G.C. Bharuka, J.These two references made under s. 256(1) of the IT Act, 1961 (in short the "Act), require consideration of the following question of law :

"Whether, on the facts, the Tribunal was justified in holding that the assessee was not entitled to the deduction of the liability on account of dividend on preference shares "

2. The assessee is a company registered under the Companies Act, 1956. For the asst. yrs. 1980-81 and 1981-82, the company claimed deduction of the dividends paid to the preference shareholders but the same were disallowed all through, including the Tribunal, giving rise to the above question of law. The company had claimed the said deduction by placing reliance on cl. (iii) of sub-s. (1) of s. 36 of the. The material portion thereof reads as under :

"36. Other deductions - (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in s. 28 -

(iii) the amount of the interest paid in respect of capital borrowed for the purposes of business or profession; ..."

3. Mr. Sarangan, learned counsel appearing for the company, has submitted that the dividend paid to preference shareholders should be construed as interest paid in respect of capital borrowed by the company within the meaning of the above quoted provisions and as such should be allowed as a deduction. In our opinion, the construction sought to be placed on behalf of the company cannot be supported either on a plain reading of the statutory provisions or by employing any permissible rule of interpretation.

4. Sec. 85 of the Companies Act provides for the kinds of share capital, sub-s. (1) whereof reads as under :

"(1) 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 cl. (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".

Further, s. 205 of the Companies Act specifically provides that no dividend, which includes dividend on preference shares, shall be declared or paid by a company for any financial year, except out of the profits of the company for that year or any accumulated profits of the previous financial years subject to the statutory provisions made in this regard.

5. From the above it is clear that the preference share capital is a contribution to the capital of the company by its subscribers or shareholders and is not a "borrowing" by the company subject to payment of interest. Similarly, for the very said reason the dividend which is paid to such shareholders is to be paid only out of the profits earned by the company. In common parlance it can be equated with the share income derived by the shareholders out of the profits of the company. Therefore, by no stretch of imagination the dividend sought to be paid can be equated with or treated as "interest" paid on the borrowed capital.

For the reasons stated as above, in our opinion, the contention raised on behalf of the company is devoid of any merit and needs to be rejected outright.

6. The question referred to us is accordingly answered against the company/assesses and in favour of the Revenue. No costs.