Commissioner of Income-Tax (Central)
Calcutta Vs. India Discount Co. Ltd. [1969] INSC 170 (7 August 1969)
07/08/1969 RAMASWAMI, V.
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 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.
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 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 769 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
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
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.
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