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Issues Involved:
1. Whether the shares of Bihar State Financial Corporation were preference shares. 2. Whether the assessee was entitled to a further rebate of 7.5% on the amount of dividend declared. Detailed Analysis: Issue 1: Whether the shares of Bihar State Financial Corporation were preference shares The core issue revolves around determining if the shares of the Bihar State Financial Corporation (the Corporation) qualify as preference shares under the relevant legal provisions. The Corporation was formed under the State Financial Corporations Act, 1951 (the Corporation Act), and its shares were guaranteed by the State Government concerning the repayment of principal and payment of annual dividend at a minimum rate of 3.5% per annum, with a maximum rate capped at 5% as per section 35(3) of the Corporation Act. For the purpose of income tax calculations, the term 'preference shares' is not defined in the Income-tax Act, 1961, and thus, the definition from the Companies Act, 1956, is considered. According to section 85(1) of the Companies Act, 'Preference share capital' must fulfill two conditions: - It must carry a preferential right to a fixed amount or a fixed rate of dividend. - It must carry a preferential right to repayment of capital on winding-up or repayment. The Corporation's shares did not meet these criteria as they did not provide a fixed rate of dividend but rather a minimum guaranteed rate subject to fluctuation up to a maximum of 5%. Additionally, there was no preferential right in the repayment of capital among shareholders. Hence, the shares could not be classified as preference shares. Issue 2: Whether the assessee was entitled to a further rebate of 7.5% on the amount of dividend declared The Finance Acts of 1964 and 1965 provided for a rebate on super-tax and income-tax respectively, with a reduction of 7.5% on the amount of dividend other than on preference shares. The Income-tax Officer initially allowed the rebate but later rectified it under section 154 of the Income-tax Act, 1961, by reducing the rebate by 7.5% on the dividend amount, as the shares were not considered preference shares. The Appellate Assistant Commissioner and the Tribunal upheld this rectification, concluding that the shares of the Corporation were not preference shares and thus, the assessee was not entitled to the additional rebate of 7.5%. This decision was based on the interpretation that the shares did not meet the fixed dividend criteria and lacked preferential treatment in capital repayment. In conclusion, the court held that the shares of the Bihar State Financial Corporation were not preference shares, and consequently, the assessee was not entitled to the further rebate of 7.5% on the amount of dividend declared. The judgment was thus in favor of the department and against the assessee. The department was awarded costs, with a consolidated hearing fee assessed at Rs. 200.
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