1974 (7) TMI 87 - HC - Companies Law

Summary

Issues Involved:
1. Whether the shares of Bihar State Financial Corporation, Patna, were preference shares.
2. Whether the assessee was entitled to a further rebate of 7 1/2 % on the amount of dividend declared.

Issue-wise Detailed Analysis:

1. Whether the shares of Bihar State Financial Corporation, Patna, were preference shares:

The core issue revolves around the classification of the shares of Bihar State Financial Corporation (the Corporation). The Corporation, formed under the State Financial Corporations Act, 1951, was assessed for the assessment years 1964-65 and 1965-66. The Income-tax Officer initially assessed the Corporation but later issued a rectification under section 154 of the Income-tax Act, 1961, arguing that the shares were not preference shares and thus not entitled to a 7 1/2 % rebate on the dividend.

Relevant Provisions:
- Section 4(3) of the Corporation Act: Determines the distribution of shares among various entities.
- Section 6 of the Corporation Act: Guarantees repayment of principal and payment of annual dividend at a minimum rate.
- Section 35(3) of the Corporation Act: Fixes the maximum rate of dividend at 5%.
- Section 43 of the Corporation Act: Deems the Corporation as a company for the purposes of the Income-tax Act.

Key Arguments:
- The Corporation argued that its shares should be considered preference shares because the dividend rate was fixed between 3 1/2 % and 5%.
- The department contended that the shares did not meet the criteria for preference shares as defined under Section 85 of the Companies Act, 1956, which requires a preferential right to a fixed amount or rate of dividend and preferential repayment of capital.

Judgment:
The court analyzed the definition of "preference shares" under Section 85(1) of the Companies Act, 1956, which requires both preferential rights as to dividends and capital. The court found that the Corporation's shares did not fulfill these criteria. Specifically, the dividend rate was not fixed but fluctuated between 3 1/2 % and 5%, and there was no preferential treatment of one class of shareholders over another. Thus, the shares could not be classified as preference shares.

2. Whether the assessee was entitled to a further rebate of 7 1/2 % on the amount of dividend declared:

The second issue was contingent on the classification of the shares. If the shares were not preference shares, the Corporation would not be entitled to the 7 1/2 % rebate on the dividend.

Relevant Provisions:
- Finance Act, 1964 and 1965: Set out the mode of calculation of super-tax and income-tax, including provisions for rebates on dividends other than preference shares.

Key Arguments:
- The Corporation argued that since the shares were preference shares, they should receive the rebate.
- The department maintained that the shares were not preference shares and thus not eligible for the rebate.

Judgment:
Given the court's determination that the shares were not preference shares, it held that the Corporation was not entitled to the 7 1/2 % rebate on the dividend. The Tribunal's decision was upheld, and the question was answered against the assessee and in favor of the department.

Conclusion:
The court concluded that the shares of Bihar State Financial Corporation were not preference shares, and therefore, the assessee was not entitled to the 7 1/2 % rebate on the dividend. The department was awarded costs.