1969 (8) TMI 2 - SC - Income Tax

Business of the assessee was to deal with shares and securities - assessee had purchased the arrears of dividend - dividend 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 - said sum of Rs. 43,925 could not be assessed either as dividend or as profit - Revenue s appeal dismissed

Summary

Issues:
1. Whether the arrear dividends received by the assessee are liable to be taxed as income?
2. Whether the amount received by the assessee should be treated as business income or dividend for tax purposes?

Analysis:
The case involved a private limited company (referred to as the assessee) dealing with shares and securities. The assessee purchased shares with arrear dividends, and the question arose whether the arrear dividends received were taxable as income. The Income-tax Officer treated the arrear dividend as business income, but the Appellate Tribunal confirmed that the amount formed part of the assessee's income from business. The High Court, however, held that the arrear dividends were not liable to tax, emphasizing that the purchase consideration included the arrear dividends. The High Court concluded that the amount was not income assessable in the hands of the assessee.

The High Court reframed the question to focus on whether the assessee purchased the arrears of dividend and if the amount could be assessed as either dividend or profit. It was established that the dividends declared belonged to registered shareholders, and a purchaser becomes entitled to dividends declared after the purchase. In this case, there was a contract between the assessee and registered shareholders to sell shares with arrear dividends, indicating that the purchase consideration included the arrear dividends. The High Court held that the arrear dividends were not claimable by the purchaser as income from the shares but were the income of the vendors.

The Supreme Court analyzed the evidence and upheld the High Court's decision, emphasizing that the purchase price included the arrear dividends and was not solely for the share scrips. The Court noted that the amount of arrear dividends was not income assessable in the hands of the assessee, as it was part of the purchase consideration for the shares. The Court also highlighted that the assessee's erroneous crediting of the amount to the profit and loss account did not change the nature of the receipt, which could not be considered income for tax purposes.

In conclusion, the Supreme Court dismissed the appeal, affirming the High Court's decision that the arrear dividends received by the assessee were not taxable income. The Court held that the amount paid by the assessee included the arrear dividends and could not be treated as income liable to tax under the Income-tax Act.