1. This reference, under Section 66(1) of the Income-tax Act, has been made in circumstances hereinafter related.
2. During the accounting year ended on March 31, 1959, (the assessment year being 1959-60) the assessee held 4,58,071 shares in a company known as Pilani Investment Corporation Ltd. and became entitled to receive as dividend Rs. 1,83,228.40 P. at the rate of 40 P. per share, namely, the declared rate of dividend. This dividend was paid to the assessee in the form of,
(a)13,087 shares of Gwalior Rayon and Silk ., (2) Rs. 10/- per share
Rs. 1,30,870/-(b)416 shares of Hind Cycles Ltd. @ Rs. 125 per shareRs. 52,000/-(c)In cashRs. 358/40
The Income-tax Officer valued the shares of Gwalior Rayon and Silk . and Hind Cycles Ltd., at the market rate, namely, at Rs. 14.60 p. per share for Gwalior Rayon and Silk and at Rs. 128.50, per share, for Hind Cycles Ltd. and came to the conclusion that the total shares, received by the assessee in the aforesaid two companies, were equivalent in terms of money to Rs. 2,44,526/-. Since the assessee had shown the value of the shares at Rs. 1,82,870/- only he added back the difference between Rs. 2,44,526/- and Rs. 1,82,870/- namely, Rs. 61,656/- to the assessee's income as dividend.
3. On appeal by the assessee, the Appellate Assistant Commissioner dismissed the appeal with the observation that the money's worth of the shares received by the assessee represented the assessee's income and came under the definition of dividend as in Section 2 (6A) of the Indian Income-tax Act.
4. On the further appeal to the Appellate Tribunal, the assessee succeeded. The Tribunal observed:
'A dividend, In its ordinary meaning, is a distribution of the share of profits or incomes of a company given to its shareholders. The definition thereto as laid down under Section 2 (6A) of the Act, however, gives an extended meaning to that expression inasmuch as it includes in its connotation such other receipts also as are set out in the definition. One such is laid down under Sub-clause (a) of the said Section 2 (6A), which reads as follows:--
'Any distribution by a company of accumulated profits whether capitalised or not, if such distribution entails the release by the company to its share-holders of all or any part of the assets of the company,' In order, therefore, to bring any distribution within the category of dividend it must be proved as a fact that what was distributed by a company was its accumulated profits. In the instant case, no such thing has been done. On the contrary, although the department is trying to value the share scrips, according to the market value when they have reached the hands of the assessee, in the hands of the distributing company, however, the said share scrips have been accepted to be of the value put upon them by the distributing company. The department.obviously, cannot adopt two standings of value in respect of the same item.
The departmental Representative also placed reliance upon the decision, of their Lordships of the Supreme Court in the case of Kantilal Manilal : 41ITR275(SC) . The relevant observation, upon which great stress has been laid by the Departmental Representative, reads as follows:--
'If instead of selling the right in the market and then distributing the proceeds, the mills directly transferred the right, the benefit in the hands of the shareholders was still dividend.' In that case the right to purchase shares by the assessee was equated to the distribution of dividends inasmuch as the transferee-holders thereof actually transferred them for much higher value than the one for which they had got them. It was under such circumstances that the value of the right shares, as indicated by the sale price was taken to be the actual dividend received by the transferee. In the instant case, however, no such position arises. Here the assessee-company has received the dividend, partly (SIC) the form of cash and partly in the form of share scrips, the latter being kept intact with the assessee itself. It cannot, therefore, be said that the assessee was selling, the shares to himself for a higher price, namely, the market value. One cannot trade and earn profit out of one's self. We, therefore, hold that the value of the share scrips as adopted at the annual general meeting of the shareholders of the distributing company must be taken to be the value of the said share scrips when they reached the hands of the assessee-company. The question of a further valuation cannot arise.' In the view taken the Tribunal ordered deletion of the sum of Rs. 61,656/- from assessment.
5. Aggrieved by the order of Tribunal, the Revenue asked for and obtained a reference to this Court on the following point;
'Whether, on the facts and in the circumstances of the case, the Tribunal rightly excluded the sum of Rs. 61,656 from being assessed as an extra dividend income of the assessee?' In contending for a negative answer to the question, the learned Counsel for the Revenue relied upon the decision of the Supreme Court in Kantilal Manilal v. Commissioner of Income-tax, Bombay : 41ITR275(SC) . What happened in that case was that the Bank of India, which had passed a resolution for increasing its share capital, offered new shares of Rs. 50 each to its existing shareholders In the proportion of one new share for every three shares held by them, at a premium of Rs. 50, The Navjivan Mills Ltd., which held 5,000 shares In the Bank and which became entitled to 1,666 new shares, purchased 66 shares in the Bank and pursuant to a resolution of its board of directors, distributed the right to purchase the remaining 1,600 shares among its shareholders in the proportion of two shares of the Bank for each share held by them in the Mills. The appellants who held 570 shares in the Mills and became entitled to purchase 1,140 new shares of the Bank, agreed to the allotment of those shares and ultimately transferred them to a private company. The assessment of the appellants was reopened under Section 34(1) (a) of the Indian Income-tax Act, on the footing that release by the Mills of shares of the Bank of India amounted to a distribution of dividend and the value of the right released in favour of the shareholders was taxable. The reassessment made on the above footing was unsuccessfully disputed by the assessee and the matter was ultimately taken before the Supreme Court. In delivering the judgment of the Supreme Court, Shah, J., upheld the stand taken by the Revenue, namely, what the appellant got was dividend liable to tax, with the following observation:-
'It was open to the mills to sell the right to the shares of the Bank of India in the market, and to distribute the proceeds among the shareholders. Such a distribution would undoubtedly have been distribution of dividend. If instead of selling the right in the market and then distributing the proceeds, the mills directly transferred the right, the benefit in the hands of the shareholders was still dividend.' The Supreme Court further observed:--'Dividend need not be distributed in money; it may be distributed by delivery of property or right having monetary value. The resolution, it is true, did not purport to distribute the right amongst the shareholders as dividend. It did not also take the form of a resolution for distribution of dividend; it took the form of distribution of a right which had a monetary value. But by the form of the resolution sanctioning the distribution, the true character of the resolution could not be altered. We are, therefore, of the view that the High Court was right in holding that the distribution of the right to apply for and obtain two shares of the Bank of India (at half their market value) for each share held by the shareholders of the mills amounted to distribution of dividend.'
In this case, the amount received by the assessee is admittedly dividend. There is also no dispute that dividend may be paid in cash or in kind. Thus, the Supreme Court decision does not take us further than what is admitted in this case.
6. The question lor our consideration is when dividend is paid in the form of property, as in this case in the form of shares of a limited company, can such property be valued at the market rate and the quantum of dividend determined at a rate higher than the rate at which the dividend, was declared. In other words, can it be said what was received by the assessee was not dividend at the declared rate but something more?
7. Now, the material portion of Section 2 (6A) of the Indian Income-tax Act, defining dividend, reads:
(a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its share-holders of all or any part of the assets of the company.'
In order, therefore, to bring any distribution within the category of dividend, it must appear what was distributed by the company was its accumulated profit. It does not appear that in the hands of Pilani Investment Corporation Ltd., the accumulated profit, in the shape of shares of Gwalior Rayon and Silk . and Hind Cycles Ltd., was taken by the Income-tax Authorities at a figure higher than figure put upon them by the Corporation. On the contrary, the Tribunal found, the share scrips in the hands of the Corporation were accepted to be of the value put upon them by the Corporation. If the accumulation be of a particular value, it cannot assume a different value on distribution.
8. Then again, the assessee was entitled to dividend at the rate declared by Pilani Investment Corporation Ltd. It could not aspire for more and had no right to anything more. It may be that what it got was more favourable than cash payment. But that is fortuitous.
9. Let us examine it from another point of view. If the shares, received by the assessee, as dividend in kind, happened to be of lesser market value than what was put on them by the dividend declaring company and if the assessee received the same in full satisfaction of the dividend declared, could it take the stand that it received less than the dividend declared? The answer must be in the negative because it is always open to everybody to receive a smaller payment in satisfaction of larger debt If this be the legal position it does not stand to reason why by receiving dividend In land, at the price put thereon by the distributing company, an. assessee should stand the risk of having received more, because the price put by the distributing company was found to be lower than the market rate. If there be collusion or attempt to defraud the revenue in such amatter be involved, then different consideration may apply. But where, as In this case, the accumulated profits. In the hands of the distributing company, namely, the value of shares, have been, evaluated at the same figure by the Income-tax Authorities, as done by the distributing company while declaring dividend, there is no justification for valuing the distribution at a different figure.
10. Further, the assessee in entitled to a certificate of deduction of income-tax on the dividend declared. If the amount of dividend declared be subsequently taken to be more than what was declared, that 'more remains uncovered by the certificate and the assessee doubly loses, namely, his income is enhanced and he does not get the coverage of the certificate.
11. For all these reasons, we are of the opinion, that in the facts and circumstances of the instant case, the question should be answered in the affirmative.
12. The asessee is entitled to costs.
K.L. Roy, J.
13. I agree.