1969 (7) TMI 2 - SC - Income Tax

Capital gains - proportionate share of the capital gains out of which the dividend was distributed to the shareholders of the company must be deemed exempt from liability to pay tax under s. 12 as dividend income liable to tax - Revenue s appeal dismissed

Summary

Issues:
1. Whether the dividend distributed by the company is exempt from tax as it was claimed to be distributed out of capital gains and not accumulated profits.
2. Interpretation of the definition of "dividend" under section 2(6A) of the Income-tax Act, 1922.
3. Determining the tax liability on the proportionate share of capital gains distributed as dividend income to the shareholders.

Detailed Analysis:
1. The respondents claimed that the dividend distributed by the company was exempt from tax as it was distributed out of capital gains and not accumulated profits. The Income-tax Officer rejected this claim and brought the dividend to tax in the hands of the respondents. The Appellate Assistant Commissioner held that a portion of the amount distributed represented capital gains and was exempt from income tax. However, the Tribunal reversed this decision, stating that if the amount distributed was considered dividend in ordinary terms, it became chargeable under the general charging section, and the exclusion of certain capital gains by the proviso had no bearing on the issue raised by the revenue.

2. The key issue revolved around the interpretation of the definition of "dividend" under section 2(6A) of the Income-tax Act, 1922. The definition of "dividend" in the Act included any distribution by a company of accumulated profits, whether capitalised or not. The proviso to the Explanation explicitly stated that capital gains arising after a certain date were not to be included within the expression "dividend." The Court emphasized that the definition of "dividend" was an inclusive one, and only the proportionate share of the member out of the accumulated profits distributed by the company would be deemed the taxable component. The Court rejected the Tribunal's view that the definition of "dividend" only included deemed dividend and held that capital gains excluded from the definition by express enactment should not be considered part of accumulated profits for tax purposes.

3. The Court agreed with the High Court's decision that the proportionate share of capital gains out of which the dividend was distributed to the shareholders must be deemed exempt from liability to pay tax under the relevant provisions. The Court dismissed the revenue's argument that the share of dividend, exempt from tax under the exemption clause, could still be taxed as income other than dividend. The Court held that since this contention was not raised before the Tribunal or the High Court, it would not be justifiable to consider it at this stage. Ultimately, the appeals were dismissed, and the respondents were awarded costs.