1964 (4) TMI 44 - SC - Companies Law

Whether on the facts and in the circumstances of the case the receipt of 50, 787 was a receipt of dividend and is taxable under the Indian Income-tax Act ? Held that - Agree with the High Court that the answer to the question referred to it is in the affirmative. The appeal fails and is dismissed

Summary

Issues:
Interpretation of the term "dividend" under the Indian Income-tax Act, 1922 in relation to the distribution of accumulated profits.
Applicability of section 78 of the Companies Act, 1956 on the taxation of dividends declared out of premiums on shares received by a company before the Act came into force.

Analysis:
The case involved the appellant, a joint stock company, holding preference shares in another company, Rohtas Industries Ltd., and receiving a sum as a dividend, which was taxed by the Income-tax Officer under the Indian Income-tax Act, 1922. The dispute arose regarding whether the sum received was taxable as a dividend. The appellant argued that the sum was not a dividend as per the definition in the Act, as the share premiums were not profits capable of being distributed as dividends under the Companies Act of 1913. Additionally, they contended that the sum was a capital gain and thus excluded from the definition of "dividend" under the Act.

The definition of "dividend" under section 2(6A) of the Income-tax Act was crucial in determining the taxability of the sum received by the appellant. The definition included any distribution of accumulated profits that entailed the release of assets to shareholders. The court noted that the distribution of the sum in question entailed the release of assets, indicating it could be considered a dividend. The court rejected the appellant's argument that the share premiums were not profits within the Companies Act, citing precedents that allowed companies to distribute premiums received on shares as dividends.

The court also analyzed the implications of section 78 of the Companies Act, 1956, which governed the treatment of share premiums. The court observed that section 78 did not change the taxability of dividends declared out of premiums on shares received before the Act came into force. The court emphasized that if such dividends were taxable before the enactment of section 78, they remained taxable post-enactment. The court clarified that section 78 did not alter the tax treatment of dividends from premiums on shares.

The court referred to legal precedents and the scheme of the Companies Act to support its decision. It highlighted that the receipt in question was considered a dividend and therefore taxable under the Indian Income-tax Act. The court dismissed the appeal and upheld the High Court's decision regarding the taxability of the sum received by the appellant as a dividend.

In conclusion, the judgment addressed the interpretation of the term "dividend" under the Income-tax Act and the impact of section 78 of the Companies Act on the taxation of dividends from share premiums. The court's analysis emphasized the legal framework and precedents to determine the taxability of the sum received by the appellant, ultimately affirming the tax treatment of the amount as a dividend.