DIXIT C.J. - This reference under section 66 (1) of the Indian Income-tax Act, 1922, has been made by the Income-tax Appellate Tribunal, Delhi, at the instance of the assessee, Ujjain General Trading Society (P.) Ltd., Gwalior. The question which has been referred to us for decision is :
'Whether, on the facts and in the circumstances of the case, the dividend income of the assessee-company should be taken to be -
(1) the value of the shares received as dividend as fixed in the resolution declaring the dividend, or
(2) the market value of the shares on the date of declaration of dividend, or
(3) the market value of the shares on the date on which the dividend was actually received by the assessee company ?'
The Pilani Investment Corporation Ltd. (hereinafter referred to as the Pilani company) passed a resolution at its general meeting held on 18th November, 1958, declaring dividend on its shares in the following terms :
'Resolved that the dividend on 35,15,000 ordinary shares of the company for the year ended 31st March, 1958, as proposed by the directors be and the same is hereby approved and made payable to those shareholders whose names stand on the register of members on the 19th day of November, 1958, @ 00.40 nP. per share (free of income-tax) in the shape of :
one ordinary share of Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. for every 35 shares of the company at the rate of Rs. 10 each
one ordinary share of Hindu Cycles Ltd. for every 1,100 shares of the company at the rate of Rs. 125 each
balance in cash.
Further resolved that all the shares of the above-noted companies will be distributed in complete unit and fractions, if any, will be paid in cash. The shareholders will also have the option of taking cash instead of shares.'
The assessee-company as holder of 2,78,711 ordinary shares of the face value of Rs. 10 each became entitled to receive Rs. 1,11,484.40 as dividend in cash or the equivalent number of shares of the Gwalior Rayon and Silk Mfg. (Wvg.) Co. Ltd. and Hindu Cycles Ltd. plus cash for the balance. It, however, received on 2nd January, 1959, as dividend 7,963 share of the Gwalior Rayon and Silk Mfg. (Wvg.) Co. Ltd., 253 fully paid ordinary shares of the Hind Cycles Ltd., and Rs. 299.40 in cash. The valuation of the shares of the Hind Cycles Ltd. was made at the rate mentioned in the resolution dated 18th November, 1958. It was common ground that, on the date of declaration of the dividend, the market value of one ordinary share of the Gwalior Rayon was Rs. 14.60 and the market value of one ordinary share of the Hind Cycles Ltd. was Rs. 128.50. The Pilani company had acquired the shares it distributed as dividend paying Rs. 10 per share for the Gwalior Rayon and Rs. 125 per share for the Hind Cycles Ltd. The resolution dated 18th November, 1958, no doubt gave an option to the shareholders of the Pilani company to receive the dividend either in cash or in specie; but it is an admitted position that before dispatching the dividend warrants for shares and/or cash, the Pilani company never ascertained from the shareholders the way in which they preferred to exercise the option.
In its return of income for the assessment year 1959-60, the assessee-company showed Rs. 1,11,484.40 as its income from dividend in the Pilani company. The assessee valued the shares of the Gwalior Rayon and the Hind Cycles Ltd. at Rs. 10 and Rs. 125 per share, respectively, as per the resolution dated 18th November, 1958, of the Pilani company declaring dividend. The Income-tax Officer, Gwalior, however, took the view that the assessees income from dividend from its shares in the Pilani company should be calculated taking the market value of the shares of the Gwalior Rayon and the Hind Cycles Ltd. on the date of the declaration of the dividend. On this calculation, the Income-tax Officer added a sum of Rs. 37,515 to the dividend income declared by the assessee-company on its holdings in the Pilani company. The decision of the Income-tax Officer was confirmed in appeal by the Appellate Assistant Commissioner and by the Appellate Tribunal.
It will be seen that the question put forward before us proceeds on the undisputed basis that dividend need not be distributed in money or cash; it may be distributed by delivery of property or right having monetary value. In fact, before the Tribunal the position was admitted that dividend could be paid not only in money but 'in moneys worth also by delivery of goods or securities' and that the shares of the Gwalior Rayon and the Hind Cycles Ltd. received by the assessee-company constituted its income as dividend on the shares held by the assessee-company in the Pilani company. This position was in accord with the decision of the Supreme Court in Kantilal Manilal v. Commissioner of Income-tax, where it has been held that 'dividend need not be distributed in money; it may be distributed by delivery of property or right having monetary value'. The controversy in this reference centres round the question of the monetary value in the hands of the assessee of the shares of the Gwalior Rayon and the Hind Cycles Ltd. which it received as dividend.
In our opinion, by the resolution of 18th November, 1958, the Pilani company distributed by way of dividend out of its profits a part of its assets, namely, the shares to which it was entitled in the Gwalior Rayon and the Hind Cycles Ltd. This distribution, which was both in form and substance a release by the Pilani company of its assets to its shareholders, was clearly dividend within the ordinary meaning of the word 'dividend', namely, the receipt by the shareholder by reason of his being a shareholder of a part of the profits of the company of which he is a shareholder. The Supreme Court has pointed out in Kantilal Manilal v. Commissioner of Income-tax that the ordinary meaning of 'dividend' is 'a distributive share of the profits or income of a company given to its shareholders' and when the legislature by section 2 (6A) sought to define the expression 'dividend', it added to the normal meaning of the expression several other categories of receipts which may not otherwise be included therein. The Supreme Court emphasized that by the definition given in section 2 (6A) 'dividend' meant dividend as normally understood and included in its connotation several other receipts set out in the definition. 'Profits' means 'advantage or gain in money or in moneys worth'. If, therefore, there was a release to the shareholders by the Pilani company of a part of its assets, namely, the shares to which it was entitled in the Gwalior Rayon and the Hind Cycles Ltd., by the resolution dated 18th November, 1958, and the shareholders got an advantage by receiving as dividend shares in the Gwalior Rayon and the Hind Cycles Ltd. at the rate of Rs. 10 and Rs. 125, respectively, when their market value on the date of the declaration of the dividend was higher, then clearly the value of the shares which the assessee received as dividend was their market value as assets of the Pilani company and not the valuation which the Pilani company put down in the resolution dated 18th November, 1958, or in its books but the value which it would have obtained if it had sold the shares in the market on 18th November, 1958. If the Pilani company had thus sold the shares, it could have secured for itself not merely the par value of the shares entered in its books or the valuation put on the shares in the resolution dated 18th November, 1958, but it would also have been able to obtain a premium. Instead of doing so, the Pilani company diverted into the pockets of its shareholders the equivalent value of the shares of the Gwalior Rayon and the Hind Cycles Ltd. which it otherwise would have obtained on 18th November, 1958. When, therefore, the shares in question were given to the assessee as dividend, the equivalent money value of the shares to the assessee was the value computed on the basis of the market price of the shares prevailing on 18th November, 1958.
That the equivalent money value of the shares has to be determined with reference to the market price of the shares prevailing on 18th November, 1958, is clear from the fact that the dividend accrued to the assessee-company on the date it was declared, that is, on 18th November, 1958; and it was on that date that the dividend declared became a debt owned by the Pilani company to the assessee. The argument that in the hands of the assessee the value of the shares received as dividend would be as on the date the shares are transferred to the assessee and received by it is of no validity. It is quite true that after the declaration of dividend, shares given as dividend may rise or fall in the market and until the shares given to a shareholder as dividend are transferred to him, he is not in a position to realise the equivalent value of the shares by selling them in the open market. But by the resolution dated 18th November, 1958, what the shareholders received as dividend in the form of shares were the shares of the Gwalior Rayon and the Hind Cycles Ltd. having that market price which was prevailing 18th November, 1958, and not the price which might have been prevailing subsequently. It is, therefore, altogether fallacious to say that the equivalent money value of the shares which the assessee received should be computed on the basis of the market price prevailing on the day when it actually received the shares as dividend.
It is worthy of note that the resolution dated 18th November, 1958, gave an option to the shareholders of taking dividend either in cash or in the form of shares. A shareholder exercising the option and deciding to take shares as dividend does so taking the risk of the shares which he may obtain as dividend rising or falling in value. In the present case, it was not enquired of the assessee-company whether it would like to have the dividend in the form of shares, but, at the same time, the assessee-company accepted the shares given to it as dividend without any demur. It must, therefore, be taken that the assessee-company, if not expressly, impliedly agreed to take the shares as dividend and along with it the risk of the shares falling or rising in value after the declaration of dividend on 18th November, 1958. It is not necessary to speculate on the reasons which prevailed with the Pilani company for not ascertaining from the assessee-company about the exercise of option and for the acceptance of the shares by the assessee-company without any demur. It is likely that the Pilani company, the assessee-company, the Gwalior Rayon and the Hind Cycle Ltd. are all closely connected. For that reason, the directors of the Pilani Company really intended to give the assessee-company a chance of acquiring a share interest in the Gwalior Rayon and the Hind Cycles Ltd. at a favourable price so that it might have a 'stake' in the Gwalior Rayon and the Hind Cycles Ltd. with the success of which the assessee-companys own interest may be closely connected.
Our attention has not been drawn to any authority directly covering the questions placed before us for decision in this reference. But some guidance is obtainable from the cases of Weight (H. M. Inspector of Taxes) v. Salmon and Ede (H. M. Inspector of Taxes) v. Wilson. In both those cases, the employees of two companies were allowed to acquire at par value certain shares when the shares were of greater value. The employees there had to pay the sum required, which was charged at par value; and it was held in those cases that the employees were taxable on the difference between the par value and the actual value of the shares. In other words, they were taxed on the value of that which they received. The principle that runs through these two cases can be legitimately applied here for holding that the assessee-company is liable to be taxed on the shares received by it as dividend not according to the value set down in the resolution dated 18th November, 1958, but according to the actual market value of the shares. That market value, as pointed out earlier, would be as on 18th November, 1958.
For all these reasons, we answer the question referred to us by saying that the dividend income of the assessee-company would be the market value of the shares on the date of the declaration of the dividend. The assessee shall pay the costs of this reference. Counsels fee is fixed at Rs. 200.