1. The question referred to this Court under section 66 (1) of the Act is:
'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 dividend within the meaning of Section 12 of the Income-tax Act?'
2. In his application to the Appellate Tribunal for reference to this Court the assessee posed no less than four questions the last of which was:
'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?'
3. The question referred might lead one to think that the assessee did not dispute the taxability of the sum of Rs. 43,925/- and that the point at issue was whether the receipt would fall under Section 10 or under Section 12. This however would not accurately describe the stand taken by the assessee as it has throughout contended that the amount was not income at all and could not be taxed.
4. The facts as taken from the statement of case are as follows:
The assessee is a private limited company. Its business, inter alia, is to deal in shares and securities. On September 30, 1954 it purchased 11,900 shares of Kedarnath Jute . from one Beharilal Nathani, share broker, for a total consideration of Rs. 1,12,575/-. The purchase was effected in two lots; one at Rs. 9/8/- per share and the other at Rs. 9/4/- per share. These shares stood in various names from 1936 to 1945; the bulk of them stood in the name of Babulal Rajgaria, a director of Kedarnath Jute . who held at least 11,250 shares all through the years 1936 to 1945 and had 9850 shares registered in his name, shortly before the purchase of the shares by the assessee. Another block of 1600 shares stood in the name of his mother. For some reason which does not appear from the papers a large amount of dividend declared on the 11,900 shares between the years 1936 and 1945 had not been claimed by Babulal Rajgaria and his associates although the dividends declared between the years 1945 and 1954 had been paid to and received by the shareholders. There is a letter addressed by Beharilal Nathani to the assessee bearing date September 30, 1954 which 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.
5. 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 when it was not the owner of the shares the same could not be considered as its income. The Income Tax Officer turned down the contention holding that as the assessee was a dealer in shares and as the shares were part of his stock-in-trade, whatever accrued on the stock was the business income of the assessee. He held moreover that the value of the shares had remained the same both in the opening and the closing stock as was evidenced by the balance sheet and the receipt of Rs. 43,925/-had not depreciated the value of the shares at all. Various contentions were urged before the Appellate Commissioner who observed that 'it was not that the purchase had been made and some rights followed but that some rights were known to have existed and the purchase of the shares followed. The appellant was clearly privy to the knowledge that he would be entitled to certain profits, if certain steps were taken by him. One of such steps was to purchase 11,900 shares which might have been the only lot available then, from all the lots. This is because the profits to which he became entitled and which are now in dispute were not all, in respect of the shares now purchased. It cannot, therefore, be said that the purchase itself resulted in creating the rights in their entirety. This is further strengthened by the fact that the company was already a registered shareholder for these 11,900 shares about a fortnight prior to the date of the voucher. It appears therefore that the appellant was entering into a sort of adventure to tap this balance of unclaimed dividends of which he became aware and as such amount could not be received otherwise than by being a substantial shareholder of the company, this purchase was arranged.' According to the Appellate Commissioner the circumstances showed a certain plan and design which was an essential characteristic of an adventure in the nature of trade.
6. The Tribunal held that the assessee, had acquired these shares in course of its business and the receipt formed an integral part of its income from the business carried on by him and so the amount of Rs. 43,925 had been properly taxed.
7. It seems to us that there is a good deal of confusion of thought in this matter. 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 to be considered a trustee for the purchaser of the rights attaching to the shares or accruing thereon, including the voting rights. The dividends declared by Kedarnath Jute . could only recognise the members whose names stood on the share register from 1936 to 1945 as the persons lawfully entitled to the dividends declared within that period and its action in paying over the said dividends to the assessee after September 30, 1954 can only be justified by the mandate of the said members. Such a mandate or the action of Kedarnath Jute . based thereon cannot make the dividends due to the vendors income in the hands of the purchaser. Had there been no contract to pay over these 'arrear dividends' to the purchaser the latter could only have received them by way of gift. The existence of a contract binding the vendor to make them over to the purchaser only meant that the consideration paid by the purchaser was not given only for the value of the shares but Rs. 43,925/- which was going to be returned by the vendor. In effect it meant that the value of Rs. 9/8/- or Rs. 9/4/- as shown in the broker's bill was not the real value which was substantially less.
8. The appellate Commissioner was right when he in effect said that the transaction was according to a plan hatched by the vendor, the sharebroker and the assessee. There can be no doubt about this although it is not for us to speculate as to the motive behind the scheme. Whatever may have been the object with which the transaction was carried out in the above manner the position in law 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 reality the transaction was like A selling a house to B for Rs. 1,12,000 informing B at the same time that there was a sum of Rs. 43,923 embedded under the floor of one of the rooms and that the vendor would allow the purchaser to have the same as a part and parcel of the contract. If everybody knew that the sum of Rs. 43,925/- was there the sum and substance of the bargain was that the house was being sold for a consideration of Rs. 1,12,000 minus Rs. 43,925. If this Rs. 43,925 embedded under the floor of the house was income of the vendor it could not automatically be taxed as income in the hands of the purchaser of the house.
9. Counsel for the assessee cited a number of authorities to show that it is not the treatment by the assessee of a particular sum of money in his books of account but the real nature of the receipt which has got to be considered for computation of income, profits and gains for income-tax purpose. I do not think necessary to refer to these cases.
10. Counsel for the Revenue contended that whenever shares are sold with arrear dividends the dividends should be taxed in the hands of the purchaser as income and he referred to the case of Commissioner of Inland Revenue v. Forrest, (1890) 8 Tax Cas 704. There the facts were as follows: Forrest purchased certain shares on November 25, 1919 for a sum exceeding their par value by 50, the excessbeing expressed in the contract to be paid 'tocover the portion of the dividend accrued todate.' Some months thereafter a dividend of10 per cent free of Income Tax was declaredand paid by the company for the year endingthe 28th February, 1920, the contract havingbeen entered into on November 25, 1919. Forrest contended that of the dividend which cameto him 60 plus Income Tax i.e., 71 in allshould be treated as capital in view of the termsof the contract of purchase, and should not beincluded in the computation of his income for the year 1920-21 for the purpose of Super-taxfor the following year. This was accepted bythe Special Commissioners on appeal but theCourt of Session of Scotland allowed the further appeal therefrom holding that the transaction was in essence an ordinary one of purchase of shares, and the sum of 71 in questioncould not be deducted from the full amount ofthe dividend receivable by Forrest as under Section 5 (1) and Section 5 (3) (c) of the Income-tax Act 1918 it was required to be included in the computation of his income forthe purpose of Super-tax for the year 1921-22. The Lord Justice Clerk (Alness) remarked'to say that the respondent purchased the dividend upon the shares is I think inaccurate. Hebought the shares with their potentialities,whatever they were. There was men no dividend in existence. He paid a certain and arbitrary price for these shares and that is thewhole transaction. *** *** The question which arises between the respondent andthe Inland Revenue arises at the moment whenthe dividend was paid on these shares in May,1920. That dividend was then prima facie income upon the shares, and what Mr. Watsonhas to make out in my view is that he is entitled to set off against that income certaincapital expenditure which he made months previously to the effect of divesting that incomeof its revenue character and of clothing it witha capital character. For that operation I amunaware of any authority at all. This casedoes not help the Revenue. The income inForrest's case (1890) 8 Tax Cas 704 did notarise or accrue until after the purchase of theshares and the declaration of dividend. It couldonly be Forresfs income and not his vendor'sincome who had no interest in the shares aftertheir sale or in the dividends declared thereon.So far as the present case is concerned the dividends had been declared long back and in lawbelonged to the vendor (registered share-holder).As soon as they were paid to the registeredshare-holders they would assume the characterof income in their hands. The fact that bysome arrangement with the company--whichwas possible only because the vendor, and thepurchaser were both influential members of it--the moneys went straight to the purchaserdid not alter the character of the payment, Theincome from the dividends was the income ofthe registered shareholder and it was not income in the hands of the purchaser.
11. The next argument of the Revenue was that the sum of Rs. 43,925 was a monetary return coming to the assessee from an adventure in the nature of trade entered into by it as a dealer in shares and for the augmentation of his .stock-in-trade. No doubt there was a plan behind the transaction and no doubt that the assessee's stock-in-trade was added to by the purchase but these two factors by themselves do not make the receipt an income from an adventure in the nature of trade. If that were so any transaction entered into by a businessman would be an adventure of that type. Here so far as the assessee was concerned the result of the transaction was that he was paying Rupees 1,12,000 with one hand and receiving Rupees 43,925 with the other. The case of Smith Barry v. Cordy, (1946) 28 Tax Cas 360 cited by Mr. Pal is not really relevant. There the appellant embarked on a carefully worked out scheme whereby between July 1937 and February, 1939, he laid out his capital in the purchase of a large number of endowment policies on other people's lives with such dates of maturity as would provide him with 7,000 a year until 1960. In 1942 after having suffered injuries in the War he decided on medical advice to settle permanently in India and contemplating an entire change in his manner of life, he sold and gave away all the policies which had not then matured. He was assessed to Income-tax under Case I of Schedule D for the year 1938-39 to 1942-43 in respect of profits from dealings in life insurance policies. On appeal to the Special Commissioners he contended that the transactions in question were in the nature of investments and realisations of investments, and that the accretions whether on maturity or sale, were capital accretions. The Special Commissioners held that the appellant had engaged in a concern in the nature of trade resulting in profits the fruit of the capital laid out--which were assessable to Income-tax under Case I of Schedule D. There the contention of the assessee was that the whole business was a mere investment of capital and that the annual return contemplated by it was no more than a realization by degrees one after another of items of capital when had increased in value subsequently to their purchase, and therefore were not income. Scott, L. J. who delivered the judgment of the Court of Appeal pointed out that the finding of Commissioners was that the resultant profits were the fruit of capital invested and not the capital itself and if there was evidence to support the conclusion, this would be a sufficient answer to the point raised. His Lordship observed that 'the circulating capital of a shopkeeper produces profits of an Income-tax nature. Purchases and sales of land may equally be income transactions, as is the case with every land company.' According to his Lordship the finding of the Commissioners that Mr. Barry was engaged in a concern in the nature of trade resulting in profits was based on evidence before them. His lordship remarked that the .assessee 'showed great mathematical skill--an element in the business of an average adjuster; an underwriter, a banker or a financier. He continued to make his purchases in the commercial market over a period of eighteen months, i.e. until he had planted enough trees to yield him the fruit he wanted over the series of seasons for which he was making his purchases.'
12. Can we say the same here of the assessee before us? There was only one transaction. The money described as dividend which came to the assessee would not have been his by a mere contract of purchase and as the amount thereof was known the transaction could only be on the basis that he was paying for the shares the amount mentioned in the broker's bill less the sum of money received by him. There was certainly a plan behind it but that by itself is not sufficient to lead to the conclusion that it Was an adventure in the nature of trade. In the result, we must hold that the sum of Rs. 43,925 was not income in the hands of the assessee at all and could not be taken into account in computing his income liable to tax. The assessee will have the costs of this Reference.
13. I agree.