any
book asset is not capital for computing the capital of a company for the
purposes of this Act.
Explanation 2.—Any premium received in cash by the
company on the issue of its shares standing to the credit of the share premimum account shall be regarded as forming part of its
paid up share capital.
Explanation 3.—Where a
company has different previous years in respect of its income, profits and
gains, the computation of capital under rules 1, 2 and 3 shall be made with
reference to the previous year which commenced first".
Thereafter the court observed :
"Turning now to the balance-sheet of the
company, it is seen that the amounts that are claimed by the assessee must be taken into account to reduce the value of
the assets which are referred to under the first part of r. 2 of the Second
Schedule, namely, assets the income from which is required to be excluded under
clauses (iii), (vi) and (viii) of r. 1 of the First Schedule. After determining the value of these assets as on the first day of
the year of account, sub-rr. (i) and (ii) of r. 2 provide that
the portion of such assets shall be reduced further by the borrowing and
particularly under sub-r. (ii) under which the
question arises, by any fund, surpluses and reserves which are not to be
included for the purpose of r. 1 of the Second Schedule. On the basis of this
provision in r. 2 of the Second Schedule, the assessee
has contended that the following amounts shown in the balance-sheet at page 18,
namely, Rs. 24,36,239 under the heading 'Reserves or Contingency Accounts', the
sums of Rs. 1,82,346, Rs. 50,709 and Rs. 16,70,197 falling under 'Estimated
liability in respect of outstanding claims whether due or intimated' which
amounts sum up to Rs. 19,03,352 as also the provision towards unearned premium
and premium deposits of the amounts, Rs. 2,40,197 and Rs. 91,510, as seen at
page 20 of the balance-sheet falling under the heading 'Liabilities' as well as
the sum of Rs. 6,42,524 which is termed as 'Proposed dividend for the year
1964' should be deducted from the value of the assets, the income from which is
required to be excluded for the purpose of r. 1 of the First Schedule in order
to arrive at the capital base or the value of the capital assets in relation to
which 10% has to be allowed as a statutory reduction".
The court thereafter dealt with those items one by
one and with regard to the item under the heading 'Proposed dividend for the
year 1964' it observed (p. 539 of 117 ITR):
"The amount, which has given considerable
difficulty, not entirely due to the complicated question, but in view of the
number of decisions that had been cited, reference having been made to the
other Acts and Schedule and forms, is the sum of Rs. 6,42,524 referred to as
'proposed dividend for the year 1964'. Before we deal with this, we would like
to state a few principles, which are indisputable. Reserves, in order that they
may be so called under the real sense of the term, must normally come out of
the profits of the company. But if reserves are constituted out of assets which
are sold or by any other means, it may be difficult to term that the amount
shown as reserve is really a reserve. But here again we do not wish to state anything by way of opinion of this
court, for, the question does not arise. But we can be more specific and
certain that the amounts set apart specifically for the purpose of meeting a
specific liability will not be a reserve but will only be a provision made for
meeting the specific liability. Therefore, on the first day of the year in
question if there has been an accrued liability for the purpose of payment of
the dividend notwithstanding the provision made for the payment of that
dividend, the sum that has been provided for payment of that dividend will not
be treated as reserve. One other principle that we wish to state is that the
proposal for payment of the dividend having been made by the board of
directors, it is not in fact a present liability by the mere fact that there is
such a proposal. The Supreme Court has ruled for the purpose of the W.T. Act
that the proposal will become an accrued liability only when the shareholders
of the company approve of the proposal in the general body meeting of the
company. The decision is in Kesoram Industries and
Cotton Mills v. CWT [1966] 59 ITR 767 (SC). We consider that this principle
laid down by the Supreme Court is certainly applicable for the purpose of
deciding whether on the first day of the year of accounting in question there
was an accrued liability for payment of dividend by the company. It was not contended
on behalf of the revenue that there was any such accrued liability on the first
day of the year of accounting. Reference was then made to the decision of the
Supreme Court in CIT v. Mysore Electrical Industries
Ltd. [1971] 80 ITR 566 and it was submitted that if appropriation to reserves
has been made by the general body it will date back to the first day of the
year in question, because it must be taken to be a reserve made on the first
day of the year in question. This decision only dealt with the reserves which
were for purposes other than the reserves for the purpose of payment of
dividends. Therefore, this decision cannot be taken as an authority for the
proposition that an appropriation made towards the reserve for the purpose of
payment of dividend, apart from making the appropriation later effective from
the first day of the year of account, will also create a liability for dividend
from the first day of the year of account". (underlining is ours).
With great
respect to the learned judges, we are unable to share their view. In the
context in which we are considering the question, there cannot be an accrued
liability for payment of dividend on the first day of the year. As a matter of
fact, as we have pointed out already, on the first day of the year following
the year of account, there may not be any scope even for finding out whether
the company has made a profit or suffered a loss and, consequently, there can
be no question of there being an accrued liability for payment of the dividend
as on the first day of the year. The two decisions of the Supreme Court,
namely, Kesoram Industries and Cotton Mills
Ltd. v. CWT [1966] 59 ITR 767 and CIT v. Mysore
Electrical Industries Ltd. [1971] 80 ITR 566, dealt with two different
situations in the context of two different statutory provisions. In Kesoram Industries and Cotton Mills Ltd.'s
case [1966] 59 ITR 767, as we have pointed out already, the Supreme Court was
considering whether there was a debt in existence on the valuation date in
order to deduct the same from the total value of all the assets for the purpose
of arriving at the net assessable wealth. On the other hand, in Mysore Electrical Industries Ltd.'s
case [1971] 80 ITR 566, the Supreme Court was considering the question whether
a reserve which was created subsequent to the first day of the year, which from
the very nature of the case, could not have been created on the first day of
the year, will relate back to the first day of the year or not. Further, in Mysore Electrical Industries Ltd.'s
case [1971] 80 ITR 566, the Supreme Court was not concerned with a
"liability" or "debt" or with the question as to when that
liability or debt arose. Simply by holding that for the purpose of r. 1 of the
Second Schedule to the Act, a declaration of dividend made by the general body
of the company during the course of a year will relate back to the first day of
that year, the court is not deciding any rights inter se between the company
and its shareholders to whom the dividend has to be paid; nor is it deciding
the question as to when the liability of the company to pay the dividend and
the right of the shareholders to get the dividend arose. All that the court is
deciding in such a situation is, from a practical and commonsense point of
view, when a dividend is declared during the course of a year, which is
inevitable whether it will relate back to the first day of the year or not. In
such a context, we are unable to hold that any question of creation of a
liability on the part of the company arises.
The learned judges of this court, in the Full Bench
decision, proceeded to state (p. 540 of 117 ITR) :
"The decision in CIT v. Mysore
Electrical Industries Ltd. [1971] 80 ITR 566 (SC), which dealt with certain
reserves other than reserves for dividend, and the decision in Kesoram Industries and Cotton Mills Ltd. v. CWT [1966] 59
ITR 767 (SC), which specifically dealt with the question of reserves for
dividend, which on the date of valuation, were only in the nature of proposal
for payment of dividend, will have to be noticed and applied. If we have to
reconcile the two decisions, which dealt with different kinds of reserves, we
have to come to the conclusion that the amounts in question are reserves that
have been made for payment of dividend at the time when there was only a
proposal made by the directors and, though they have been shown in the
balance-sheet as a separate item indicating a specific sum under the heading
'Proposal for dividend', nevertheless remains as a provision for reserve made
for the purpose of meeting the contingent liability which may or may not accrue
depending upon the shareholders approving of that proposal of the directors or
not".
With respect to the learned judges, we are unable to
share either their reasoning or the assumption underlying their reasoning. In
our opinion, the expression, "If we have to reconcile the two
decisions" is not warranted because, as we have pointed out already, there
is no inconsistency, apparent or real, between the two decisions of the Supreme
Court in Mysore Electrical Industries Ltd.'s case [1971] 80 ITR 566 and Kesoran
Industries and Cotton Mills Ltd.'s case [1966] 59 ITR
767 calling for any reconciliation. Further, as we have pointed out already,
there is no distinction between reserve for payment of dividend and reserve for
any other purpose, because both the "reserves" are finally decided
upon only by the general body in its meeting which takes place subsequently.
For the reasons we have already indicated, the amount
shown in the balance-sheet even as a separate item indicating a specified sum
under the heading "Proposal for dividend" will not form part of
"reserve" since a "reserve" itself is finally created only
by the general body which declares the dividend.
The Full Bench, after noticing the decision of a
Division Bench of this court in Nagammal Mills Ltd.
v. CIT [1974] 94 ITR 387 proceeded to observe (p. 541 of 117 ITR):
"The question, therefore, is whether any amount
shown to represent a dividend proposed by the directors represent
any liability for the company from the 1st day of the year of accouut. Any provision made by way of reserve of an amount
for the purpose of a possible liability that may arise in the payment of
dividend cannot be refused to be taken into account merely on the ground that
the amount represented a provision or a reserve for an accrued liability as
there was no accrued liability as on the relevant date, namely, first day of
the year of account. It has been so held by the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. CWT [1966] 59
ITR 767. So, in all these cases, we think, where a proposal has been made by
the directors and by virtue of this proposal, a reserve has been made for a
possible liability towards dividend, that provision or reserve could not cease
to be a reserve on the ground that it is a reserve for the purpose of payment
of an accrued liability as on that date. On the facts of the case before us, it
has not been contended that the shareholders had approved the proposal as on
that date. There is, therefore, no liability to pay that amount as on that
date. This aspect was not urged before this court when it decided the case in Nagammal Mills Ltd. v. CIT [1974] 94 ITR 387, and the question
has not been considered at all in the judgment under consideration. We think,
therefore, that the decision cannot be taken to be a precedent for the question
which has to be dealt with in this judgment, but can be distinguished, as we
propose to do, as a case where the emphasis had been on the payment out of the
money which was at one time provided for dividend and in view of the fact that
the proposal of the directors was later approved by the shareholders of the
company and the money had been actually expended for the purpose. We are not
called upon in this case to consider whether payment out during the year of
account will deprive the right of an assessee to
claim the benefit, for, that question does not arise before us, no point having
been taken in that behalf. We, therefore, leave that question open to be
considered in another appropriate case".
With respect to the learned judges, we are clearly of
the opinion that the conception of accrued liability as on the first day of the
year of account can have no reality or relevancy to the point under
consideration under r. 1(iii) of the Second Schedule to the Act. As we have
pointed out more than once, r. 1 of the Second Schedule to the Act does not
refer either expressly or impliedly to any liability or accrued liability and
all that it refers to is a " reserve " and, consequently, the only
question that one has to consider in such a context is, whether a particular
amount set apart for a particular purpose would constitute a "reserve"
or not. Having regard to the basic notion of a "reserve", namely, the
amount that will be available to the company for its uninhibited use in future,
the amount set apart to be declared as dividend by the company in its general
meeting cannot be a "reserve", once the company in its general body
meeting actually declares the dividend. For this purpose, it is not even
necessary to find out whether the amount has been paid out during the year of
account or not, since the moment a particular amount has been declared to be
dividend, it is no longer available to the company to freely draw upon, to be
used for its business and, consequently, will not be a "reserve".
Hence, we are unable to hold that there was any valid ground for distinguishing
the point which the Full Bench was considering from the point considered in Nagammal Mills Ltd. v. CIT [1974] 94 ITR 387 (Mad).
We may point out in this context that though the Full
Bench noticed the decision of the Division Bench in Nagammal
Mills Ltd. v. CIT [1974] 94 ITR 387 (Mad), it did not refer to the subsequent
decision of a Division Bench of this court in Madras Auto Service v. CIT [1978]
112 ITR 540, where the Bench held that there was no ground for reconsidering
the decision of this court in Nagammal Mills Ltd. v.
CIT [1974] 94 ITR 387, in the light of the decision of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. CWT [1966] 59 ITR 767.
Curiously there is one statement contained in the
judgment of the Full Bench which will make the entire discussion and
observation of the court as merely obiter. In the penultimate paragraph of its
judgment, the Full Bench observed ([1979] 117 ITR 534, 541):
"In the light of what we have stated above it is
clear that the amount provided cannot be said to be not a reserve merely on the
ground that it represented a sum set apart for the purpose of meeting a
specific accrued liability. But this does not take the assessee
very far, because if the amount is a reserve—and we will assume so without
deciding the question that it represented merely a provision, and assume again
that there is a distinction between a provision for an uncertain and unaccrued liability and a reserve made for meeting any
contingent liability—we think that it will be a reserve that will fall under r.
1 of the Second Schedule. If the amount will fall under r. 1 of the Second
Schedule then the amount cannot be excluded for the purpose of sub-r. (ii) of r. 2 and, therefore, the assessee
has in any case to fail on this aspect as well".
Thus, it will be seen that the ultimate decision of
the Full Bench was based upon what it considered to be the effect of sub-r.
(ii) of r. 2 of the Second Schedule on the assumption
that the amount was a "reserve". Consequently, there was no need for
the Full Bench to really decide whether the concerned amount was a reserve or
not, because even on that assumption the assessee had
to fail. However, we may make it clear that if the Full Bench intended to lay
down a proposition that even if the board of directors set apart a specific sum
under the heading "Proposal for dividend" and, subsequently, the
company in its general body meeting accepted their proposal and declared the
said amount as dividend, still the same would continue to be a
"reserve" because it did not represent an accrued liability on the
first day of the relevant year, we express our disagreement with such a
proposition for the reasons we have already indicated.
In fact, the questions which the Full Bench of this
court considered referred only to r. 2(i) and r.
2(ii) of the Second Schedule to the Act. However, r. 2(ii) refers to "any
such reserve as is not to be taken into account in computing the capital under
r. 1". Therefore, the Full Bench had to consider the scope of the
expression "reserve" occurring in r. 1 of the Second Schedule to the
Act.
Subsequent to the decision of the Full Bench in
Madras Motor and General Insurance Co. Ltd. v. CIT [1979] 117 ITR 534 (Mad),
the question came up for consideration in another case before a Division Bench
of this court in India Motor Parts
& Accessories Ltd. v. CIT [1981] 130 ITR 311 (Mad). In that case,
assessment to super profits under the Super Profits Tax Act, 1963, for three
assessment years, namely, 1963-64, 1964-65 and 1965-66, was under consideration
and for those three years the amount set apart towards proposed dividends were:
|
|
Rs. |
|
"1963-64 |
4,05,000 |
|
1964-65 |
2,65,000 |
|
1965-66 |
2,12,500" |
The matter
came up for consideration before a Division Bench consisting of two learned judges,
one of whom was a party to the Full Bench judgment, namely, P. Govindan Nair C.J. and in the judgment of the Division
Bench, after extracting a passage from the Full Bench judgment, the court
observed (p. 315):
"In the
light of the above observations, we hold that the various amounts mentioned
under the head 'Proposed dividends' for the assessment years 1963-64, 1964-65
and 1965-66 are 'reserve' and as such they are includible in the computation of
the capital of the company for the respective assessment years".
For the
reasons, we have already given, the above conclusion of the Division Bench
cannot be said to be good law.
There is only
one other matter to which we would like to make reference. In the referring
order it was stated :
"Since
the assessee in that case was an insurance company,
the argument on behalf of the revenue based on Explanation II to rule 1, was
not considered and no definite answer was given. In the present case, since the
assessee is not an insurance company the computation
of capital will have to be done with reference to the Explanation. Though the
Full Bench decision related to an insurance company, as if the principle laid
down in that judgment was applicable even to non-insurance companies, a
Division Bench, without going into the Explanation, simply purported to apply
the principle in the decision in India Motor Parts & Accessories Ltd. v.
CIT [1981] 130 1TR 611".
We are of the
opinion that the construction of the relevant provision in r. 1 of the Second
Schedule to the Act is not dependent upon whether the company is an insurance
company or not, because there is nothing in that particular rule which is
exclusively applicable cither to an insurance company or to a non-insurance
company. Further, a perusal of the Act does not show that there is any
Explanation as Explanation II to r. 1 of the Second Schedule to the Act and the
same may be a typographical error.
Under
these circumstances, we answer the question referred to this court in the
affirmative and against the assessee. The
respondent-Commissioner is entitled to his costs of this reference and the
counsel's fee is fixed at Rs. 1,000 (Rs. one thousand only).
[1975] 45 Comp Cas 429 (
HIGH COURT OF
v.
Globe United Engg.
& Foundry Co. Ltd.
V.S. DESHPANDE
AND B.C. MTSRA, JJ.
COMPANY APPEAL NO. 6 OF 1974
G.L.
Sanghi, B.P. Singh and K.K. Bhatia for the Appellant.
D.S. Dang, R.C. Beri and N.W. Goswami for the Respondent.
The question
for decision involving construction of sections 9, 36, 85, 100, 102, 205, 211
(read with Schedule VI), 217 and 511 of the Companies Act, 1956 (hereinafter
called "the Act"), is whether the holders of preference shares
carrying a right to a fixed cumulative dividend payable when the company is a going
concern only out of profits earned and when dividend is recommended to be paid
by the directors in a general meeting are entitled during the winding-up of the
company to the arrears of the fixed cumulative dividend in view of article 7 of
the articles of association out of the assets of the company which did not make
any profits at any time at all.
The
appellant-company, Messrs. Globe Motors Ltd., are the equity shareholders of
respondent No. 1, Messrs. Globe United Engineering & Foundry Company Ltd. Respondents
Nos. 2 to 7 are the holders of the company's (respondent No. 1) preference
shares carrying a fixed cumulative dividend as per article 7(i) of the articles of association which is as follows:
"The
preference shares shall confer on the holders thereof the right to a fixed
cumulative preferential dividend of 9.5% per annum free of company's tax but
subject to deduction of taxes at source at the prescribed rates on the capital
paid up thereon, and in the event of winding up, the right of repayment
of capital and arrears of dividend whether earned, declared or not, up to the
commencement of the winding-up in priority to the equity shareholders."
As the expected foreign technical collaboration did
not materialise, the company did not go into business
at all but went into voluntary liquidation which was later put under the
supervision of the court. The liquidator made a reference to this court under
section 518 of the Act as to whether the preference shareholders of the company
were entitled to the payment not only of their share capital but also of the
arrears of the fixed cumulative dividend thereon before any payment is made to
the equity shareholders out of the assets of the company in liquidation. The
learned company judge answered the question in the affirmative relying mainly
on the unanimous opinions of writers on British company law based on English
decisions. Hence this appeal by the equity shareholders.
Shri G.L. Sanghi for the appellant urges that the answer to the above
question should be governed not so much by the weight of the British text books
and precedents but by the provisions of our Companies Act which may be
dissimilar. Shri D.S. Dang for the respondents
submitted that the provisions of our Companies Act would lead to the same
conclusion. In the light of their arguments and our own further thinking, we
shall consider the question in depth primarily on the construction of the
relevant provisions of the Companies Act and article 7 and then see if the
British precedents and the opinions of well-known authors lead to the same
conclusion.
We first start with the premise that the company and
its shareholders are two different legal entities. When the company was
incorporated, it adopted its memorandum and articles of association including
article 7. These were the statutory terms of contract governing the
relationship between the company and the shareholders. Persons who contributed
the preference share capital became members of the company on these terms. The
effect of the memorandum and articles of association is stated in section 36(1)
of the Act as follows:
"Subject to the provisions of this Act, the
memorandum and articles shall, when registered, bind the company and the
members thereof to the same extent as if they respectively had been signed by
the company and by each member, and contained covenants on its and his part to
observe all the provisions of the memorandum and of the articles."
The expression "subject to the provisions of
this Act" recalls section 9 of the Act which is as follows
:
"Save as otherwise expressly provided in the Act—
(a) the
provisions of this Act shall have effect notwithstanding anything to the
contrary contained in the memorandum or articles of a company, or in any
agreement executed by it, or in any resolution passed by the company in general
meeting or by its board of directors, whether the same be registered, executed
or passed, as the case may be, before or after the commencement of this Act;
and
(b) any provision
contained in the memorandum, articles, agreement or resolution aforesaid shall,
to the extent to which it is repugnant to the provisions of this Act, become or
be void, as the case may be."
At the first blush, one may think that every
provision of the Act would override every provision in the articles to the
extent of repugnancy between the two. We would like to emphasise
that this is not so. The reason is that the Companies Act, like all law
relating to companies, consists of two distinct parts, namely, (1) relating to
the formation and the management of a company as a going concern, and (2)
relating to its winding-up. The difference between the two is the same as
between running and stopping. The memorandum of a company sets forth the
objects to be achieved by the working of the company during its lifetime. It
does not usually provide for what is to happen during its winding-up. Parts I
to VI of the Companies Act contain provisions regulating the formation and the
management of companies. Part VII relates to the winding-up of companies.
Similarly, the majority of the articles of association are concerned with the
formation and working of the company while article 7 consists of two parts, the
first part relating to the company as a going concern and the second part
relating to its winding-up. The existence of two distinct provisions in the
same article strikingly brings out the contrast between the working of the
company and its winding-up. The effect is that some provisions of the company
law and of the articles would apply exclusively to a company which is a going
concern while the other provisions would apply only to a company in
liquidation.
It is in this background that section 511 has to be
read which is as follows:—
"Subject to the provisions of this Act as to
preferential payments, the assets of a company shall, on its winding-up, be
applied in satisfaction of its liabilities pari passu and, subject to such application, shall, unless the
articles otherwise provide, be distributed among the members according to their
rights and interests in the company."
Subject to the making of preferential payments (e.g.,
under sections 520 and 530), the assets of the company are distributed among
the members according to their rights and interests in the company unless the
articles otherwise provide (emphasis
supplied). The rights and interests of the members in the company are based
both on the provisions of the Act and of the articles of association. In
striking contract with sections 9 and 36, the articles prevail over the second
part of section 511. Since sections 9 and 36 ensure the superiority of the
provisions of the Act as against the provisions of the articles, the obvious
difference between them and the provisions of section 511 securing the
superiority of the articles over its second part can be understood only on the
hypothesis that sections 9 and 36 relate to those provisions of the Act which
apply to the working of a company as a going concern while section 511 refers
to those provisions of the Act which apply during the winding-up of the
company. This is why the former override the articles while the latter is
subject to the articles.
The prospectus was issued in 1967 long after the
terms of the contract between the company and the members were settled by the
articles which were finalised in 1963. The
representation made in the prospectus inviting the public to subscribe capital
and buy the shares of the company would not change the terms of the contract
between the company and the members which are already settled. The prospectus
did not become a contract between the company and the members inasmuch as the
subscribers buying the shares did so with the knowledge that the contract would
consist of the memorandum and the articles of association and not of the
representations made in the prospectus. Any variation between the language of
the prospectus and article 7(i) is, therefore, to be
construed as the article prevailing over the prospectus.
Originally, the statutes relating to companies in
"When the company is wound up, new rights and
liabilities arise............. While the company is a going concern no capital
can be returned to the shareholders, except under the statutory provisions in
that behalf............In the case of winding-up everything is changed. The
assets have to be distributed."
The distinction was also emphasised
in a subsequent leading decision of the House of Lords in Scottish Insurance
Corporation Ltd. v. Wilsons & Clyde Coal Company .
The counsel on both sides emphasised the distinction
between "the rights of the stockholders to dividends while the company is
a going concern and their rights in a liquidation, first, to return of capital
and, secondly, to surplus assets" (page 471) and "the status and
rights of the preference stockholders in the company as a going
concern.............and the statement of the rights of the preference
stockholders in a liquidation" (pages 474 and 475). The contrast was put
in a literary flourish as follows: "There is no known status of a company
being moribund or comatose. Either it is in liquidation or it is not and the
members when they join it contract on the basis of those two alternatives.
There is no half-way house—half law, half fact and almost wholly picturesque
language." (page 475).
The contract between the preference shareholders and
the company is contained in article 7(i) reproduced
above. The first part of article 7(i) obviously
refers to the company as a going concern. What is the meaning of "the
right to a fixed preferential cumulative dividend" conferred on the
preference shareholders ? It means that the company
must pay every year to the preference shareholders dividend at a fixed rate.
Why is the dividend to be "cumulative" and "preferential" ? The reason is that another primary principle of
company law both in our country and in
"Etymologically a dividend is the 'dividendum', the total divisible sum. But, in its ordinary
sense, it means the sum paid and received as the quotient forming the share of
the divisible sum payable to the recipient."
From the point of view of the company, the profits
are earned and divided. The profits or a part of the profits may, therefore, be
the dividend to the company. The word "earned" qualifying the word
"dividend" may, therefore, mean either of the two things depending on
whether it is used in relation to the company or in relation to the preference
shareholders. A company earns dividend in the sense of earning profits. A
preference shareholder earns dividend in the sense that the contract between
him and the company embodied in article 7(i) gives
him the right to the dividend. What is the nature of this right
? The phases through which a contractual right passes till it is
enforced by the receipt of a payment of money are described by Hidayatullah C.J. in H.H. Madhav Rao Scindia v. Union of India ,
in paragraph 63, as follows :
"The dynamic theory of obligations regards a
debt as a claim to 'an equivalent in value to a floating charge against the
generality of things which are the properties of the debtor'. From this is
developed the notion of a credit-debt where property rights arise from a
promise, express or implied, in respect of ascertained or readily ascertained
sums of money. Thus a debt or a liability to pay money passes through four
stages. First, there is a debt not yet due. The debt has not yet become a part
of the obligor's 'things' because no net liability has yet arisen. The second
stage is when the liability may have arisen but is not either ascertained or
admitted. Here again the amount due has not become a part of the obligor's things.
The third stage is reached when the liability is both ascertained and admitted.
Then it is property proper of the debtor in the creditor's hands. The law
begins to recognise such property in insolvency, in
dealing with it in fraud of creditors, fraudulent preference of one creditor
against another, subrogation, equitable estoppel,
stoppage, intransitu, etc. A credit-debt is then a
debt fully provable and which is fixed and absolutely owing. The last stage is
when the debt becomes a judgment debt by reason of a decree of a court. Thus an
American judge held 'outstanding uncollected accounts' as property (Standard
Marine Insurance Co. v. Board of Assessors ).
It is because of this that the French law includes such obligations in
mobiles."
What is the reason why in the first part of article
7(i) only the word "dividend" is used while
in the second part of article 7(i) the words
"arrears of dividend" are used ? The answer
is given by Professor R. R. Pennington in his Company Law, 3rd edition. The
learned author deals with the company as a going concern at page 180 and
observes as follows :
"It is common to speak of the unpaid balance of
preference dividend as 'arrears' but this is misleading because it conveys the
impression that the unpaid balance is a sum of money which the company already
owes the preference shareholders. The preference dividend only becomes owing
when (a) there are profits available to pay it, and (b) it has been properly
declared in accordance with the articles, unless they dispense with a
declaration, and when there are arrears of preference dividends ex hypothesi one or other or both of these things have not
happened."
This is why the first part of article 7(i) does not talk of arrears of dividend but merely emphasises that the dividend is cumulative. That is to say,
even if a dividend is not declared and paid in one year, the right to it
continues to accumulate till the whole accumulation is declared and paid later.
Strictly speaking, when the company is a going concern, unearned and undeclared
dividend is not due and does not amount to arrears. But the situation is
completely changed during the winding-up. At page 186 Professor Pennington comments
on an article under which arrears of preference dividend are payable in a
winding-up in the following words:
"Under such a clause unpaid preference dividends
are payable for periods up to the repayment of the preference capital, even
though the dividends have not been declared, and even though the company did
not earn sufficient profits to pay them while it was a going concern."
The learned author does not dispute the use of the
word "arrears" as applied to a company in liquidation and thus recognises the fundamental difference between the two
situations. The same dividend which is not payable during the life of a company
as not having been earned or declared
becomes payable with all the arrears during liquidation even if it is not
earned or declared.
Section 85 of
the Act defines "preference share capital" and expressly recognises the distinction between the right of a
preference shareholder to the payment of a dividend when the company is a going
concern and to the same right when the company is in liquidation. It reads as follows :
"Preference
share capital means, with reference to any company limited by shares, whether
formed before or after the commencement of this Act, that part of the share
capital of the company which fulfils both the following requirements, namely :
(a) that as respects dividends, it carries or
will carry a preferential right to be paid a fixed amount or an amount
calculated at a fixed rate, which may be either free of or subject to
income-tax ; and
(b) that as respects capital, it carries or will
carry, on a winding-up or repayment of capital, a preferential right to be
repaid the amount of the capital paid up or deemed to have been paid up,
whether or not there is a preferential right to the payment of either or both
of the following amounts, namely :
(i) any money
remaining unpaid, in respect of the amounts specified in clause (a), up to the
date of the winding-up or repayment of capital; and
(ii) any fixed
premium or premium on any fixed scale, specified in the memorandum or articles
of the company."
The words
"whether or not there is a preferential right to the payment
of...........any money remaining unpaid in respect of the amounts specified in
clause (a)" are decisive. They recognise that a
contract between the preference shareholder and the company may provide for the
payment of unpaid preferential dividend on a preference share capital during
the winding-up. Because they apply only during the winding-up proceedings, they
are not subject either to section 205 or to section 217 which restrict payment
of dividends to earning of profits and to the declaration of dividends. Article
7(i) is, therefore, clearly authorised
by section 85(1)(b)(i). It
is to be noted that the words the amounts specified in clause (a) in section
85(1)(b)(i) simply mean the
amount of preferential dividend calculated at the fixed rate. They do not
import the restrictions imposed by sections 205 and 217 on the payment of such
amount. These restrictions would be implied in section 85(1)(a)
which refers to the company as a going concern but not in section 85(1)(b)
which refers to it during liquidation. Had section 85(1)(b)(i) been subject to sections 205 and 217, it could not have
permitted a contract to provide for payment of dividend to preference
shareholders during winding-up. Such a provision could be permitted by contract
only because sections 205 and 217 are not applicable during winding-up. Section
205(1) says "no dividend shall be declared or paid by a company for any financial
year except out of the profits of the company for that year arrived at after
providing for depreciation in accordance with the provisions of sub-section
(2)". The determination of profits for a particular year after providing
for depreciation can only be the act of a company which is a going concern.
Section 217(1) refers to a report by the board of directors placed before a
general meeting. But the board of directors becomes extinct and is replaced by
the liquidator during the winding-up proceedings. None of these sections can,
therefore, apply during winding-up. They do not, therefore, restrict or affect
the right of the preference shareholders to payment of arrears of dividend
during winding-up.
The reason
why article 7(i) is so worded is historical. Formerly,
the English judges were also dominated by the idea that dividends not being
payable except out of profits could not be paid during winding-up if no profits
had been made. This view was expressed in In re W.J.
Hall & Co. Ltd.
The distinction between the company as a going concern and a company during
liquidation was, however, soon realised and this
decision was dissented from successively in the subsequent decisions in In re New Chinese Antimony Co. Ltd.,
in In re Springbok Agricultural Estates Ltd.
and finally in In re Wharfedale Brewery Co. Ltd.,
all of which suggested or concluded that arrears of dividend were payable to
the preference shareholders during winding-up irrespective of profits having
been made. This view was followed in
"Prima
facie a preference dividend is payable only out of the profits made whilst the
company is a going concern, and it wants special provision to give the holders
a right to have the arrears paid out of assets in winding-up........If by the
articles arrears are to be paid, they may be payable although no profits have
been made."
Shri Sanghi suggested that the words in article 7(i) "arrears of dividend whether earned, declared or
not" should not be literally construed. He put forward the distinction
between the earned and the unearned income, the former being due to
appreciation of the assets of the company. He argued that the latter part of
article 7(i) only meant that dividend was payable
whether profits were by way of earned or unearned income or not. He maintained,
therefore, that if the profits were not made by a company at all, then dividend
was not payable in winding-up. Firstly, the expression "earned, declared
or not" is not accidental but deliberate. The juxtaposition of the words
"earned" and "declared" recalls the two limits on payment
of dividend when the company is a going concern, namely, non-earning of profits
and non-declaration of dividends referred to in sections 205 and 217 of our
Act. The word "earned" is not, therefore, used in contradistinction
to the word "unearned".
While the company is a going concern, it has to
prepare a balance-sheet annually as per section 211 and Schedule VI to the
Companies Act-The left side of the balance-sheet shows the liabilities and the
right side shows the assets. As remarked by Professor Pennington at page 600 of
his book referred to above, "the left hand side of a balance-sheet is
often misleadingly referred to as the liabilities side ;
it is certianly true that the company's debts and
liabilities appear there but so also do other items such as paid up capital and
reserves which are not liabilities owed by the company but represent the
interest of its shareholders in its undertaking. The left hand side of the
balance-sheet should be regarded as a statement of the way in which the company's
assets shown on the right hand side would be applied if the company were wound
up immediately". Item No. (13)(3) under the
heading "Provisions" on the side of the liabilities in the statutory
form of balance-sheet in Schedule VI is as follows :
"Arrears of fixed cumulative
dividends". An explanatory note added to it says that "the
period for which the dividends are in arrears.......shall be stated". This
is a statutory recognition of the fact that in the balance-sheet of a company,
provision has to be made for payment of the liability consisting of the arrears
of fixed cumulative dividends. This may or may not mean that there is an
enforceable debt due to a preferential shareholder against a company while it
is a going concern. But it does mean that a provision has to be made by the
company for the payment of the arrears of cumulative dividend in its
balance-sheet with a view to provide for payment of such cumulative dividends
in the event of winding-up.
Shri Sanghi
then argued that the English decisions should not be allowed to influence the
construction of article 7(i) inasmuch as there was no
provision in the English Companies Act, 1948, corresponding to section 205 of
our Companies Act. This argument ignores the fact that article 116 of Table A
of Schedule I of the English Companies Act corresponds to section 205 of our
Companies Act.
The reason why the distinction between profits on the
one hand and the capital and the other assets of the company on the other hand
so important when the company is a going concern disappears when the company is in liquidation is that in
liquidation the whole of the property of the company is treated as its assets
without any difference between the sources from which the assets have accrued
to the company. Shri Sanghi
contended that even during liquidation a distinction between the different sets
of assets could be made according to their sources. He relied on the special
definition of a "dividend" in the Income-tax Acts by which income-tax
could be imposed on that part of the assets of a company in liquidation which
could be traced to the profits made by the company (Hari
Prasad Jayantilal & Co. v. Income-tax Officer ,
Bharat Fire and General Insurance Co. v. Commissioner
of Income-tax
and Kantilal Manilal v.
Commissioner of Income-tax ).
But these very decisions show that such a distinction could be made during
winding-up only for the purposes of taxation and that it was not relevant for
the purposes of the distribution of the assets of the company.
On the other hand, in J.K. (
"..................the very object for which the
company existed and which also was the assumption on which the scheme was
framed ceased to exist......... The effect of a winding-up order is that except
for certain preferential payments provided in the Act the property of the
company is to be applied in satisfaction of its liabilities pari
passu. Pari passu distribution is to be made in satisfaction of the
liabilities as they exist at the commencement of the winding-up."
Applying this principle to our case, it is apparent
why some but not all rights created during the working of the company survived
after the winding-up order is made. Those rights which
concern the working of the company do not survive. For, the very objects of the
company ceased. On the other hand, those rights which are expressly meant to be
worked out only during the winding-up of the company survived and become
enforceable after the winding-up, e.g., the right to the preferential payment
of cumulative dividends to preference shareholders being a right which becomes
enforceable only during the winding-up.
Lastly, Shri Sanghi stressed that this was a very exceptional case. The
company did not go into business at all. In such a case cumulative dividends to
preference shareholders should not be paid out of capital. We do not see,
however, any difference between such a company and a company which has made no
profits and which may have run into losses. In either case, the cumulative
dividend shall have to be paid out of the capital of the company. The rule
against reduction of capital or nonpayment of dividends except from profits
ceases to apply during winding-up simply because the very object of winding-up
is to obliterate all distinctions in the kinds of assets and to apply the
assets under section 511 of the Companies Act.
For the above reasons, the answer given to the
reference made by the liquidator by the learned company judge, namely, that the
arrears of dividends on preference shares are payable during the winding-up
under article 7(i) is upheld. The appeal is
dismissed. The parties to bear their own costs.
[1975] 45 Comp Cas 429 (
HIGH COURT OF
v.
Globe United Engg.
& Foundry Co. Ltd.
V.S. DESHPANDE
AND B.C. MTSRA, JJ.
COMPANY APPEAL NO. 6 OF 1974
G.L.
Sanghi, B.P. Singh and K.K. Bhatia for the Appellant.
D.S. Dang, R.C. Beri and N.W. Goswami for the Respondent.
The question
for decision involving construction of sections 9, 36, 85, 100, 102, 205, 211
(read with Schedule VI), 217 and 511 of the Companies Act, 1956 (hereinafter
called "the Act"), is whether the holders of preference shares
carrying a right to a fixed cumulative dividend payable when the company is a
going concern only out of profits earned and when dividend is recommended to be
paid by the directors in a general meeting are entitled during the winding-up
of the company to the arrears of the fixed cumulative dividend in view of
article 7 of the articles of association out of the assets of the company which
did not make any profits at any time at all.
The
appellant-company, Messrs. Globe Motors Ltd., are the equity shareholders of
respondent No. 1, Messrs. Globe United Engineering & Foundry Company Ltd.
Respondents Nos. 2 to 7 are the holders of the company's (respondent No. 1)
preference shares carrying a fixed cumulative dividend as per article 7(i) of the articles of association which is as follows:
"The
preference shares shall confer on the holders thereof the right to a fixed
cumulative preferential dividend of 9.5% per annum free of company's tax but
subject to deduction of taxes at source at the prescribed rates on the capital
paid up thereon, and in the event of winding up, the right of repayment
of capital and arrears of dividend whether earned, declared or not, up to the
commencement of the winding-up in priority to the equity shareholders."
As the expected foreign technical collaboration did
not materialise, the company did not go into business
at all but went into voluntary liquidation which was later put under the
supervision of the court. The liquidator made a reference to this court under
section 518 of the Act as to whether the preference shareholders of the company
were entitled to the payment not only of their share capital but also of the
arrears of the fixed cumulative dividend thereon before any payment is made to
the equity shareholders out of the assets of the company in liquidation. The
learned company judge answered the question in the affirmative relying mainly
on the unanimous opinions of writers on British company law based on English
decisions. Hence this appeal by the equity shareholders.
Shri G.L. Sanghi for the appellant urges that the answer to the above
question should be governed not so much by the weight of the British text books
and precedents but by the provisions of our Companies Act which may be
dissimilar. Shri D.S. Dang for the respondents
submitted that the provisions of our Companies Act would lead to the same
conclusion. In the light of their arguments and our own further thinking, we
shall consider the question in depth primarily on the construction of the
relevant provisions of the Companies Act and article 7 and then see if the
British precedents and the opinions of well-known authors lead to the same
conclusion.
We first start with the premise that the company and
its shareholders are two different legal entities. When the company was
incorporated, it adopted its memorandum and articles of association including
article 7. These were the statutory terms of contract governing the
relationship between the company and the shareholders. Persons who contributed
the preference share capital became members of the company on these terms. The
effect of the memorandum and articles of association is stated in section 36(1)
of the Act as follows:
"Subject to the provisions of this Act, the
memorandum and articles shall, when registered, bind the company and the
members thereof to the same extent as if they respectively had been signed by
the company and by each member, and contained covenants on its and his part to
observe all the provisions of the memorandum and of the articles."
The expression "subject to the provisions of
this Act" recalls section 9 of the Act which is as follows
:
"Save as otherwise expressly provided in the Act—
(a) the
provisions of this Act shall have effect notwithstanding anything to the
contrary contained in the memorandum or articles of a company, or in any agreement
executed by it, or in any resolution passed by the company in general meeting
or by its board of directors, whether the same be registered, executed or
passed, as the case may be, before or after the commencement of this Act; and
(b) any provision
contained in the memorandum, articles, agreement or resolution aforesaid shall,
to the extent to which it is repugnant to the provisions of this Act, become or
be void, as the case may be."
At the first blush, one may think that every
provision of the Act would override every provision in the articles to the
extent of repugnancy between the two. We would like to emphasise
that this is not so. The reason is that the Companies Act, like all law
relating to companies, consists of two distinct parts, namely, (1) relating to
the formation and the management of a company as a going concern, and (2)
relating to its winding-up. The difference between the two is the same as
between running and stopping. The memorandum of a company sets forth the
objects to be achieved by the working of the company during its lifetime. It
does not usually provide for what is to happen during its winding-up. Parts I
to VI of the Companies Act contain provisions regulating the formation and the
management of companies. Part VII relates to the winding-up of companies.
Similarly, the majority of the articles of association are concerned with the
formation and working of the company while article 7 consists of two parts, the
first part relating to the company as a going concern and the second part
relating to its winding-up. The existence of two distinct provisions in the
same article strikingly brings out the contrast between the working of the
company and its winding-up. The effect is that some provisions of the company
law and of the articles would apply exclusively to a company which is a going
concern while the other provisions would apply only to a company in
liquidation.
It is in this background that section 511 has to be
read which is as follows:—
"Subject to the provisions of this Act as to
preferential payments, the assets of a company shall, on its winding-up, be
applied in satisfaction of its liabilities pari passu and, subject to such application, shall, unless the
articles otherwise provide, be distributed among the members according to their
rights and interests in the company."
Subject to the making of preferential payments (e.g.,
under sections 520 and 530), the assets of the company are distributed among
the members according to their rights and interests in the company unless the
articles otherwise provide (emphasis
supplied). The rights and interests of the members in the company are based
both on the provisions of the Act and of the articles of association. In
striking contract with sections 9 and 36, the articles prevail over the second
part of section 511. Since sections 9 and 36 ensure the superiority of the
provisions of the Act as against the provisions of the articles, the obvious
difference between them and the provisions of section 511 securing the
superiority of the articles over its second part can be understood only on the
hypothesis that sections 9 and 36 relate to those provisions of the Act which
apply to the working of a company as a going concern while section 511 refers
to those provisions of the Act which apply during the winding-up of the
company. This is why the former override the articles while the latter is
subject to the articles.
The prospectus was issued in 1967 long after the
terms of the contract between the company and the members were settled by the
articles which were finalised in 1963. The
representation made in the prospectus inviting the public to subscribe capital
and buy the shares of the company would not change the terms of the contract
between the company and the members which are already settled. The prospectus
did not become a contract between the company and the members inasmuch as the
subscribers buying the shares did so with the knowledge that the contract would
consist of the memorandum and the articles of association and not of the
representations made in the prospectus. Any variation between the language of
the prospectus and article 7(i) is, therefore, to be
construed as the article prevailing over the prospectus.
Originally, the statutes relating to companies in
"When the company is wound up, new rights and
liabilities arise............. While the company is a going concern no capital
can be returned to the shareholders, except under the statutory provisions in
that behalf............In the case of winding-up everything is changed. The
assets have to be distributed."
The distinction was also emphasised
in a subsequent leading decision of the House of Lords in Scottish Insurance
Corporation Ltd. v. Wilsons & Clyde Coal Company .
The counsel on both sides emphasised the distinction
between "the rights of the stockholders to dividends while the company is
a going concern and their rights in a liquidation, first, to return of capital
and, secondly, to surplus assets" (page 471) and "the status and
rights of the preference stockholders in the company as a going
concern.............and the statement of the rights of the preference
stockholders in a liquidation" (pages 474 and 475). The contrast was put
in a literary flourish as follows: "There is no known status of a company
being moribund or comatose. Either it is in liquidation or it is not and the
members when they join it contract on the basis of those two alternatives.
There is no half-way house—half law, half fact and almost wholly picturesque
language." (page 475).
The contract between the preference shareholders and
the company is contained in article 7(i) reproduced
above. The first part of article 7(i) obviously
refers to the company as a going concern. What is the meaning of "the
right to a fixed preferential cumulative dividend" conferred on the
preference shareholders ? It means that the company
must pay every year to the preference shareholders dividend at a fixed rate.
Why is the dividend to be "cumulative" and "preferential" ? The reason is that another primary principle of
company law both in our country and in
"Etymologically a dividend is the 'dividendum', the total divisible sum. But, in its ordinary
sense, it means the sum paid and received as the quotient forming the share of
the divisible sum payable to the recipient."
From the point of view of the company, the profits
are earned and divided. The profits or a part of the profits may, therefore, be
the dividend to the company. The word "earned" qualifying the word
"dividend" may, therefore, mean either of the two things depending on
whether it is used in relation to the company or in relation to the preference
shareholders. A company earns dividend in the sense of earning profits. A
preference shareholder earns dividend in the sense that the contract between
him and the company embodied in article 7(i) gives
him the right to the dividend. What is the nature of this right
? The phases through which a contractual right passes till it is
enforced by the receipt of a payment of money are described by Hidayatullah C.J. in H.H. Madhav Rao Scindia v. Union of India ,
in paragraph 63, as follows :
"The dynamic theory of obligations regards a
debt as a claim to 'an equivalent in value to a floating charge against the
generality of things which are the properties of the debtor'. From this is developed
the notion of a credit-debt where property rights arise from a promise, express
or implied, in respect of ascertained or readily ascertained sums of money.
Thus a debt or a liability to pay money passes through four stages. First,
there is a debt not yet due. The debt has not yet become a part of the
obligor's 'things' because no net liability has yet arisen. The second stage is
when the liability may have arisen but is not either ascertained or admitted.
Here again the amount due has not become a part of the obligor's things. The
third stage is reached when the liability is both ascertained and admitted.
Then it is property proper of the debtor in the creditor's hands. The law
begins to recognise such property in insolvency, in
dealing with it in fraud of creditors, fraudulent preference of one creditor
against another, subrogation, equitable estoppel,
stoppage, intransitu, etc. A credit-debt is then a
debt fully provable and which is fixed and absolutely owing. The last stage is
when the debt becomes a judgment debt by reason of a decree of a court. Thus an
American judge held 'outstanding uncollected accounts' as property (Standard
Marine Insurance Co. v. Board of Assessors ).
It is because of this that the French law includes such obligations in
mobiles."
What is the reason why in the first part of article
7(i) only the word "dividend" is used while
in the second part of article 7(i) the words
"arrears of dividend" are used ? The answer
is given by Professor R. R. Pennington in his Company Law, 3rd edition. The
learned author deals with the company as a going concern at page 180 and
observes as follows :
"It is common to speak of the unpaid balance of
preference dividend as 'arrears' but this is misleading because it conveys the
impression that the unpaid balance is a sum of money which the company already
owes the preference shareholders. The preference dividend only becomes owing
when (a) there are profits available to pay it, and (b) it has been properly
declared in accordance with the articles, unless they dispense with a
declaration, and when there are arrears of preference dividends ex hypothesi one or other or both of these things have not
happened."
This is why the first part of article 7(i) does not talk of arrears of dividend but merely emphasises that the dividend is cumulative. That is to say,
even if a dividend is not declared and paid in one year, the right to it
continues to accumulate till the whole accumulation is declared and paid later.
Strictly speaking, when the company is a going concern, unearned and undeclared
dividend is not due and does not amount to arrears. But the situation is
completely changed during the winding-up. At page 186 Professor Pennington
comments on an article under which arrears of preference dividend are payable
in a winding-up in the following words:
"Under such a clause unpaid preference dividends
are payable for periods up to the repayment of the preference capital, even
though the dividends have not been declared, and even though the company did
not earn sufficient profits to pay them while it was a going concern."
The learned author does not dispute the use of the
word "arrears" as applied to a company in liquidation and thus recognises the fundamental difference between the two
situations. The same dividend which is not payable during the life of a company
as not having been earned or declared
becomes payable with all the arrears during liquidation even if it is not
earned or declared.
Section 85 of
the Act defines "preference share capital" and expressly recognises the distinction between the right of a
preference shareholder to the payment of a dividend when the company is a going
concern and to the same right when the company is in liquidation. It reads as follows :
"Preference
share capital means, with reference to any company limited by shares, whether
formed before or after the commencement of this Act, that part of the share
capital of the company which fulfils both the following requirements, namely :
(a) that as respects dividends, it carries or
will carry a preferential right to be paid a fixed amount or an amount
calculated at a fixed rate, which may be either free of or subject to
income-tax ; and
(b) that as respects capital, it carries or will
carry, on a winding-up or repayment of capital, a preferential right to be
repaid the amount of the capital paid up or deemed to have been paid up,
whether or not there is a preferential right to the payment of either or both
of the following amounts, namely :
(i) any money
remaining unpaid, in respect of the amounts specified in clause (a), up to the
date of the winding-up or repayment of capital; and
(ii) any fixed
premium or premium on any fixed scale, specified in the memorandum or articles
of the company."
The words
"whether or not there is a preferential right to the payment
of...........any money remaining unpaid in respect of the amounts specified in
clause (a)" are decisive. They recognise that a
contract between the preference shareholder and the company may provide for the
payment of unpaid preferential dividend on a preference share capital during
the winding-up. Because they apply only during the winding-up proceedings, they
are not subject either to section 205 or to section 217 which restrict payment
of dividends to earning of profits and to the declaration of dividends. Article
7(i) is, therefore, clearly authorised
by section 85(1)(b)(i). It
is to be noted that the words the amounts specified in clause (a) in section
85(1)(b)(i) simply mean the
amount of preferential dividend calculated at the fixed rate. They do not
import the restrictions imposed by sections 205 and 217 on the payment of such
amount. These restrictions would be implied in section 85(1)(a)
which refers to the company as a going concern but not in section 85(1)(b)
which refers to it during liquidation. Had section 85(1)(b)(i) been subject to sections 205 and 217, it could not have
permitted a contract to provide for payment of dividend to preference
shareholders during winding-up. Such a provision could be permitted by contract
only because sections 205 and 217 are not applicable during winding-up. Section
205(1) says "no dividend shall be declared or paid by a company for any financial
year except out of the profits of the company for that year arrived at after
providing for depreciation in accordance with the provisions of sub-section
(2)". The determination of profits for a particular year after providing
for depreciation can only be the act of a company which is a going concern.
Section 217(1) refers to a report by the board of directors placed before a
general meeting. But the board of directors becomes extinct and is replaced by
the liquidator during the winding-up proceedings. None of these sections can,
therefore, apply during winding-up. They do not, therefore, restrict or affect
the right of the preference shareholders to payment of arrears of dividend
during winding-up.
The reason
why article 7(i) is so worded is historical. Formerly,
the English judges were also dominated by the idea that dividends not being
payable except out of profits could not be paid during winding-up if no profits
had been made. This view was expressed in In re W.J.
Hall & Co. Ltd.
The distinction between the company as a going concern and a company during
liquidation was, however, soon realised and this
decision was dissented from successively in the subsequent decisions in In re New Chinese Antimony Co. Ltd.,
in In re Springbok Agricultural Estates Ltd.
and finally in In re Wharfedale Brewery Co. Ltd.,
all of which suggested or concluded that arrears of dividend were payable to
the preference shareholders during winding-up irrespective of profits having
been made. This view was followed in
"Prima
facie a preference dividend is payable only out of the profits made whilst the
company is a going concern, and it wants special provision to give the holders
a right to have the arrears paid out of assets in winding-up........If by the
articles arrears are to be paid, they may be payable although no profits have
been made."
Shri Sanghi suggested that the words in article 7(i) "arrears of dividend whether earned, declared or
not" should not be literally construed. He put forward the distinction
between the earned and the unearned income, the former being due to
appreciation of the assets of the company. He argued that the latter part of
article 7(i) only meant that dividend was payable
whether profits were by way of earned or unearned income or not. He maintained,
therefore, that if the profits were not made by a company at all, then dividend
was not payable in winding-up. Firstly, the expression "earned, declared
or not" is not accidental but deliberate. The juxtaposition of the words
"earned" and "declared" recalls the two limits on payment
of dividend when the company is a going concern, namely, non-earning of profits
and non-declaration of dividends referred to in sections 205 and 217 of our
Act. The word "earned" is not, therefore, used in contradistinction
to the word "unearned".
While the company is a going concern, it has to
prepare a balance-sheet annually as per section 211 and Schedule VI to the
Companies Act-The left side of the balance-sheet shows the liabilities and the
right side shows the assets. As remarked by Professor Pennington at page 600 of
his book referred to above, "the left hand side of a balance-sheet is
often misleadingly referred to as the liabilities side ;
it is certianly true that the company's debts and
liabilities appear there but so also do other items such as paid up capital and
reserves which are not liabilities owed by the company but represent the
interest of its shareholders in its undertaking. The left hand side of the
balance-sheet should be regarded as a statement of the way in which the company's
assets shown on the right hand side would be applied if the company were wound
up immediately". Item No. (13)(3) under the
heading "Provisions" on the side of the liabilities in the statutory
form of balance-sheet in Schedule VI is as follows :
"Arrears of fixed cumulative
dividends". An explanatory note added to it says that "the
period for which the dividends are in arrears.......shall be stated". This
is a statutory recognition of the fact that in the balance-sheet of a company,
provision has to be made for payment of the liability consisting of the arrears
of fixed cumulative dividends. This may or may not mean that there is an
enforceable debt due to a preferential shareholder against a company while it
is a going concern. But it does mean that a provision has to be made by the
company for the payment of the arrears of cumulative dividend in its
balance-sheet with a view to provide for payment of such cumulative dividends
in the event of winding-up.
Shri Sanghi
then argued that the English decisions should not be allowed to influence the
construction of article 7(i) inasmuch as there was no
provision in the English Companies Act, 1948, corresponding to section 205 of
our Companies Act. This argument ignores the fact that article 116 of Table A
of Schedule I of the English Companies Act corresponds to section 205 of our
Companies Act.
The reason why the distinction between profits on the
one hand and the capital and the other assets of the company on the other hand
so important when the company is a going concern disappears when the company is in liquidation is that in
liquidation the whole of the property of the company is treated as its assets
without any difference between the sources from which the assets have accrued
to the company. Shri Sanghi
contended that even during liquidation a distinction between the different sets
of assets could be made according to their sources. He relied on the special
definition of a "dividend" in the Income-tax Acts by which income-tax
could be imposed on that part of the assets of a company in liquidation which
could be traced to the profits made by the company (Hari
Prasad Jayantilal & Co. v. Income-tax Officer ,
Bharat Fire and General Insurance Co. v. Commissioner
of Income-tax
and Kantilal Manilal v.
Commissioner of Income-tax ).
But these very decisions show that such a distinction could be made during
winding-up only for the purposes of taxation and that it was not relevant for
the purposes of the distribution of the assets of the company.
On the other hand, in J.K. (
"..................the very object for which the
company existed and which also was the assumption on which the scheme was
framed ceased to exist......... The effect of a winding-up order is that except
for certain preferential payments provided in the Act the property of the
company is to be applied in satisfaction of its liabilities pari
passu. Pari passu distribution is to be made in satisfaction of the
liabilities as they exist at the commencement of the winding-up."
Applying this principle to our case, it is apparent
why some but not all rights created during the working of the company survived
after the winding-up order is made. Those rights which
concern the working of the company do not survive. For, the very objects of the
company ceased. On the other hand, those rights which are expressly meant to be
worked out only during the winding-up of the company survived and become
enforceable after the winding-up, e.g., the right to the preferential payment
of cumulative dividends to preference shareholders being a right which becomes
enforceable only during the winding-up.
Lastly, Shri Sanghi stressed that this was a very exceptional case. The
company did not go into business at all. In such a case cumulative dividends to
preference shareholders should not be paid out of capital. We do not see,
however, any difference between such a company and a company which has made no
profits and which may have run into losses. In either case, the cumulative
dividend shall have to be paid out of the capital of the company. The rule
against reduction of capital or nonpayment of dividends except from profits
ceases to apply during winding-up simply because the very object of winding-up
is to obliterate all distinctions in the kinds of assets and to apply the
assets under section 511 of the Companies Act.
For the above reasons, the answer given to the
reference made by the liquidator by the learned company judge, namely, that the
arrears of dividends on preference shares are payable during the winding-up
under article 7(i) is upheld. The appeal is
dismissed. The parties to bear their own costs.
[1991] 72
COMP. CAS. 421 (
HIGH COURT OF
P. Sengupta
v.
ANANDAMOY
BIIATTACHARJEE AND AMULYA KUMAR NANDI JJ.
CRIMINAL REVISION NO. 362 OF 1984.
MARCH 29, 1990.
B.N. Sanyal for the Petitioner.
Abdul Sattar and Ananda
Mohan Biswas for Respondent.
Bhattacharjee
J.—More than seven decades ago, Sir Lawrence Jenkins, speaking for the Judicial
Committee in Krishnasami v. Ramaswami,
AIR 1917 PC 179, observed that even when a proceeding is admitted by the court
beyond the period prescribed after an ex parte order
extending the period and condoning the delay without any notice to the opposite
party, according to the practice then prevalent in the courts in India, it was
to be regarded to be a tacit term of such an order, however unqualified in
expression, that it would be open to reconsideration at any later stage at the
instance of the party prejudically affected thereby.
The Privy Council, however, deprecated this practice as "manifestly open
to grave objection" and as leading to "a needless expenditure of
money and an unprofitable waste of time", "creating elements of
considerable embarrassment when the court finally comes to decide on the
question of delay" finally. It may be noted that the decision in Krishnamsami, AIR 1917 PC 179, has been referred to with
approval by the Supreme Court in Dinabandhu Saha v. Jadumoni Mangaraj, AIR 1954 SC 411.
If we may
add, with respect that such a practice is also violative
of the fundamental priniciples of natural justice
according to which, as pointed out by Vivian Bose J. in the decision of the
Supreme Court in Sangram Singh v. Election Tribunal,
AIR 1955 SC 425, no proceeding affecting the life, liberty or the property of a
person must be allowed to be held behind his back without giving him an
opportunity of participating therein. Though the Privy Council in Krishnasami, AIR 1917 PC 179, and the Supreme Court in Sangram Singh, AIR 1955 SC 425, were dealing with matters
in the civil jurisdiction, the principle enunciated therein must a fortiori
apply to criminal prosecution, where not only the resultant conviction but even
its continuation puts the personal liberty of the person proceeded against in
some peril. In all such cases, therefore, the party sought to be proceeded
against must be allowed to participate at all stages of the proceeding, even if
the relevant law does not expressly provide therefor,
unless such participation is ruled out by an express provision or irresistible
implication. That is the mandate of the rules of natural justice on which our
laws of procedure are and must be deemed to be grounded. That is the message in
Sangram Singh, AIR 1955 SC 425, where it has been
ruled that these principles must be allowed to supplement all our procedural
laws, wherever possible. The much later decision in A.K. Kraipak,
AIR 1970 SC 150, has also reiterated that principle with this rider that these
principles, which must supplement our procedural laws, cannot, however,
supplant them.
A criminal
prosecution may, and very often does, affect the liberties of the person
prosecuted, not only when it ends in conviction, but even during the trial by
putting the accused under the fetters of a bond to ensure his attendance. The
person sought to be prosecuted, therefore, must be allowed to participate in
that part of the criminal proceeding where the question of allowing a
time-barred prosecution after condonation of the
delay would be considered. The Division Bench decision of this court in Asiatic
Oxygen v. Registrar of Companies [1978] 2 Cal HCN 412 appears to be a clear
authority for this view where a number of decisions of the other High Courts
have been referred to with approval. The Division Bench has placed strong
reliance on the observations made in Bharat Hybrid
Seeds v. State [1978] Crl LJ 61 to the effect that
when the court extends that time, it means that it is interfering with the
rights of the accused which have vested in him by virtue of the expiry of the
period of "limitation" and, "therefore, even though there is no
rule of law requiring the court to issue a notice to the proposed accused and
to give him an opportunity for meeting the case of the complainant in regard to
the extension of time, the interest of justice and the principles of natural
justice require that the condonation of the delay and
extension of time can be done only after giving reasonable opportunity to the
proposed accused" and that "it would be violating the very principles
of natural justice and, in fact, the very spirit of administration of justice,
if a party is prosecuted in a court of law after the period prescribed for the
launching of a prosecution is over and without giving him an opportunity to
explain his case as to why the delay should not be condoned". The Division
Bench in Asiatic Oxygen [1978] 2 Cal HCN 412, accordingly, quashed the ex parte order passed by the Magistrate in that case extending
the time and condoning the delay and the order of taking cognisance
on such extension and condonation. The Division
Bench, however, ruled that the trial Magistrate would be at liberty to issue
notice to the accused named in the petition of complaint and decide the
question of extension/condonation after hearing the
proposed accused on that score and to pass appropriate orders.
We also
propose to act accordingly and quash the ex parte
order of extension/condonation passed by the
Magistrate without notice to the petitioners and would direct the Magistrate to
decide the question of extension/ condonation with
notice to the petitioners and to proceed in accordance with law. But a query, before we conclude.
The Division
Bench decision of this court and all the decisions of the other High Courts
relied on therein have ruled issuance of notice to the person sought to be
prosecuted before extension/condonation is made under
section 473 of the Code, not because of any statutory provision to that effect,
but in the interest of justice and to comply with the principles of natural
justice. We are inclined to think that whatever a court does, not under any
statutory provision, but in the interest of justice or to prevent the abuse of
process, it does so and can do so only in the exercise of its inherent powers.
In civil jurisdiction, this would present no difficulty, for it is settled
beyond the pale of all controversies for centuries that all civil courts have
inherent powers inhering in them as a matter of course, to do all that may be
necessary to secure the ends of justice and to prevent abuse of their processes
and that section 151 of the Code of Civil Procedure has never conferred any
such power and has only demonstrated the anxiety of the Legislature to declare
that all such powers to act ex debito justitiae, as the courts inherently possess, are saved and
left intact and not affected by liters legis of the
Code.
But an
impression has gained ground that a two-judge Bench of the Supreme Court in Bindeshwari Prasad Singh, AIR 1977 SC 2432, has ruled out
all the inherent powers of the criminal courts subordinate to the High Court
that they were held to possess till then. This court has all along held that
all criminal courts have inherent powers to make such orders as may be
necessary for the ends of justice, even though section 561A of the preceding
Code of Criminal Procedure expressly saves only the inherent powers of the High
Court and reference may be made, among others, to the decisions in Budhe Lal v. Chattu
Gope, AIR 1918 Cal 850, in Pigot
v. Ali Mohammad Mandal, AIR 1921 Cal 30, in Rahim Sheikh v. King Emperor, AIR 1923 Cal 724, and in Akhil Bandhu Ray v. Emperor, AIR
1938 Cal 258. This is in perfect consonance with the view of the Privy Council
in Boger v. Comptoir [1871]
LR 3 PC 465, to the effect that all the courts must and do possess such
inherent powers "from the lowest court which entertains jurisdiction over
the matter up to the highest court which finally.disposes
of the case". The Supreme Court has also, among others, in the three-judge
Bench decision in Padam Sen,
AIR 1961 SC 218, and then in the four-judge Bench decision in Manohar Lal Chopra, AIR 1962 SC
527, held that these inherent powers are not conferred upon the court by
section 151 of the Code of Civil Procedure, but are powers inherently possessed
by the court and the Legislature only thought it fit to insert an express
saving provision by that section, which, however, would have existed even
without and independently of that section. As ruled in Manohar
Lal Chopra, AIR 1962 SC 527 (at page 534), "the
inherent powers have not been conferred upon the court, it is a power inherent
in the court by virtue of its duty to do justice". Now, if according to
the three-judge Bench decision in Padam Sen, AIR 1961 SC 218, and the four-judge Bench decision in Manohar Lal Chopra, AIR 1962 SC
527, all the civil courts would have all the inherent powers even de hors any
statutory recognition, it may be difficult to understand why all the
subordinate criminal courts would not have inherent powers, even without their
statutory recognition. And, in view of these larger Bench decisions to the
effect that section 151 of the Code of Civil Procedure, dealing with saving of
inherent powers, does not confer, but only recognises
the existence of these powers, it may be similarly difficult to understand how
the Supreme Court in this two-judge Bench decision in Bindeshwari
Prasad Singh, AIR 1977 SC 2432, could hold that section 561A of the Code of
Criminal Procedure "confers" these powers on the High Court. It may,
therefore, be necessary for us to hold, with respect, that in view of the
larger Bench decisions as aforesaid to the effect that no conferment was either
necessary or made for the continuance of the inherent powers of the court, the
contrary dicta in the later smaller Bench decision to the effect that section
561A conferred powers on the High Court is not correct and as a result, that
being the foundation of the later decision, the same must be held to be
confined to the case actually dealt with by it to the effect that subordinate
criminal courts have no inherent power to review or recall a judicial order of
dismissal of a complaint under section 203 of the Code of Criminal Procedure.
This
two-judge Bench decision of the Supreme Court in Bindeshwari
Prasad Singh, AIR 1977 SC 2432, appears to have been followed in a much later
two-judge Bench decision of the Supreme Court in A.S. Gauraya
v. S.N. Thakur [1986] 2 SCC 709. In that case, a
complaint dismissed for default was, however, later restored. The accused moved
against this order of restoration before the Magistrate without success and his
revisional application before the Chief Judicial
Magistrate and then before the High Court also failed and the case was, therefore,
being proceeded with before the Magistrate. But, thereafter, when the decision
in Bindeshwari Prasad Singh, AIR 1977 SC 2432, was
delivered and reported, the accused again moved the Magistrate contending that
the restoration of the complaint and all proceedings thereafter were without
jurisdiction in the light of that Supreme Court decision. The Magistrate
accepted this contention and dropped the proceeding. The complainant moved the
Court of Sessions against this order in revision and the order of the Magistrate
having been reversed by that court, the accused moved the High Court in
revision under article 227 of the Constitution and section 482 of the Code of
Criminal Procedure, which was, however, dismissed. The accused moved the
Supreme Court in appeal and, following the decision in Bindeshwari
Prasad Singh, AIR 1977 SC 2432, the Supreme Court allowed the appeal and
restored the original order of the Magistrate dismissing the complaint.
According to this decision, therefore, the order of the Magistrate dropping all
proceedings and thus nullifying the order of restoration passed earlier was
approved. But once the complaint was restored and proceeded with, how could the
Magistrate thereafter set the restoration at naught and drop all proceedings,
save in the exercise of his inherent power for the ends of justice and to
prevent abuse of the process of law? As would be apparent from the decision of
the Supreme Court in Mulraj v. Murti
Raghunathji, AIR 1967 SC 1386, when the court is
satisfied that orders passed by it were not proper and were not to be passed,
it can set them aside only in the exercise of its inherent powers. Even as to
the order dismissing the complaint for non-appearance on the date fixed for the
appearance of the accused, we do not know how the Magistrate could do so except
in the exercise of his inherent power. But, in view of the course we propose to
adopt as indicated hereinbefore, this question need not be pursued any further.
The revisional application, accordingly, succeeds and the impugned
order passed ex parte and without
notice to the petitioners are quashed and the case is sent back to the
court below to decide the question of extension of time and condonation
of the delay, after issuing notice to and hearing the petitioners. Records to go down at once.
Nandi J.—The
Registrar of Companies filed a complaint against the petitioner and three
others under section 217(3) read with section 217(5) of the Companies Act. He
also filed a petition under section 473, Criminal Procedure Code, for condonation of delay in filing the complaint. By order No.
1, dated July 10, 1978, the Chief Judicial Magistrate condoned the delay ex parte, took cognizance of the offence and issued process
under section 217(3) read with section 217(5) of the Companies Act.
The
petitioner challenged the order in this application, inter alia,
on the ground that the delay cannot be condoned ex parte
among other different grounds.
We have
considered other grounds and we are of the opinion that these grounds can be
pressed only at the trial. We have been addressed only on the question of
limitation.
I have had
the advantage of going through the judgment of Bhattacharjee
J. I agree with his conclusion that the determination of the question of
limitation should be preceded by a notice to the person who is proposed to be
summoned as an accused. I advance some reasons of my own to support his
conclusion.
It is
well-settled that the accused can raise the plea of limitation at any stage of
the proceeding : State of
But judicial
opinion is divided as to the time of determination of the question of
limitation, that is to say, whether before taking cognizance or after taking
cognizance.
The Joint Select
Committee of Parliament, in its report, laid down that "periods of
limitation have been prescribed for criminal proceedings in the laws of many
countries and the committee feels that it will be desirable to prescribe such
periods in the Code……….."
The Joint
Committee of both the Houses of Parliament assigned various reasons for
incorporation of the provisions of limitation.
The report,
however, remained silent in its recommendation as to the mode and time of
determination of the question particularly having regard to the criminal
jurisprudence. The legislators also did not lay down the procedure. The
omission in this behalf gave rise to conflicting opinions.
Some High
Courts, relied upon the observation of the Supreme Court reading as "at
any rate, at the stage of section 202 or section 204 of the Code of Criminal
Procedure as the accused had no locus standi, the
Magistrate had absolutely no jurisdiction to go into any materials or evidence
which may be produced by the accused who could be present only to watch the
proceedings and not to participate in them" : Smt. Nagawwa v. Veeranna Shivalingappa Konjalgi, AIR 1976 SC 1947.
As a matter
of fact, among the other High Courts, the
Reviewing a
good number of decisions, the Andhra Pradesh High Court summed up in K. Hanumantha Rao v. K. Narashima Rao [1982] Crl LJ 734 (AP) saying "the Code does not provide an
opportunity to the accused of being heard on the bar of limitation enacted
under section 468 of the Code before taking cognizance of offences of the
categories specified in sub-section (2) thereof. The Code does not also
envisage issue of any process against the accused before taking cognizance of
the offence. Any cognizance of the offence taken by the court is subject to
defeasance of the cognisance on the ground of
limitation and it is open to the accused to plead before the court in response
to the process issued to him that the complaint or the challan
filed against him and taken cognisance of by the
court is barred by limitation."
Section 468
of the Code bars the taking of cognizance of a time-barred offence. In the
process suggested above, the court has to take cognizance tentatively and then
to defeat it after hearing the accused if the accused succeeds in proving that
the offence comes within the mischief of limitation. The consideration of the
absence of provision for a notice to the accused for the purpose of
determination of the question of limitation before issue of process very much
weighed with the learned judges. The Magistrate cannot discharge or acquit an
accused or drop the proceeding except under the provisions of the Code once
cognizance is taken. This legal proposition has not been considered in the
aforesaid decision. Defeasance of cognizance on the ground of limitation after
taking cognizance is not provided for in the Code. So, both the processes,
viz., issue of notice to the accused before determination of the question of
limitation and defeasance of cognizance on the ground of limitation have to be
followed in exercise of the inherent jurisdiction of the court although the
Supreme Court pointed out in no unmistakable terms in Bindeshwari
Prasad Singh, AIR 1977 SC 2432, that the subordinate courts have no such
inherent power. The Supreme Court may possibly have to review its decision
since the legislation cannot comtemplate all
contingencies and the court may have to exercise its inherent power to dispense
justice. If the courts are allowed to exercise their inherent power in either
of the situations, it is better to take recourse to what we have suggested.
While the statute bars taking of cognizance of an offence barred by limitation,
possibly it shall be proper to decide the question of limitation before taking
cognizance and that will be in consonance with the spirit and letter of the
provision. In taking a contrary view, inspiration cannot be had from the
Supreme Court decision in Smt Nagawwa,
AIR 1970 SC 1947, since the Supreme Court prohibits participation of the
accused while the court is considering the question of taking cognizance and
issuance of process. In determining the question of limitation after hearing
the accused, no such participation occurs. On determination of the question of
limitation only, process is not issued. The Court has, thereafter, to apply its
mind to the complaint or police report to decide whether cognizance is to be
taken and process is to be issued.
The procedure
suggested by us has found favour with the Madhya Pradesh High Court in Krishna
v. State of
Thus, I have
set out reasons for according with the view expressed in the preceding
paragraph and concluded by my learned brother.
[1998] 92
COMP. CAS. 564 (KAR.)
HIGH COURT OF KARNATAKA
T.P.G. Nambiar
v.
Registrar of Companies
M.P. CHINNAPPA J.
Criminal Petitions Nos. 551, 552, 595 to 598,
607, 608,
626, 646, 662, 1064, 1151 and 1464 of 1993
Naganand, Santosh
Hegde and S.G. Bhagavan for
the petitioner.
Ashok Haranahalli, Mukunda Menon and A Padmanabhan
for the respondent.
M.P. Chinnappa J.—The brief facts of
the cases which lead to these petitions and which are common in all these
petitions are as follows:
Fairgrowth Financial
Services Ltd. was incorporated on July 9, 1990, as a public company limited by
shares under the Companies Act, 1956, (hereinafter referred as "the
Act"), in the State of Karnataka. The certificate of commencement of
business was issued by the Registrar of Companies on August 10, 1990. The
company has its registered office at No. 22/11, Vittal
Mallya Road, Bangalore—Sri K. Dharmapal
is the managing director and Sri R. Lakshminarayanan
is the whole-time director (also designated as executive director and company
secretary) of the company. It is also alleged that Dr. V. Krishnamurthy, Sri Ved Kapoor, Sri Kanhaiyalal Rajgarhia, Sri T.P.G.
Nambiar, Sri Pratap C.
Reddy, Sri Vijay Dhar, Dr. D.N. Patodia
and Sri Vinod L. Doshi are
said to be at all material times pertaining to the complaint, the members of
the board of directors of the company. The main object for which the company
was established has been incorporated in the memorandum of association.
Inspection of the books of account and other books and papers of the company
was ordered by the Department of Company Affairs under section 209A of the Act,
during the month of July, 1992. Accordingly, Sri Richard, Inspecting Officer,
attached to the office of the Regional Director,
It is further
alleged that accused Nos. 1 to 13 were under a statutory obligation under
section 210(1) and (3) of the Act, to lay before the company in its annual
general meeting which ought to have been held in pursuance of section 166 of
the said Act, by September 30, 1992, at the latest (being extension given by
the complainant/Registrar), its balance-sheet and profit and loss account for its
financial year ending March 31, 1992, on June 30, 1992, but the accused persons
have failed to take all reasonable steps to comply with the said provisions of
section 210 of the said Act, and have thereby committed an offence punishable
under section 210(5) of the Act. This case was registered in C.C. No. 298 of
1993.
Similarly,
the Registrar of Companies filed a complaint in C.C. No. 1180 of 1992 alleging
that the company had given loans to other body corporates
on the allegation that the inspection report, inter alia,
shows that the provisions of section 370(1) of the Act have been contravened by
the company by lending loans to other bodies corporate in excess of the limits
laid down under section 370(1) read with rule 11B of the Companies (Central Government's)
General Rules and Forms, 1956. The details of the loans given to bodies
corporate in excess of the maximum permissible limit have been furnished in the
complaint. Therefore, it is alleged that the accused persons have committed an
offence punishable under section 370(1) of the Act.
It is alleged
in C.C. No. 179 of 1993, that the company circulated large amount of
application forms for raising capital of the company by private placement
without complying with the provisions of sections 56 and 60 of the Act, and
received favourable response from the public. The
company's board of directors after allotting to 2,738 shareholders went ahead
and made partial allotment to some and refunded to some other shareholders.
This was done without complying with the provisions of sections 56 and 60 of
the Act. The company's board of directors thereby have
committed offence punishable under section 60(5) of the Act.
The
complainant has alleged in C.C. No. 678 of 1993, that in terms of section
217(2A) of the Act, read with the Companies (Particulars of Employees) Rules,
1975, the particulars of employees of the company drawing remuneration above
the prescribed limit should be furnished in the report of the board of
directors attached to every balance-sheet laid before the company in its annual
general meeting. The Department of Company Affairs has also clarified that such
statements should not be furnished in detachable annexures,
but incorporated in the board's report itself. The Inspecting Officer has
reported that the copy of the balance-sheet as at March 31, 1991, furnished to
him at the time of inspection did not contain the particulars of employees as
required to be furnished under the aforesaid provision. On a verification of
the printed copy of the balance-sheet as at March 31, 1991, filed by the
company with the complainant, it is seen that the aforesaid particulars of
employees have been furnished in a detachable annexure to the balance-sheet. No
page number has also been given to the said annexure. Thus the accused have not
strictly complied with the requirements of section 217(2A) of the Act, thereby
they committed an offence punishable under section 217(5) of the Act.
On the basis
of these complaints, the
Since all
these petitions pertain to the same company and are in respect of various
sections and material particulars are similar in nature, they are disposed of
by this common order. Retain a copy of this order in each file.
Heard Sri Santosh Hegde, senior counsel
appearing for Sri Vinod L. Doshi,
who is the petitioner in Crl. P. Nos. 595 to 598 and
1151 of 1993, Sri Naganand, learned advocate
appearing for Sri T.P.G. Nambiar in Crl. P. Nos. 551, 552, 1064 and 1464 of 1993, and Sri S. G.
Bhagvan, learned counsel appearing for the
petitioners in Crl. P. Nos. 607, 608, 626, 646, 662
and 663 of 1993, and Sri Ashok Haranahalli
and Sri Mukunda Menon,
learned advocates appearing for the respondent.
Sri Santosh Hegde, learned advocate
for Sri Vinod L. Doshi, at
the very outset submitted that this petitioner was inducted as a director of
the company because of his reputation, experience and standing in society on
February 1, 1991. He had never attended any director's meeting at any time nor the general meeting of the company. He had never
participated in any transaction of the company. Further, on June 24, 1992, he
had tendered his resignation to the directorship which had taken effect from
that day onwards. Though this fact was within the knowledge of the complainant,
he suppressed the same and arrayed him as the accused. Therefore, the entire
proceedings as far as this petitioner is concerned may be quashed.
However,
learned counsel for the respondent submitted that this is not the stage at
which all these aspects will have to be considered. Even if he had tendered his
resignation, the question of his participation in the affairs of the company
and his responsibility as the director is a matter to be decided by the trial
court. Further, no material is placed by the petitioner before the trial court
in support of these arguments and this court cannot look into the documents
sought to be produced by the petitioner as it requires evidence to support
their contention.
It is an
admitted fact that this petitioner was the director during the relevant period.
Nothing is on record of the complainant to show that he had tendered his
resignation and that resignation had come into effect from the said date. The
complainant does not know anything about the resignation being tendered by him.
At this stage, as rightly pointed out by learned counsel for the respondent,
this court cannot go into the pros and cons of the case of the company nor can
this court look into the documents sought to be produced by the petitioners.
These documents ought to have been produced before the learned magistrate to
substantiate their case. On the other hand, the petitioners rushed to this
court under section 482 of the Criminal Procedure Code. At this stage, it is
also necessary to refer to the various decisions rendered by the Hon'ble Supreme Court in regard to the scope, object and
purpose of section 482 of the Criminal Procedure Code.
In State of
H.P. v. Pirthi Chand [1996]
2 SCC 37, their Lordships have considered the judgment of the Supreme Court in
the case of State, of Haryana v. Bhajan
Lal [1992] Supp 1 SCC 335, wherein a two-judge Bench
of the Supreme Court laid down certain broad tests to exercise the inherent
power or extraordinary power of the High Court. And it is also laid down that
the High Court should sparingly and only in exceptional cases, in other words,
in the rarest of rare cases, and not merely because it would be appealable to the learned judge, be inclined to exercise
the power to quash the FIR/charge-sheet/complaint. It is also held that the FIR
should not be quashed since it disclosed prima facie cognizable offences to
proceed further in the investigation. In Rupan Deol Bajaj v. Knnwar
Pal Singh Gill [1995] 6 SCC 194, the court reiterated the above view and held
that when the complaint or charge-sheet filed disclosed prima facie evidence
the court would not weigh at that stage and find out whether an offence could
be made out. It is also further observed that it is well-settled law that the
exercise of inherent power of the High Court is an exceptional one. Great care
should be taken by the High Court before embarking to scrutinise
the FIR/charge-sheet/complaint. In deciding whether the case is the rarest of
rare cases to scuttle the prosecution in its inception, it first has to get
into the grip of the matter whether the allegations constitute the offence. It
must be remembered that the FIR is only an initiation to move the machinery and
to investigate into cognizable offence. After the investigation is concluded
and the charge-sheet is laid, the prosecution produces the statements of the
witnesses recorded under section 161 of the Code, in support of the
charge-sheet. At that stage, it is not the function of the court to weigh the
pros and cons of the prosecution case or to consider the necessity of strict
compliance with the provisions which are considered mandatory and the effect of
non-compliance. It would be done after the trial is concluded.
In regard to
exercise of inherent power by the High Court under section 482 of the Criminal
Procedure Code, it is held that the prime consideration should only be whether
the exercise of the power would advance the cause of justice or it would be an
abuse of the process of the court. Further action should not be short-circuited
by resorting to exercise of inherent power to quash the charge-sheet. The
social stability and order requires to be regulated by proceeding against the
offender as it is an offence against society as a whole. This cardinal
principle should always be kept in mind before embarking upon exercising
inherent power.
It is also
held in Mushtaq Ahmad v. Mohd.
Habibur Rehman Faizi [1996] JT 1 SC 656, 657, wherein the Supreme Court
has held:
"According
to the complaint, the respondents had thereby committed breach of trust of
Government money. In support of the above allegations made in the complaint,
copies of the salary statements of the relevant periods were produced. In spite
of the fact that the complaint and the documents annexed thereto clearly made
out a, prima facie, case for cheating, breach of trust and forgery, the High
Court proceeded to consider the version of the respondents given out in their
petition filed under section 482 of the Criminal Procedure Code, vis-a-vis that of the appellant and entered into the
debatable area of deciding which of the version was true,—a course wholly
impermissible..."
Their
Lordships have in a decision in State of U.P. v. O.P. Sharma [1996] 7 SCC 705,
held reiterating the earlier judgments referred to above, that quashing of
criminal proceedings at initial stage-the High Court should be loath to
interfere at the threshold to thwart the prosecution, exercising its inherent
power under section 482 or under articles 226 and 227 of the Constitution—FIR
containing all the ingredients of the offence—High Court committed grave error
of law in quashing the FIR. From these judgments, it is abundantly clear that
the High Court should exercise its inherent power under section 482 of the
Criminal Procedure Code, under exceptionally exceptional circumstances. At the
cost of repetition, it may be mentioned here that when the court exercises its
inherent power under section 482, the prime consideration should only be
whether the exercise of the power would advance the cause of justice or it
would be an abuse of the process of the court, and not otherwise. With this
principle in mind, it is now necessary to consider the common arguments
advanced in respect of the other matters by the advocates for the petitioners.
Before
proceeding to consider the various offences alleged to have been committed, it
is necessary to mention as a prelude that these complaints came to be filed on
the interim report submitted by the enquiry officer. The allegations of
commission of offences are based on this report. The said report may disclose
the various omissions and commissions and violations of the provisions of law.
What can be gathered in these cases is that this report was submitted after
enquiry and not merely on surmises or conjectures. Hence, this cannot be lost
sight of at this stage and, therefore, it will have to be attached with some
importance on the allegations made in the complaint in that regard to this
enquiry report.
It is also
necessary to mention that the company, the managing director and the whole-time
directors were also arrayed as accused persons before the trial court. But they
have not questioned the order passed by the court taking cognizance of the
offences. On that ground, the learned advocates for the petitioners strenuously
argued that the prosecution can proceed only against them and the directors are
unnecessarily prosecuted. The arguments will have to be considered along with
the allegations contained in each complaint which will be dealt with presently.
C.C. Nos.
11-81 of 1992: The allegations in this complaint have been stated at page 6 of
the order. It is in regard to the exceeding power vested in the directors of
the company and the directors under section 281. Learned counsel submitted that
the memorandum of association contains the main object of setting up the
company. The memorandum of association empowers the company and the company did
the business within its limits. The accusation against these petitioners is
that the petition filed by the board under section 17 to alter the objects
clause of the memorandum of association on January 23, 1991, to provide
specific objects enabling the company to acquire and deal in shares, debentures
and other securities which was allowed on May 17, 1991. The argument of learned
counsel is that this is already there in the memorandum of association.
Therefore, there is no violation of section 17 of the Act. This argument at
this stage cannot be accepted. If the object as contended by the petitioners
was already there, there was no need for the company to file a petition under
section 17 and also an order being passed. But as on March 31, 1991, the
company was having investments in shares and debentures amounting to Rs.
2,670.73 lakhs which was far in excess of the limit
laid down under section 372 of the Act.
Learned
counsel submitted that the amendment was allowed and brought into effect from
May 17, 1991. The illegality alleged is prior to May 17, 1991. This action was
by a resolution of the directors. The material allegations prima facie appear
that the complaint is not totally false. The question ultimately would be as to
whether the violation is with the knowledge, direction and at the instance of
the petitioners or not. Hence, trial will be necessary. It is further argued,
even if there is any violation, the directors are not responsible in view of
sections 5 and 220 of the Act. According to the allegation, the punishment
prescribed is under section 629A which provides penalty where no specific
penalty is provided elsewhere in the Act. Learned counsel for the petitioner
submitted that according to this section every officer of the company who is in
default or such other person shall be punishable. In the said company there are
managing director and also whole-time director. Therefore, these directors are
not liable to be punished. In support of this argument, they placed reliance on
a decision in Ravindra Narayan
v. Registrar of Companies [1994] 81 Comp Cas
925 (Raj) wherein the Rajasthan High Court has held (headnote):
"Complaints
were filed against a company, its managing director and directors for an
offence under section 220(3) of the Companies Act, 1956. The directors filed a
petition for quashing the complaint against them:
Held,
allowing the petition, that under sub-section (3) of 220 of the Act, the
company and every officer of the company who is in default is liable to punishment.
The definition of 'officer who is in default' in section 5 of the Act, makes it
clear that directors of the company fall within the definition if the company
does not have officers specified in clauses (a) to (c), namely, managing
directors, whole-time directors, managers. Admittedly, in the present case, the
company had a managing director at the relevant time. Therefore, the
petitioners who were directors, at the relevant time, did not fall within the
expression 'officer in default' and they could not be held liable criminally,
for the default in complying with the requirements of sub-sections (1) and (2)
of section 220 of the Companies Act, 1956."
Similarly,
they have also placed reliance on a decision in J.R. Grover, Director of K.D. Woollen Mills (P.) Ltd. v. Assistant Director, Enforcement
Directorate [1987] 62 Comp Cas
807, wherein the
"A
complaint was filed against a company, and the petitioner, as director of the company,
for contravention of certain provisions of the Foreign Exchange Regulation Act,
1973. Paragraph 9 of the complaint stated that 'accused No. 1 is the company
and accused Nos. 2 to 5 were its directors and who were managing the affairs of
the company.' The director filed a petition under section 482 of the Criminal
Procedure Code, 1973, to have the complaint quashed:
Held,
quashing the complaint, that in the light of the contents of paragraph 9 of the
complaint, neither the petitioner nor the other directors like him could be
held liable even vicariously for the offences alleged against them."
They also
placed reliance on a decision in Siddharth Kejriwal v. Regional Director, ESI Corporation [1994] ILR Kar 3484; [1997] 90 Comp Cas 496, 517, wherein this court has held:
"All the
directors as such cannot automatically become 'principal employers' when the
factory belongs to and is run by a company. The complaint or other material produced
along with the complaint must disclose how the directors of the company would
be liable in such a case."
In this case,
from the averments, it is clear that as on March 31, 1991, the company was
having investment in shares and debentures amounting to Rs. 2,670.73 lakhs which was far in excess of the limits laid down under
section 372 of the Act. This means to say that in the normal course only the
managing director and the whole-time director could have done it without the
active connivance and knowledge of these petitioners who are the directors.
Therefore, it requires that the matter has to be tried by the court to find out
as to whether these petitioners also are involved in the commission of the
offence. The decisions cited above obviously are referring to one particular
incident but it is pertaining to a period from January 23, 1991, to May 17,
1991. Under the circumstances, I am of the considered view that the impugned
order cannot be quashed at the threshold.
C.C. No. 298
of 1993: The complaint averments are mentioned in para.
2 of the order which disclose that the annual general meeting
ought to have been held in pursuance of section 166 of the Act. As they
did not hold the annual general meeting, the directors committed offence under
section 210(1) and (3) punishable under section 210(5) of the Act. Admittedly,
the annual general meeting was not held. The petitioners sought to make out a
ground by saying that the meeting could not be held and the balance-sheet and
profit and loss accounts were not laid for the year on or before March 31,
1992, or extended period by June 30, 1992. Therefore, they complained that the
complaint read as a whole does not constitute any offence. According to them,
when the meeting was not held, the question of presenting the balance-sheet
does not arise. Further, sections 220 and 210 are to be read together. At the
time of filing the complaint, the Registrar did not receive a reply to the
show-cause notice and it was because a custodian was appointed and records were
seized. Therefore, the general meeting could not be held. They also contended
that some of the directors sent replies on January 19, 1993, to the show-cause
notice dated January 4, 1993. They also further contended that the prosecution
was launched under section 220 and the company was convicted and the managing
director was relieved by the court under section 166 invoking section 633 of
the Act. Even if there is any liability, the petitioners are not at default as
section 168 refers to "officers at default".
As against
it, the respondent submitted that offences under sections 166, 210 and 220 are
different and distinct offences. There is no co-relation also. Whether the
annual general meeting was held or not, has no bearing to proceed under section
210. They further emphasised that under section 210
all the directors are liable to be prosecuted. In support of his argument, he
placed reliance on a decision in Assistant Registrar of Companies v. Mati Begum Safaran Khatoon [1979] 49 Comp Cas 651, wherein the Calcutta High Court has held (headnote):
"The
circumstance that no annual general meeting was held will not absolve the
directors of a company from liability under section 210(1) of the Companies
Act, 1956, for failure to place before the annual general meeting of the
company, the profit and loss account and balance-sheet of the company. The
directors cannot defeat the provisions of the section simply by not calling the
meeting wilfully."
So the
question is whether they have wilfully failed to call
the meeting or they were prevented by sufficient cause, etc., and is once again a matter to be decided by the trial court.
Therefore, the first argument of learned counsel for the petitioners that since
the annual general meeting was not held, the question of not placing the
balance-sheet and profit and loss account of the company, etc., is not
available to them at this juncture and on this ground this court cannot quash
the entire proceedings pending against these petitioners.
C.C. No. 1180
of 1993: The allegations made in the complaint are set out in para. 3 of the order. The offences
alleged against these petitioners are under section 370(1), rule 11B of the
Rules. The complaint contains the details of the loan advanced by the company.
Whether it was permitted or not and whether the company violated section 370(1)
and rule 11B are matters to be established by the complainant. The fact is that
loans were granted by the directors and some of the directors have direct
access. The words used under section 317(5) "if any person being director
and all the persons who are knowingly parties are matters to be established by
the complainant."(sic). Learned counsel for the
petitioners however submitted that these specific pleadings are absent in the
complaint. Therefore, the court below should have looked into all these
ingredients at the inception itself and dismissed the complaint and in support
of their argument, they also placed reliance on decisions in J.R. Grover,
Director of K.D. Woollen Mills (P.) Ltd. v. Assistant
Director, Enforcement Directorate [1987] 62 Comp Cas 807 (P&H) and Siddharth
Kejriwal v. Regional Director, ESI Corporation [1994]
ILR 4 Kar 3484; [1997] 90 Comp Cas
496, which are already referred to above. But from a perusal
of para. 5 of the complaint, it is specifically
stated "the accused herein were knowingly parties to the above
contravention by the company and are, therefore, liable for punishment under
sub-section (1) of section 371 of the Act." From the
details furnished in para. 4 of the complaint,
it is prima facie clear that the company had advanced loans right from August
27, 1990, to January 5, 1991, far exceeding the limits prescribed. Therefore,
it cannot be at this stage said that the managing director and the, whole-time
director only were responsible for advancing the loan in violation of section
370 of the Act, without the knowledge and consent and concurrence of the
directors. This is not a single transaction. On the other hand, it is a
continuous process. Therefore, the contention of the. petitioners cannot be accepted and the same is liable to be
rejected. Under the circumstances, these criminal petitions are also liable to
be dismissed.
C.C. No. 179
of 1993: The sum and substance of the allegations are mentioned in para. 4 of the order. According to
the complainant, the company's board of directors after allotting 2738 shares
went ahead and made partial allotment to some and refunded to some other
shareholders. This was done without complying with the provisions of sections
56 and 60 of the Act. Thus, they committed an offence punishable under section
60(5) of the Act. Learned counsel for the petitioners submitted that under
sections 56, 60 read with section 67, the company has to follow the requirement
only if prospectus is printed and published and only if the company wants to go
public. According to them there is nothing to indicate that the directors
issued applications to the public to purchase shares. The directors issued
shares only to friends, relatives and business associates which is a private
placement and not prohibited. No publicity is produced. Mens
rea is an important ingredient to constitute the
offence as stated in the section as the word "knowingly" is used in
this section. Therefore, no offence is committed.
Repelling
this argument, learned counsel for the respondent submitted whatever the
decisions of the board of directors are required, all the directors are
involved in the commission of the offence or offences being committed by the
directors, managing director and this again is a question of fact to be decided
by the trial court. It was further emphasised that
the paid up capital of the company was Rs. 1 crore
which has gone up to Rs. 860 crores by March 31, 1992. According to the
complaint 63.5 per cent, shares were held by the members of the public and
these members of the public were spread all over
"To
encapsulate, for the discussion above, the expressions 'communication' and
'association' deployed in the definition should be qualified so as to save the
definition, in the sense that 'actual knowledge or reason to believe' on the
part of a person to be roped in with the aid of that definition should be read
into it instead of reading it down and clause (i) of
definition 2(1)(a) should be read as meaning 'the communication or association
with any person or class of persons with the actual knowledge or having reason
to believe that such person or class of persons is engaged in assisting in any
manner terrorists or disruptionists' so that the
object and purpose of that clause may not otherwise be defeated and
frustrated."
This is a
case in which the petitioners challenged the constitutional validity of the
"terrorists affected area" (Spl. Courts Act
No. 61 of 1984), and other relevant Acts. While dealing with that Act, their
Lordships made observations. They also further submitted that there should be
actual participation of directors and in support of that argument they placed
reliance on a decision in Girdharilal Gupta v. D.N.
Mehta, Collector of Customs [1971] 3 SCR 748; AIR 1971 SC 28, wherein their
Lordships have held that a partner in charge of the business of a firm is
guilty under section 23C(1) of the Foreign Exchange Regulation Act, 1947,
unless he can prove that the contravention of the Act by the firm took place
without his knowledge and he had exercised diligence to prevent the
contravention. From this also it is clear that it is for the directors to prove
that the entire transaction had taken place without their knowledge and
intervention. To further emphasise this, learned
counsel for the petitioner, Sri V.L. Doshi, submitted
that he ceased to be the director of the company. Therefore, he cannot be
proceeded against. As stated earlier, there is absolutely nothing on record to
show that he ceased to be the director of the company during the relevant time.
Further, this fact will have to be established before the court.
They also
placed reliance on a decision in Municipal Corporation of Delhi v. Ram Kishan Rohtagi, AIR 1983 SC 67,
wherein the Hon'ble Supreme Court has held that if
the necessary ingredients are not made out, the High Court can interfere
under section 482 of the Criminal Procedure Code. In this case, as already
stated, there are allegations made in the petitions. Whether those allegations
are sufficient to constitute an offence is once again a matter to be decided by
the court. It is well-settled law that the complaint is only for initiation of
proceedings. It need not contain all the details but contain such allegations
as would be necessary to constitute an offence. In this case, the allegations
are very specific and based on the preliminary report submitted by the enquiry
officer. Therefore, the complainant will have to establish these facts before
the court failing which the petitioners can take advantage of the same. But it
can be said at this stage that the allegations are not totally lacking to quash
the proceedings. However, in this case the question would be as to whether the
shares held by the members is either public or private (friends or relatives
and business associates) as contended by the petitioners. This can be
established only by trial before the court. Under the circumstances, this
petition also cannot be allowed by quashing the proceedings.
C.C. No. 678 of 1993: The allegations made in the
complaint are concisely stated in para. 5 of the order. According to this complaint, the Inspecting
Officer reported that the copy of the balance-sheet as on March 31, 1991,
furnished to him at the time of inspection did not contain the particulars of
employees as required to be furnished under section 217(2A) of the Act.
Therefore, the complainant claims that the board of directors committed an
offence punishable under section 217(5) of the Act. The learned advocates
appearing for the petitioners submitted that it is only an executive order and
not a statutory requirement. Non-compliance of the same does not constitute an
offence. In support of their argument they placed reliance on a decision in
State of Karnataka v. Muniswamy (L), AIR 1977 SC
1489; [1977] 3 SCR 113; R.P. Kapur v. State of
Punjab, AIR 1960 SC 866 ; State of Haryana v. Bhajan Lal [1992] Supp 1 SCC 335;
AIR 1992 SC 604. In State of Karnataka v. Muniswamy
(L.), AIR 1977 SC 1489, it is held that
the High Court was justified in holding that for meeting the ends of justice
the proceedings against the respondents ought to be quashed. It would be a
sheer waste of public time and money to permit the proceedings to continue
against the respondents, when there is no material on the record on which any
tribunal could reasonably convict them for any offence connected with the
assault on the complainant.
In R.P. Kapur v. State of Punjab, AIR 1960 SC 866, their Lordships
have held that in dealing with the class of cases, it is important to bear in
mind the distinction between a case where there is no legal evidence or where
there is evidence which is manifestly and clearly inconsistent with the
accusation made and cases where there is legal evidence which on its
appreciation may or may not support the accusation in question. In exercising
its jurisdiction under section 561A, the High Court would not embark upon an
enquiry as to whether the evidence in question is reliable or not. That is the
function of the trial magistrate, and ordinarily it would not be open to any
party to invoke the High Court's inherent jurisdiction and contend that on a
reasonable appreciation of the evidence the accusation made against the accused
would not be sustained.
In State of
"Where
the uncontroverted allegations made in the FIR or
complaint and the evidence collected in support of the same do not disclose the
commission of any offence and make out a case against the accused."
This argument
of learned counsel as far as this case is concerned, appears to be justified.
It is not disputed by the complainant that the balance-sheet was produced
according to the report, the balance-sheet was produced before the Inspection
Officer and the complaint also discloses that the balance-sheet was produced
before the Registrar at the relevant time. The only allegation as stated earlier,
at the cost of repetition, is the printed copy of the balance-sheet as on March
31, 1991, filed by the company with the complainant, containing the particulars
of employees which were furnished in a detachable annexure to the
balance-sheet. Paging was not done to the said annexure, thereby the accused
persons have not strictly complied with the requirements of section 217(2A) of
the Act. From a bare reading of section 217(2A), it is clear that the board's
report shall also include a statement showing the name of every employee of the
company. The complaint does not say that there is any violation in regard to
the statement furnished to the inspection report or to the Registrar of
Companies. They also admit that the statements were furnished. Just because it
was not properly numbered, or it was in a blue sheet, etc. itself cannot be an
offence to proceed against the directors. It is an executive function and the
directors cannot be held responsible for this. Such complaint will have to be
quashed as no purpose would be served and the allegations also do not
constitute an offence as such. There is no rule or bye-law prescribing the mode
in which these statements should be furnished. From a reading of section
217(2A), it is only clear that such statements should be furnished, which in
actual fact, were furnished by the company. Hence, C. C. No. 678 of 1993, is liable to be quashed.
From the
various grounds urged during the course of the arguments by learned counsel for
the petitioners it is apparently clear that they have insisted upon those
points which are only available to them as defence in
the enquiry. They pointed out the facts which according to them, the learned
magistrate should have noticed at the initial stage of taking cognizance of the
offence. It is not humanly possible for anyone to visualise
what would be the probable defence of the accused.
But what has to be done by the magistrate is to see whether the complaint if
taken as a whole constitutes an offence or not, and not to go into the aspect
of probable defence or defects in the complaint. If
an overall reading of the complaint makes out a prima facie case by satisfying
the ingredients of the provisions of law, that itself is sufficient to take
cognizance. At this stage, the court cannot probabilise
the defence. It is left to the accused to take
advantage of any lacuna in the prosecution case at the stage of trial.
It is also a
well-settled principle of law that this court has to find out as to whether the
magistrate has committed any error in taking cognizance of the case, on the
basis of the materials produced before him by the complainant and not on the
documents to be produced in this court for the first time to explain the case
of the accused. This is uncalled for and if this is permitted, this court would
be indulging in a mini trial which is not the object, purpose or scope of
section 482. In other words, the High Court would be usurping the jurisdiction
of the magistrate. With this background, it is also necessary to refer to the
decision of the Supreme Court in K.M. Mathew v. State of
"It is
open to the accused to plead before the magistrate that the process against him
ought not to have been issued. The magistrate may drop the proceedings if he is
satisfied on reconsideration of the complaint that there is no offence for
which the accused could be tried. It is his judicial discretion. No specific
provision is required for the magistrate to drop the proceedings or rescind the
process. The order issuing the process is an interim order and not a judgment.
It can be varied or recalled. The fact that the process has already been issued
is no bar to drop the proceedings if the complaint on the very face of it does
not disclose any offence against the accused."
From the above decision and also the discussions, it is clear that
the accused persons could approach the trial court for necessary relief.
Despite this, the accused persons have rushed to this court under section 482
of the Criminal Procedure Code, thereby causing inordinate delay in the
disposal of the main criminal cases pending in the trial court and virtually it
would be a futile attempt in view of the well established principle of law by
the Hon'ble Supreme Court as referred to in the
decisions cited above.
In the
result, therefore, I proceed to pass the following:
(a) Criminal Petitions Nos. 1151 of 1993 and
1464 of 1993 are allowed and the entire proceedings in C.C. No. 678 of 1993 are
quashed.
(b) Criminal Petitions Nos. 551 of 1993, 552
of 1993, 595 of 1993 to 598 of 1993, 607 of 1993, 608 of 1993, 626 of 1993, 646
of 1993, 662 of 1993, 663 of 1993 and 1064 of 1993 are dismissed.