1956 (2) TMI 33 - HC - Companies Law

Summary

Issues Involved:
1. Whether the distribution of the right to apply for shares of the Bank of India by Navjivan Mills Ltd. to its shareholders amounted to a distribution of 'dividend'.

Detailed Analysis:

1. Distribution of Right as Dividend:

The primary issue revolves around whether the distribution of the right to apply for shares of the Bank of India by Navjivan Mills Ltd. to its shareholders constituted a 'dividend' under the Indian Income-tax Act. The court noted that the Navjivan Mills had invested its profits in purchasing 5,000 shares of the Bank of India. The Bank of India offered its shareholders one share for every three shares held, on payment of Rs. 100 per share. Navjivan Mills decided to invest in only 66 shares and distributed the right to the remaining 1,600 shares among its 800 shareholders.

The court emphasized that the right to obtain one share for three shares had a market value of Rs. 100 per share. Navjivan Mills could have sold this right for cash, indicating that the right was a valuable asset of the company. The court distinguished between income and capital, asserting that the right constituted income or profits, not capital. Therefore, it was legally permissible for Navjivan Mills to distribute this right or its proceeds as a dividend.

2. Formalities of Dividend Declaration:

The court addressed the argument that the distribution did not follow the formalities required by the Companies Act for declaring a dividend. It was noted that a dividend could only be declared by the shareholders, and the directors could only recommend it. In this case, there was no formal recommendation or acceptance by the company. However, the court opined that the failure to comply with these formalities did not negate the nature of the transaction as a distribution of profits. The court emphasized that the true nature of the transaction should be considered, and if it involved the receipt of part of the company's profits by the shareholders, it should be treated as a dividend for tax purposes.

3. Definition of Dividend under Income-tax Act:

The Tribunal had considered the definition of dividend under section 2(6A)(a) of the Income-tax Act, which includes any distribution of accumulated profits that entails the release of the company's assets to its shareholders. The court agreed that there was a release of part of the company's assets to the shareholders. However, the court also considered the ordinary meaning of dividend, which involves the receipt of part of the company's profits by the shareholders. The court concluded that the distribution of the right to apply for shares fell within the ordinary meaning of dividend, regardless of the specific definition in section 2(6A)(a).

4. Relevant Case Law:

The court discussed several cases to support its reasoning. It referred to the English case of Commissioners of Inland Revenue v. Fisher's Executors, where the issue of debenture stock was not considered a distribution of profits. The court distinguished this case by emphasizing the nature of the right distributed by Navjivan Mills. The court also discussed the Madras High Court case of Commissioner of Income-tax v. M.P. Viswanatha Rao, where the issuance of deposit certificates was not considered a release of assets. The court noted that in the present case, there was a clear release of assets by Navjivan Mills.

5. Conclusion:

The court concluded that the distribution of the right to apply for shares of the Bank of India by Navjivan Mills Ltd. amounted to a distribution of 'dividend'. The court re-framed the question to reflect the real controversy and answered it in the affirmative, indicating that the distribution was indeed a dividend for tax purposes. The court made no order as to costs.