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Issues Involved:
1. Whether the sum of Rs. 38,000 received by the assessee on redemption of 380 redeemable preference shares should be included in the assessment as dividend under section 2(6A)(a) of the Income-tax Act, 1922. 2. Whether the assessee is entitled to claim a deduction of the purchase price paid for the acquisition of the said 380 redeemable preference shares. Issue-wise Detailed Analysis: 1. Inclusion of Rs. 38,000 as Dividend: The primary issue was whether the Rs. 38,000 received by the assessee on redemption of 380 redeemable preference shares should be taxed as dividend under section 2(6A)(a) of the Income-tax Act, 1922. The company had capitalized its accumulated profits and issued redeemable preference shares. The assessee acquired these shares from her brother-in-law and later received Rs. 38,000 upon their redemption. The court examined whether this amount constituted a "dividend" under section 2(6A)(a). The section extends the definition of "dividend" to include any distribution by a company of accumulated profits, whether capitalized or not, if such distribution entails the release of the company's assets to its shareholders. The court noted that the term "distribution" should be broadly interpreted to include both physical distribution and other forms of distribution that do not necessarily involve the release of assets. The court analyzed the mechanics of issuing and redeeming redeemable preference shares. When the company issued these shares, the capitalized accumulated profits were converted into share capital. Upon redemption, the company returned this share capital to the shareholders, which constituted a distribution of the capitalized accumulated profits. The court rejected the assessee's argument that there could not be a second distribution of the same capitalized accumulated profits. It held that the initial capitalized accumulated profits remained in the company's coffers and were not physically distributed to the shareholders. Therefore, the physical distribution occurred only upon redemption, entailing the release of assets. The court concluded that the Rs. 38,000 received by the assessee on redemption of the preference shares constituted a distribution of capitalized accumulated profits entailing the release of assets and was, therefore, taxable as dividend under section 2(6A)(a). 2. Deduction of Purchase Price: The second issue was whether the assessee could claim a deduction for the purchase price paid for acquiring the 380 redeemable preference shares. The assessee had purchased these shares before the commencement of the accounting year and sought to deduct the purchase price from her income. The court held that the purchase price paid for acquiring the shares constituted capital expenditure and could not be claimed as an allowable expenditure under section 12 of the Income-tax Act, which pertains to income from dividends. Additionally, since the purchase occurred before the accounting year, it could not be considered an allowable expenditure for computing the income for that year. Therefore, the court concluded that the assessee was not entitled to claim any deduction for the purchase price paid for the shares. Conclusion: The court answered the first question in the affirmative, holding that the Rs. 38,000 received by the assessee on redemption of the preference shares was taxable as dividend under section 2(6A)(a). The second question was answered in the negative, denying the assessee's claim for deduction of the purchase price paid for acquiring the shares. Consequently, the assessee was ordered to pay the costs of the reference to the Commissioner.
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