Judgment :- RAMACHANDRA IYER C.J. This second appeal raises a question of some importance and difficulty. The appellants who are closely related, the first four among them being members of one family and the fifth, the husband of the fourth appellant, held severally and jointly 150 preference shares in the Mettur Chemical and Industrial Corporation Ltd., the respondent herein, a public limited company having a share capital of Rs. one crore divided into "(a) 20, 000 six per cent. income-tax-free ......... cumulative preference shares of Rs. 100 each, but with no further rights in the participation of the profits of the company, and (b) 8, 00, 000 equity shares of Rs. 10 each" * . The company carries on business in the manufacture and sale of chemicals and their by-products. Its year of accounting is the financial year. For the years 1950-51 to 1956-57, the profits made by the company stood wiped out in the accounts by reason of setting them off against the depreciation allowable under the Indian Income-tax Act and also against the losses incurred in the previous years which were being carried forward from year to year. But the profits earned during those years, though set off for the purpose of income-tax, enabled the company to declare dividends to the shareholders. The appellants received in respect of their preference shares dividends appropriate to their holding at six per cent. by means of dividend warrants issued in the prescribed form. As the company had not paid income-tax during these years, the dividend warrants specified only the amount of dividend payable to the appellants either individually or jointly in accordance with their holding. The certificate appended to the dividend warrant did not say that the company had paid or would pay income-tax on the profits which were being distributed for the simple reason that no income-tax had been paid by the company during those years on the profits made. It however stated thus "......... according to the company's profit and loss account and the balance-sheet there would be no assessable income for the aforesaid year after set-off of the losses carried forward or after deduction of depreciation allowance including unabsorbed depreciation, if any), and that dividend has been distributed from (a) profits of the aforesaid year." * The first appellant was an assessee under the Indian Income-tax Act in his individual capacity. He included the dividends received by him in his total income for the relevant years and has been assessed to tax at the rate appropriate to his income. Claiming----a claim that has been contested by the respondent company----that under the terms of the memorandum of association, the holders of preferential shares would be entitled not merely to the guaranteed dividend of six per cent. but to a certificate of deduction of tax at source in respect of such dividend, the appellants instituted the suit which has given rise to this appeal for recovery of a sum of Rs. 3, 990-2-0 from the company. The appellants put their case thus in paragraph 12 of their plaint "The plaintiffs submit that in view of the aforesaid provision contained in the defendant company's memorandum of association, the defendant company was bound to pay the said dividends to the plaintiffs free of income-tax, so that not only would such dividends not be liable to any income-tax in their hands, but the plaintiffs would also be entitled, except when the provisions of section 15C of the said Act applied, to claim a refund of the income-tax paid to the Government of India by the defendant company in respect of the said dividends when the rate applicable to them was less than the maximum rate." * Ultimately, the appellants sought a declaration that the company was liable to pay them an amount equivalent to income-tax at the maximum rate applicable to companies on dividends on preference shares paid by the company and for recovery of the sum referred to above The substantial or the only question for consideration is whether, under the terms of the memorandum of association of the company, the holders of preference shares are to be given not merely the guaranteed dividend of six per cent., but also the tax at the maximum rate payable by the company, so that in the years in which the company is not assessed to the tax for one reason or another, it should make over to the shareholder the amount which it could have paid as tax on the amount of the dividendThe case for the company is that "income-tax-free dividend" only means that as between the company and the preference shareholder, the six per cent. agreed to be paid as dividend is not to be diminished by any retention of tax by the company out of it towards the tax payable by the company in respect of such dividend. The decision of the case, therefore, turns on the true meaning of the phrase "six per cent. income-tax-free ......... cumulative preference shares". The phrase literally interpreted might mean little, as it will not be for the company or its shareholders but for the taxing statute to say whether the tax is payable on the dividend or not. The dividend paid or distributed by a company to its shareholders will undoubtedly constitute income in the hands of the recipient and will be liable to charge under the Income-tax Act unless of course the statute has provided for exemption. The words "tax-free dividends" are, however, in common use in company parlance and have been the subject-matter of judicial interpretation. In Cull v. Commissioners of Inland Revenue Lord Atkin, speaking of a declaration by a company that dividend shall be paid tax-free, said "Such a declaration is equivalent to giving the shareholder the right to such a sum as after making the deduction of the appropriate amount attributed to tax will produce the net tax-free dividend in fact paid. Such larger sum in truth represents the profit to which the shareholder has become entitled from the company...." * Again Lord Macmillan interpreting the expression said that it meant "...a dividend of such a sum as after deduction of tax gives the actual sum received. The tax-free dividend is not really a dividend of the amount received, but a dividend of a larger sum less the tax thereon." * But that was a case where the company did not in fact deduct the tax although it was paid out of the taxable profits, that is, a case where dividend was paid without any deduction of tax. As I shall presently show, the interpretation of the words will, to a large extent, depend on the context in which they occur The appellants contended that under the terms of the memorandum of association and articles of association a preference shareholder would be entitled in case the company did not itself pay the tax to get from it a certificate under section 20 of the Act or at least the amount which the company would have paid as income-tax with respect to the shares held by that shareholder. In other words, that the term "six per cent. tax-free dividend" meant six per cent. Plus the standard or the maximum rate of tax which the company would have paid the revenue had it been assessed. Both the lower courts have declined to accept that contention and dismissed the appellants' suit Mr. Gopalaswami Aiyangar, who appeared for the appellants, put their case in a somewhat different form. According to learned counsel, the articles of association should be read as amounting to a contract by the company with the preference shareholder that the latter would be entitled to get six per cent. return on the share without being obliged to pay tax thereon. In other words, the articles of association amounted to indemnifying the company to the shareholder that he would not be liable to pay any tax thereon. I am, however, unable to regard the contract contained in the articles of association that the preference shareholder will be given six per cent. income-tax-free dividend as amounting to a guarantee that such dividend would be free from tax in the hands of the recipient himself. The inconvenience of such an interpretation will be obvious if I refer to one or two illustrations. Suppose there are two preference shareholders, one who, by virtue of his higher income, is assessable to tax at the maximum rate, and the other, who by reason of his moderate income will be liable to a lower rate of tax. The argument, if sound, would mean that for the former shareholder a larger amount should be paid to cover the tax on the six per cent. dividend declared, while as regards the latter, a smaller amount would be sufficient. That is to say, between the same category of shareholders, there will be a discriminatory treatment. The argument, if sound, would mean that for the former shareholder a larger amount should be paid to cover the tax on the six per cent. dividend declared, while as regards the latter, a smaller amount would be sufficient. That is to say, between the same category of shareholders, there will be a discriminatory treatment. Then again, if the dividend were to include tax payable by the shareholder in respect of his dividend income, the declaration of dividend will then have to wait till the individual assessment of the shareholders is complete and the amount of tax in relation to the dividend received by them ascertainedThe expression "tax-free" is, as I shall show presently, equally open to another construction. But before going into that, it will be useful to refer broadly to the incidents of a declaration of dividend by a company and the assessability to tax under the Indian Income-tax Act A dividend is a share of the company's profits. It may be, as in the present case, at a fixed rate, or one determinable for each year out of the amounts allocated to the shareholders by the company. In either case, the company is not bound to divide the entirety of its profits amongst its shareholders, unless there is some provision in its memorandum or articles of association which compels it to do so. Whether the entire profits are to be divided between the shareholders or whether a portion of such profits should be set apart for specified purposes and the rest alone is to be distributed is a matter for the company to decide. But when the company decides to set apart the whole or part of its profits for distribution amongst its shareholders as dividends, it should do it according to the terms of its constitution. It is well known that it is not necessary that equal rights and privileges should be attached to all shares. There may be preference shares, such preference existing either in regard to the capital or dividend or both or with respect to other matters. Preference shares, normally speaking, carry a preferential right to dividend which is expressed in a percentage of the nominal value of the share. But the right of a preference shareholder to obtain that dividend will arise just as in the case of an equity shareholder, only when the dividend is declared. Preference shares, normally speaking, carry a preferential right to dividend which is expressed in a percentage of the nominal value of the share. But the right of a preference shareholder to obtain that dividend will arise just as in the case of an equity shareholder, only when the dividend is declared. If a dividend is not so declared, he will, where the dividend is cumulative, be entitled to the dividend at the stipulated rate, including arrears, out of the dividends declared in future years. As I said before, dividend is out of the profits, and the declaration of dividend would presuppose the existence of distributable profits in the companyA limited company is a juristic person and will be chargeable to income-tax on profits earned by it. In paying such a tax it discharges its own liability and is not acting as the agent or trustee of the shareholders. Thus, the income-tax paid by the company can only be part of the profits. In Attorney-General v. Ashton Gas Co., Buckley J. (as he then was) said "The income tax is part of the profits----namely, such part as the revenue is entitled to take out of the profits. A sum which is an expense, which must be borne whether profits are earned or not, may no doubt be deducted before arriving at profit. But a proportionate part of the profits payable to the revenue is not a deduction before arriving at, but a part of, the profits themselves." * Normally, therefore, a company before declaring its dividend to its shareholders will have to set apart from out of the profits earned, the amount payable to tax and it will only be the balance that could be distributed amongst the shareholders. When, therefore, the memorandum or articles of association of a company provides that a preference shareholder will be entitled to be paid a fixed percentage as dividend tax-free, it can only mean that the declared percentage of dividend will be paid by the company to the shareholder in full without providing for or taking away therefrom the tax. When, therefore, the memorandum or articles of association of a company provides that a preference shareholder will be entitled to be paid a fixed percentage as dividend tax-free, it can only mean that the declared percentage of dividend will be paid by the company to the shareholder in full without providing for or taking away therefrom the tax. That is to say, out of the profits earned by the company and set apart for the purpose of distribution of dividends, the company will first pay the dividend to the preference shareholder at the rate specified, and out of the balance remaining the sum payable to income-tax will be deducted and the residue will be distributed among the equity shareholders. Preference shareholders have therefore this advantage, namely, that dividends due to them will be paid out of profits even without providing for the income-tax, although such tax would be payable even in respect of the dividends paid to them. The incidence of tax will, therefore, be felt by the equity shareholders who would otherwise have a larger percentage of profits. The contention of Mr. Rajah Iyer, learned counsel for the respondents, is that it is only in this case that the expression "tax-free" has been used in the memorandum and articles of associationReference, however, was made before us to the decision reported in Attorney-General v. Ashton Gas Co., where by a special Act under which a gas company was constituted it was provided that the profits divisible in any year amongst its ordinary shareholders should not exceed a given rate ; it was held that an aliquot share of the income-tax paid by the company should be included in the dividend paid over to the shareholders. There was no question in that case of payment of any tax-free dividend. The only point that arose for consideration was whether the company acted beyond the terms of the statute which provided that the profits divisible in any year should not exceed a given rate in paying the income-tax and then declaring dividend at the maximum rate permissible under the Act. It was held that as the income-tax paid was part of the profits, in calculating the rate of dividend for the purpose of the Act, the income-tax should be included. It was held that as the income-tax paid was part of the profits, in calculating the rate of dividend for the purpose of the Act, the income-tax should be included. But it must be remembered that in England, although the company pays tax on profits made by it as any other taxpayer, the shareholder who receives the dividend in respect of which tax had been paid, will not again be liable to pay tax in respect of the dividends received. This is made clear in the speech of Lord Atkin in Cull v. Commissioners of Inland Revenue "My Lords, it is now clearly established that in the case of a limited company the company itself is chargeable to tax on its profits, and that it pays tax in discharge of its own liability and not as agent for its shareholders. The latter are not chargeable with income tax on dividends, and they are not assessed in respect of them. The reason presumably is that the amount which is available to be distributed as dividend has already been diminished by tax on the company, and that it is thought inequitable to charge it again. At one time it was thought that the company, in paying tax, paid on behalf of the shareholders: but this theory is now exploded by decisions in this House, and the position of the shareholders as to tax is as I have stated it." * But the matter is, however, different under the Indian Income-tax Act. A company will be liable to tax on the profits earned by it. Even if dividends are distributed to various shareholders after payment of tax, the dividend income in the hands of the shareholder would again be liable to tax by reason of the same statute, the normal rule being that each person pays tax on his own income. The operation of the provision will of course lead to injustice in that the income suffers tax twice over by reason of the concept of the company being a distinct person in the eye of law. The Act has remedied this injustice by sections 16(2), 18(5) and 48B. Section 16(2) provides for what has been described by Lord Atkin in the case referred to above "as Income Tax slang of grossing up". The Act has remedied this injustice by sections 16(2), 18(5) and 48B. Section 16(2) provides for what has been described by Lord Atkin in the case referred to above "as Income Tax slang of grossing up". That is to say, in respect of a dividend received from a company, it is not the actual dividend that is included in the total income of the shareholder, but the actual dividend plus the hypothetical sum representing the income-tax attributable to the dividend paid at the rate applicable to the total income of the company. In other words, where income-tax has been paid by the company, the shareholder's return of income grosses up the amount of dividend together with the standard tax which had been paid thereon. Section 18(5) gives credit for the tax paid by the company to the assessee. That is to say, the credit for the tax is given in the assessment of the shareholder for the amount by which the net dividend has been increased under section 16(2). The result will be that where the shareholder pays a lesser rate of tax than the company, he will have the benefit of the difference between the standard rate and the rate applicable to him. In Commissioner of Income-tax v. Blundell Spence & Co. Ltd., Chagla C. J., while considering this aspect of the matter, observed.