P.V. Rajamannar, C.J.
1. The appellant is a sterling company incorporated in the United Kingdom. Messrs W. A. Beardsell & Co., Ltd., is a company incorporated under the Indian Companies Act, 1913, and has its registered office at Madras. Sir William Beardsell owned or controlled practically all the shares in the latter company. The applicant purchased from him 8190 ordinary shares sometime in 1940. Previously, it had purchased 4110 preference shares of the same company. A copy of the agreement relating to the purchase by the applicant from Sir William Beardsell is marked as Ex. T.A. It is necessary to set out material portions of this agreement on which ultimately the decision of the question referred to us in this case must depend. The preamble is as follows:
(a) The vendor owns or controls all the shares in W. A. Beardsell & Co., Ltd (hereinafter called 'The Company') a company incorporated under the Indian Companies Act, 1913, and having its registered office at Madras aforesaid.
(b) The nominal capital of the company is Rs. 15,00,000 divided into 5,000 preference shares of Rs. 100 each and 10,000 ordinary shares of Rs. 100 each and all of the said capital has been issued.
(c) The association has agreed to purchase from the vendor acting for himself and all other holders of shares in the company all the shares in the Company and the vendor has agreed to sell the same or procure the same to be sold to the Association at the price and upon the terms and conditions hereinafter appearing.
Then follows the operative portion of the agreement, of which paragraphs 1 and 5 are as follows:
1. The Association shall (subject to the vendor carrying out his obligations under this Agreement) purchase from the vendor and the other holders of shares in the Company and the vendor shall sell or procure to be sold to the Association all the shares in the company for the sum of Rs. 14,00,000 (such price being subject to adjustment as hereinafter provided.) The said purchase price shall be paid as hereinafter provided.
5. The vendor hereby warrants to the Association that the net asset of the company as on the transfer date shall amount to the net sum of Rs. 14,00,000. The net assets shall for such purpose be ascertained by deducting the total of (a) all sums owing by the Company to its creditors as on the transfer date, (b) all sums owing or accrued or accruing due by the Company in respect of commissions, pensions or other sums due to employees and in respect of taxes, rates similar liabilities up to the transfer date (apportionment being made if necessary) and (c) any amount set aside in respect of a gratuity and/or pension Fund or in respect of other provisions for employees, (d) all dividend (less Indian Income-tax) accrued or accruing due on the preference shares up to the transfer date (apportionment being made if necessary) from the total of
(a) the stock-in-trade of the Company as on the transfer date valued as hereinafter provided.
(b) The furniture, baling press and other items like moveable assets valued in accordance with the past practice of the Company.
(c) The amount owing to the Company by its debtors in respect of goods sold as on the transfer date assessed as hereinafter provided.
(d) The cash in hand and at the Bank.
(e) The shares held by the Company in Mettur Industries Limited taken at cost price.
Paragraph 7 provides that the vendor, that is, Sir William Beardsell, shall be entitled to purchase and undertakes to purchase from the company all investments held by the Company other than the shares in Mettur Industrials Limited and such stock-in-trade of the company in excess of a total value of Rs. 5,50,000. Paragraph 9 is the most important for the purpose of this case, and it runs thus;
The Association shall procure the Company to distribute to the vendor and the other persons who were on the 30th day of September, 1939, the holders of Ordinary shares in the Company by way of dividend on the ordinary shares a sum equal to the surplus of the assets over the liabilities of the Company as on the transfer date such surplus to be computed for the purpose of this clause by deducting from the value of the net assets ascertained in accordance with Clause 3 hereof the sum of Rs. 14,00,000 after all capital and revenue payments and liabilities (exclusive of share capital but including any liabilities which may arise in respect of taxation and trading losses up to the transfer date such liabilities to be apportioned to that date so far as may be necessary) due by the Company other than those mentioned in Clause 3 hereof shall have been paid or provided for together with all liability in respect of the dividend on the preference share up to the transfer date. Payment of such sum by way of dividend if any shall be made to the vendor and the other persons who were on the 30th day of September, 1939, the holders of ordinary shares in the Company as soon as is reasonably possible after the vendor shall have purchased from the Company the assets mentioned in Clause 7 hereof and a computation shall be made as soon as possible showing whether or not for the purpose of this clause such surplus exists. The vendor shall give to the Company a written indemnity in respect of all tax payable in respect of any dividend so paid.
Paragraph 10 provides for the payment of the purchase price of Rs. 14,00,000 subject to such increase or diminution thereof as provided therein, and paragraph 12 for the delivery on the transfer date of share certificates held by the vendor and the other holders of shares in the company together with transfers executed by him and such other shareholders in favour of the applicant association or its nominees, whereupon the association shall become entitled to be registered or have its nominees registered as holders of the said shares.
2. The transfer date was 22nd April, 1940. On 5th October, 1942, Beardsell & Co., declared two dividends (1) a dividend on the ordinary share capital or 5 per cent. free of income-tax and surcharge, and (2) a bonus on the ordinary share capital of 8 3/4 per cent. free of income-tax and surcharge representing a sum equal to the excess over Rs. 14,00,000 of the net surplus of assets over liabilities of the company as on 30th September, 1939. The latter ' bonus ' was apparently declared in accordance with the provision in paragraph 9 of the agreement above
3. Under instructions from the assessee association a dividend warrant in respect of the bonus amount, Rs. 71,662-8-0 net was issued in the name of St. James Nominees, Ltd., Manchester, the nominees of the assessees. The dividend warrant was not endorsed in favour of Sir William Beardsell's executors, he having died before that date, but the dividend was sent by telegraphic transfer to the District Bank, Ltd., 55 King Street, Manchester, to the credit of J. B. Beardsell and A. E. Scott, through the Chartered Bank of India, Australia and China, and Madras, on 29th March, 1943. The assessee received the net amount of Rs. 40,950 as dividend at 5 per cent, mentioned above.
4. The assessee included in its return for the assessment year 1943-44 (the year of account ending 31st March, 1943) the amount of the latter dividend at 5 per cent. (Rs. 40,950 net or Rs. 55,486 gross) but did not include the bonus amount, on the ground that it was not really received by it as income. The Income-tax Officer held that the bonus was in law the income of the assessee association and taxed it accordingly. The circumstance that the assessee utilised the bonus payments to pay the vendor, Sir William Beardsell, in his opinion, did not alter the position, namely, that the payment was primarily a dividend under Section 2(6-A) of the Act. The Appellate Assistant Commissioner of Income-tax on appeal took the same view. The following passages from his order sum up his conclusions on the point in issue:
6. From the description given in the relevant dividend warrant the bonus which is calculated at a definite percentage on shares is evidently dividend, pure and simple. The fact that it was passed on to Sir William Beardsell as part of the purchase price for his holdings will not secure for that amount exemption from tax in the hands of the appellant company. The dividend warrant stands in the name of St. James Nominees Ltd., Manchester the nominees of ' the Calico Printers' Association, Ltd., Manchester and the declaration in the dividend warrant is that the dividend relates to shares, which were the property of the appellant company at the time when the dividend was declared.
7. It will be seen from the facts stated above that the dividend was declared in respect of the shares held by the appellant company in Messrs. W. A. Beardsell & Co., Ltd., that the real owners of these shares were the appellant company themselves and that the appellant was entitled to receive the dividend by virtue of their holdings in Messrs W. A. Beardsell & Co., Ltd. The fact that the dividend belonging to the appellant company was utilised to fulfil an agreement between the appellant company and Sr William Beardsell, the original holder of the ordinary shares in Messrs. W. A. Beardsell & Co., Ltd., is immaterial. I therefore consider that the dividend income has been rightly included in the assessment of the appellant company.
The Income-tax Appellate Tribunal agreed with the Income-tax Officer and the Appellate Assistant Commissioner. On an application made by the assessee under Section 66(1), the Tribunal have sent up a statement of the case and referred the following question of law to this Court:
Whether, in the circumstances of the case, the sum of Rs. 93,600, the gross bonus dividend, was the income of the Calico Printers' Association, Ltd., (Manchester) and assessable on them?
5. Mr. Subbaraya Aiyar, learned Counsel for the applicant assessee contended that this was a case of a simple sale of shares ex dividend, and the vendor was entitled to the said dividend of Rs. 93,600 gross, and that was income in his hands. He developed his contention thus: one person may be registered shareholder at the time when a dividend is declared, but another person may be entitled to that dividend by virtue of a contract between the two. The contract of sale is the governing factor even for purposes of revenues to determine whose income a particular dividend really is. If under an enforceable contract the vendor is entitled to a dividend which is declared after the date of sale and the purchaser happens to be the registered shareholder at the time of the declaration of such dividend, then the shareholder when he receives the dividend receives it for the vendor as a trustee. The fact that the registered shareholder as such has certain rights to partake in the company's affairs, for example, the right of voting, is not inconsistent with the right to a particular dividend under a special contract between vendor and purchaser. There is nothing in the Income- tax statute to prevent the determination of the person really entitled to a particular dividend, as income.
6. In support of his contention, learned Counsel relied mostly on observations in cases decided in Great Britain. In Cole v. Commissioners of Inland Revenue (1933) 18 T.C. 387 the facts were entirely different from the facts of the present case, and the learned Counsel referred only to a dictum of Finlay, J., at page 395 that:
there might be cases in which the shares belonged to one person but the dividend belonged to another.
We may also refer to the following passage in the judgment of Romer, L.J., in that case:
After the date of the agreement, any dividends received by the vendor declared in respect of the ordinary shares which he had agreed to sell...would have been held by him as trustee for the purchasers, because he (the vendor) had been put in possession of the purchase money and was receiving the interest on the purchase money.
In Commissioners of Inland Revenue v. Roberts (1927) 13 T.C. 277, Rowltat, J., after coming to the conclusion that on the facts before him there was a sale of shares ex dividend discusses the legal position thus:. I do not think the Commissioners' decision can possibly be supported when they say that the dividend to the Associated Company (purchasers) accrued to them as a legal and beneficial owner and was the income of that company. I think it was not. It accrued to them and they were the legal owners, of course. They were on the register; but they were not the beneficial owners. They had contracted to buy ex that sum as a dividend in order that the profits might be equalised and leaving it as profits to the man who sold it to them.
In the Court of Appeal, the decision of Rowlatt, J., was affirmed. Atkin, L.J., summed up the legal position in the following manner:
No doubt the transaction is a considerable transaction, but the legal relations are very ordinary. It is a simple sale of shares, and Mr. Roberts in this case sold his shares to the Associated Biscuit Company. When the sale of shares takes place it may take place expressly cum dividend or ex dividend or it may take place with the stipulation that the purchaser shall have the benefit of the dividend declared as from a fixed date and that the seller shall have it in respect of the period before that date. That is what happened in this case....The purchaser never had, under the terms of the contract, any right to that dividend at all. It was excepted from the sale and so far from it being a payment of the purchase price it was nothing but a return to the seller of something which he had not sold and which the purchaser got possession of as a trustee for the seller. In those terms it appears to me a very simple transaction. I think it was a payment which was received by the purchaser as a trustee for the seller, that he received it in that capacity as trustee of income for the seller and when he handed it over to the seller it was part of his income exactly as in the ordinary case of a sale ex dividend where the purchaser receives income on behalf of the seller and has to account for it.
The law in England relating to the treatment of dividend as income either of the vendor or of the purchaser on a sale of shares in respect of which the dividend is declared is laid down in paragraph 509 of Halsbury's Laws of England (2nd edition Vol. 17:
Where there is a sale by a vendor of shares or securities cum dividend or interest, no part of the purchase price is income in the vendor's hands. On a sale of shares ex dividend, the dividend when declared is income of the vendor and if the purchaser actually receives the dividend he is trustee of it for the vendor.
7. No Reported case of any Court in India directly bearing on this point was brought to our notice. How far the notion of the purchaser being a bare trustee for the vendor in respect of a dividend declared when the purchaser is the registered shareholder and the sale was ex dividend would apply to India, it is difficult to say. There is no difference between legal and equitable titles in the law of this country. It may be that there can be an enforceable right under a contract in the vendor to recover the amount representing the dividend with reference to which there has been a sale ex dividend. But this need not necessarily mean that the purchaser is a trustee for the vendor. Every debtor is not a trustee for his creditor. But even assuming that the law in this country is the same as in Britain, we are of opinion that the rule of law governing a sale of shares ex dividend does not apply to the present case, because the transaction here cannot be treated as a simple sale of shares ex dividend. The agreement between the vendor and the purchaser is complex and peculiar, and the legal position must depend entirely on a construction of the terms of the agreement.
8. The two cases cited by the learned Counsel for the assessees, Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax, Bengal (1933) 6 I.T.C. 449 and Commissioner of Income-tax, Bombay Presidency v. Tata Sons, Ltd. 1939 I.T.R. 195 have nothing in common with our present case. In the first of these cases, there was a charge on the estate of zamindar under a decree of Court for payment of maintenance to his step-mother. It was held that the amount representing maintenance allowance was not a part of the zamindar's income, though it came out of the income of the estate. In the second of the cases, there was an assignment of a portion of commission payable to a company under a managing agency agreement, and it was held that the share assigned away would cease to be the income of the transferor.
9. Now, what is the substance of the transaction between the parties? The vendor was practically the owner of the company, as it were, as he had almost entirely the ownership or control of all the shares in the company. What is the consideration for the sale, the price of the shares? In paragraph 1, it is mentioned as Rs. 14,00,000 (such price being subject to adjustment as hereinafter provided). The adjustment is presumably in accordance with the provisions of paragraph 9 of the agreement. We are clearly of opinion that the purchase price must be deemed to be Rs. 14,00,000 plus a sum equal to the surplus of the assets over the liabilities of the company as on the transfer date, such surplus to be computed in the manner set out in paragraph 9. The manner in which this surplus has to be paid over to the vendor is indicated in that paragraph. For the convenience of the purchaser and possibly with some other motive, to enable the purchaser to pay over such surplus to the vendor, the method of procuring a declaration of dividend on the ordinary shares was agreed upon. Actually, there was a declaration of the special dividend, representing the surplus of the assets over the liabilities, and a dividend warrant was issued to the nominees of the assessee. It is true that the assessee was under an obligation to forthwith pay over to the vendor the amount towards the balance of the purchase price. In such circumstance, how is this amount of dividend to be taxed? It cannot of course be taxed twice over as a dividend.
10. There are two decisions in England, both reported in 8 Tax Cases which throw considerable light on the question which falls for decision. The first is the case of Commissioners of Inland Revenue v. F.B. Sanderson (1921) 8 T.C. 38. The assessee in that case held nearly all the shares in a company which had made large profits, of which the major portion was carried over without being paid out as dividend. In July 1916, a Financial Corporation wanted to purchase all his shares. There were negotiations. The appellant refused to sell the shares at less than 3 for each share. But the Corporation were apparently unable to find the price at such a rate. It was therefore suggested to the assessee who had absolute control of the company that he should procure the company to declare a dividend of 10 sh. out of the large amount of profits which had been carried over. The suggestion was accepted and there was a declaration of dividend of 10 sh. and the assessee received a sum of nearly 40,000 as such dividend. Subsequently, on 12th October, 1916, an agreement was entered into in writing between the assessee and the Corporation for sale of the shares at 2-10-0 per share. It was stated in the agreement that the assessee was entitled to the special dividend of rosh. per share which had been previously received by him and which had been declared subsequent to July 1916. The question arose whether the sum of 40,000 paid to the assessee was income of the assessee which he had to bring into account and declared for the purposes of super-tax. The Special Commissioners held that this sum constituted part of the purchase price of the shares and did not form part of the assessee's total income. But it was held by Rowlatt, J., and the Court of Appeal that the amount formed part of the assessee's income, and it had not been received by him on behalf of the purchaser. The Court of Appeal held that there was no concluded enforceable agreement till the written agreement of the 12th October, though there were negotiations and therefore at the time of payment the dividend was paid to the assessee as dividend and it was undoubtedly his income. It was suggested in the argument of learned Counsel in that case that there was a sale of the shares in July for 3, a binding and enforceable agreement to sell and that would be a sale cum dividend and therefore any dividend that might be declared after the contract was made would belong to the purchaser. Thereafter, the purchaser agreed to give up this dividend to the vendor, the assessee, and allowed him to receive it as part of the purchase price. Dealing with this argument, the Master of the Rolls says:
The argument then, as I understand it, is that that transaction does not make the amount of the dividend income of the vendor; it is income of the purchaser, which the purchaser has chosen to apply in part payment of the capital sum which is to be paid in respect of the sale of the shares, and therefore it does not for that reason become income of the vendor, the Appellant. That is as I understand, the argument. Now, assuming the facts to be as I have stated them there, and as stated in the contentions of the Appellant, there is a great deal to be said for that contention.
But the Master of the Rolls did not finally decide the question because the real question turned upon different facts. The hypothetical case put forward in the argument of counsel in that case is in our view the present case. It would follow that the amount of the dividend would be the income of the purchaser which the purchaser had to apply in part payment of the purchase price.
11. The other case, Roe v. The Commissioners of Inland Revenue (1924) 8 T.G. 613, is more directly in point. To enable a particular director to withdraw from the management of a company, it was arranged that the greater part of his shareholding should be avilable for purchase by the remaining shareholders, of whom the Appellant was one, in proportion to their existing holdings. In order to provide the shareholders with funds for this purpose, the directors recommended that a sum of 45,000 should be distributed out of the profits of the company by way of special dividend. At an extraordinary general meeting of the company, a resolution was accordingly passed, declaring out of the accumulated profits, a special dividend on ordinary and preference shares. Prior to the passing of the resolution, the appellant, one of the shareholders, signed a letter authorising the directors to use his portion of the special dividend in payment of the consideration money for such retiring directors' shares as were purchased by him, and similar letters were signed by the other shareholders. The appellant duly applied his portion of the dividend to the purchase of shares in accordance with the prior agreement. It was held by Rowlatt, J., that the special dividend was received by the shareholders including the appellant as income and that the arrangement to apply it in the purchase of other shares in the company could not affect the appellant's obligation to include this portion of the dividend in his total income. The learned Judge tersely put the matter thus:.It is a case of declaring a dividend on the understanding, which they could not go back upon really, that the dividend should be used in a certain way, but it was a declaration of a dividend.
This language can be employed to describe the transaction in the case before us. This is also a case of procuring the declaration of a dividend on an understanding, which the assessees could not go back upon really, that the dividend should be used in a certain way, namely, used to pay over to the vendor, Sir William Beardsell, as part of the price of the shares. This dividend was therefore the income of the Association, though according to the terms of the agreement between it and the vendor it had to pay it over to the vendor.
12. The answer to the question referred to us must therefore be in the affirmative. The applicant will pay the costs of the Respondent--Rs. 250.