Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME-TAX (CENTRAL) CALCUTTA
Vs.
RESPONDENT:
INDIA DISCOUNT CO. LTD.
DATE OF JUDGMENT:
07/08/1969
BENCH:
RAMASWAMI, V.
BENCH:
RAMASWAMI, V.
SHAH, J.C. (CJ)
GROVER, A.N.
CITATION:
1970 AIR 410 1970 SCR (1) 767
1969 SCC (2) 514
ACT:
Income-tax Act (11 of 1922), ss. 10 and 12--Shares sold
with arrear dividends--Amount of arrear dividends received
by purchaser--Whether taxable.
HEADNOTE:
The assessee--a dealer in shares and securities,
purchased certain shares on which dividends relating to
previous years were in arrears. The shares were sold with
the arrear dividends. The assessee received the amount of
arrear dividends and he first credited this sum to the
profit and loss appropriation account and thereafter
transferred the same to a reserve fund. No adjustment was
made in the share purchase account on account of the receipt
of the dividend. The value of the shares which represented
the stock-in-trade of the assessee remained the same both in
the opening and the closing stocks. The assessee claimed
that the amount of arrear dividends received was not income
liable to income-tax as it was merely a realisation of the
capital. The Income-tax Officer rejected the contention and
brought it to tax. This decision was upheld in further
appeals. But, on reference, the High Court held that the
amount was not liable to tax. Dismissing the appeal by the
Revenue, this Court,
HELD: The consideration paid by the assessee was given
not only for the shares but also for the share dividends.
As the dividend had been declared long ago there was no
uncertainty as to the exact amount receivable in respect of
them, and so, both the purchaser and the vendor knew exactly
what sum would come to the vendor by way of such dividend.
The existence of a contract binding the vendors to make over
to the purchaser the arrear dividends clearly implied that
the price paid by the purchaser was not only for the value
of the share scrips but also for the amount which was going
to be realised in the form of arrear dividends by the
purchaser. Such an arrangement implied that the value of the
per share settled into the broker’s bill was not the real
value of the share scrips alone but also included the
element of the arrear dividends agreed to be receivable by
the purchaser. The legal position, therefore, was that the
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arrear dividends were not claimable by the purchaser by
virtue of his right as such purchaser and could not become
his income from the shares. He was to get the same because
the vendor had contracted to pass the arrear dividends on to
him. They were the income of the vendors, i.e., the
registered holders but they could not become the income of
the purchaser. What the assessee acquired in the form of
share scrip represented its stock-in-trade which consisted
of the shares and the dividends potential which had to be
realised. [770 D-H]
A receipt which in law cannot be regarded as income
cannot become so merely because the assessee erroneously
credited it to the profit and loss account. [771 C]
Commissioner of Income-tax, Bombay City I v. M/s.
Shoorji Vallabhdas & Co. 46 I.T.R. 144, referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION:Civil Appeal No. 2115 of
1968.
SupCl/69--5
768
Appeal from the judgment and order dated January 6, 1965
Of the Calcutta High Court in Income-tax Reference No. 145
of 1961.
B. Sen, S. A. L. Narayana Rao, R.N. Sachthey and B.D.
Sharma, for the appellant.
S. Mitra and P.K. Mukherjee, for the respondent.
The Judgment of the Court was delivered by
Ramaswami, J. The respondent is a private limited
company (hereinafter referred to as the assessee). The
appeal relates to the assessment year 1956-57 for which the
previous year is the year ending September 30, 1955. The
business of the assessee was to deal with shares and
securities. On September 30, 1954 the assessee purchased
11,900 shares of Kedarnath Jute Manufacturing Co. Ltd. in
two. lots, one at the rate of Rs. 9-8-0 per share and the
other at Rs. 9-4-0 per share from one Beharilal Nathani,
Share broker, for a total consideration of Rs. 1,12,575/-.
When the assessee purchased the said shares a large amount
of dividends was in arrear as the previous owners had not
claimed the dividends declared between 1936 and 1945,
although a large part of the dividends on the said shares in
respect of the years 1945 to 1954 had been collected by the
previous owners of the said shares. A letter addressed by
Beharilal Nathani to the assessee bearing the date
September 30, 1954 goes to show that the shares had been
"sold with arrear dividends". It is admitted that the
dividends which had been declared between the years 1936
and 1945 and were received by the assessee during the
accounting period amounted to Rs. 43,925/-. The assessee
first credited this sum to the profit and loss appropriation
account and thereafter transferred the same to a reserve
fund in the accounting year ending September 30, 1955. No
adjustment was made in the share purchase account on account
of the receipt of dividend. The value of the shares which
represented the stock-in-trade of the assessee remained the
same both in the opening and the closing stocks. Before the
Income-tax Officer it was contended on behalf of the
assessee that as the arrear dividends pertained to the years
1936 to 1945 the arrear dividend received by the assessee
Was not in the nature of income liable to income-tax as. it
was merely a realisation of capital. The Income-tax Officer
rejected the contention of the assessee and treated the
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amount of arrear dividend as the business income of the
assessee liable to tax. On appeal by the assessee the
Appellate Assistant Commissioner of Income-tax examined the
question whether the amount of Rs. 43,925/- should be
treated as dividend and should, therefore, be assessed under
s. 12 of the Indian Income-tax Act, 1922 (hereinafter
referred to as the Act) or whether it should be treated as
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profits and gains of business arising to the assessee and
taxed under s. 10 of the Act. He, however, held that the
amount could not be regarded as ’dividend’ as the assessee
was not the registered shareholder in the years for which
the arrear dividends were declared. But he held that
since the shares were purchased by the assessee with the
knowledge that it would be entitled to receive the arrear
dividends which represented profits arising on the
acquisition of such shares, the assessee could be deemed to
have entered into a scheme of profit making, an adventure in
the nature of trade. ’The assessee brought a second appeal
to the Appellate Tribunal but the appeal was dismissed. The
Appellate Tribunal confirmed the findings by the Income-tax
authorities and held that the assessee acquired the shares
on which the arrear dividends were received in the course
of its share-dealing business and that the sum of Rs.
43,925/- so received by the assesee formed an integral part
of its income arising from business which was liable to tax.
At the instance of the assessee the Appellate Tribunal
stated a case to the High Court on the following question of
law:
"Whether on the facts and in the
circumstances of the case the sum of Rs.
43,925/- received by the assessee represented
business income arising under section 10 from
an adventure in the nature of trade or it was
a dividend within the meaning of section 12
of the Income-tax Act ?"
After looking into the statement of case and also the
application of the assessee under s. 66(1) of the Act the
High Court held that the question which the Tribunal had
referred did not correctly and accurately describe the stand
and contention taken by the assessee throughout which was
that no part of the arrear dividend received by the assessee
was income at all liable to tax. The High Court thereafter
addressed itself to the real issue between the parties and
ultimately held that the amount of Rs. 43,925/- was not
liable to tax. This appeal is brought on behalf of the
Commissioner of Income-tax against the judgment of the High
Court dated January 6, 1965 by a certificate granted under
s. 66A(2) of the Act.
It is necessary that the question referred to by the
High Court should be reframed in the following manner in
order to bring out the real point in controversy between the
parties:
"Whether in the facts and circumstances of
the case the assessee had purchased the
arrears of dividend ? If so whether the said
sum of Rs. 43,925/- could at all be assessed
either as dividend or as profit ?"
It is manifest that dividends declared by Kedarnath
Jute Manufacturing Co., between the years 1936 and 1945 were
the
770
property of the persons whose names stood on the share
register on the relevant dates. When a company declares
dividend the same can only be paid to the person who is then
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the registered holder. A purchaser of shares becomes
entitled to all dividends declared since his purchase but
not before. If the purchase is made on the eve of
declaration of dividend but the purchaser does not get his
name mutated in the records of the company in time to have
the dividend-warrant issued in his own name he is entitled
to call upon his vendor to make over the dividend to him if
and when received. It is well settled that after a sale of
the shares and so long as the purchaser does not get his
name registered, the vendor is for certain purposes
considered a trustee for the purchaser of the rights
attaching to the shares or accruing thereon,including the
voting rights. In the present case there was a contract
between the assessee and the registered shareholders to sell
the shares to the assessee with arrear dividends. In other
words the assessee entered into the contract with the
registered shareholders not only to purchase share scrips
but the dividends which had been declared but not collected
by him or paid over to shareholders. As the dividends had
been declared long ago there was no uncertainly as to the
exact amount receivable in respect of them. It is.
therefore, Clear that both the purchaser and the vendor
knew exactly what sum of money would come to the vendor
by way of such dividend. In other words the purchase
consideration included the amount of the arrear dividends
and as the dividends had been declared long ago, there was
no uncertainty as to the exact amount receivable in respect
of them. The existence of a contract binding the vendors to
make over to the purchaser the arrear dividends clearly
implied that the price paid by the purchaser was not only
for the value of the share scrips but also for the sum of
Rs. 43,925/- which was going to be realised in the form
of arrear dividends by the purchaser. The High Court held
upon an examination of the evidence that such an arrangement
implied that the value of Rs. 9-8-0 and Rs. 9-4-0 per share
as settled into the broker’s bills was not the real value of
the share scrips alone but also included the element of the
arrear dividends agreed to be receivable by the purchaser.
The legal position, therefore, is that the arrear dividends
were not claimable by the purchaser by virtue of his right
as such purchaser and could not become his income from the
shares. He was to get the same because the vendor had
contracted to pass the arrear dividends on to him. They
were the income of the vendors, i.e., the registered holders
but they could not become the income of the purchaser. In
fact the assessee had purchased the amount of arrear
dividends for a price which was included in the total
consideration of Rs. 1,12,575/-. What the assessee acquired
in the form of share scrip represented its stock-in-trade,
which consisted of the shares and the dividends potential
which had to be realised.
771
In this state of facts it is manifest that the assessee
paid the amount of Rs. 1,12,575/- not only for the share
scrips but also for the arrear dividends which was
inextricably connected with the purchase of the share
scrips. In our opinion the High Court rightly held that the
amount of Rs. 43,925/- was not income which could be
assessed in the hands of the assessee.
It was said that the assessee had itself credited the
amount of Rs. 43,925/- to the profit and loss appropriation
account and thereafter transferred the same to a reserve
fund in the accounting year ending September 30, 1955. No
adjustment was made in the share purchase account on account
of the receipt of dividend. But it is well established that
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a receipt which in law cannot be regarded as income cannot
become so merely because the assessee erroneously credited
it to the profit and loss account. [see Commissioner of
Income-tax, Bombay City I v. M/s. Shoorji Vallabhdas &
Co.(1)]. The assessee’s case, had all along been that the
amount of arrear dividends received could not be treated
as income of the assessee liable to tax for the
assessment year 1956-57. As we have already shown the
consideration paid by the assessee was given not only for
the shares but also for share dividends amounting to Rs.
43,925/- and the amount of Rs. 1,12,575/- was paid not
only for the share scrips but also for the arrear dividends.
In other words there was capital purchase by the assessee.
of the shares together with arrear dividends due on the
shares for the years 1936 to 1945. It is therefore not
possible to treat the payment of Rs. 43,925/- as income
liable to tax either as profit under s. 10 of the Act or as
dividend under s. 12 of the Act.
For the reasons expressed we hold that there is no merit
in this appeal. It is accordingly dismissed with costs.
Y.P. Appeal dismissed.
(1) 46 I.T.R. 144.
772