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TMI Blog1956 (2) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... ight to two shares of the bank for one ordinary share held in the company. The assessees between them held 570 shares of these mills and the assessees requested the mills to renounce their right with regard to 1,140 shares to which they were entitled in favour of Jesingbhai Investment Co, and the question that arose for decision by the Tribunal was whether the assessees were liable to tax on the right acquired by them to the shares of the Bank of India, on the basis that that right constituted dividend for the purpose of the Indian Income-tax Act. There are certain important facts to which attention must be drawn. It is found as a fact that this right which a shareholder of the Bank of India acquired to obtain one share for three shares had a market value and that market value was Rs. 100 per share. It was therefore open to the Navjivan Mills to sell this right and obtain for it a cash consideration. Therefore, it is clear that what the Navjivan Mills were disposing of was an asset of the mills, an asset which the mills had acquired by reason of its holding 5,000 shares of the Bank of India, an asset which was a valuable asset and had a cash equivalent value. It may be accepted a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and the law is quite clear that a dividend can only be declared by the shareholders of the company. The only right that the directors have is to recommend a dividend to the meeting of the shareholders. In this case there is neither a formal recommendation by the directors that a dividend should be paid, nor is there any acceptance, formal or otherwise, by the company of that recommendation. But would it be true to say that because the company has not complied with the procedure required for the declaration of dividend under the Companies Act, it is competent to a shareholder who has received a part of the profit from the company distributed among all the shareholders to tell the taxing authorities that he is not liable to pay tax on that income as dividend because his company has failed to carry out the formalities and the procedure required by law? In our opinion, if the true nature of the transaction which we must consider is the receipt by the shareholder of dividend in the sense of his receiving a part of the profits of the company, then he is liable to tax on that income as dividend, notwithstanding the failure of the company to comply with the necessary procedure. The fail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he want of formality, then it is clear that what the directors did was to give to the shareholders a part of the assets of the company, and once it is established, as it is clearly established in this case, that that part of the assets did not constitute the capital of the company, then what the shareholders received was income in the nature of dividend. The Tribunal addressed itself only to one aspect of the definition of dividend given in the Income-tax Act. It will be remembered that the definition of dividend in the Income-tax Act is an inclusive and not an exhaustive definition and the Tribunal took the view that the case of the assessees fell under that definition. The definition of dividend is contained in section 2(6A) and the view of the Tribunal was that this particular income received by the assessees was dividend within the meaning of section 2(6A)(a). Clause (a) is to the following effect: "(a) Any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company." In our opinion, there cannot be much doubt that there was in this ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er's Executors [1926] 10 Tax Cas. 302. That case logically followed from the earlier English case reported in Commissioners of Inland Revenue v. John Blott [1921] 8 Tax Cas. 101 and the facts show that what the company did was that it capitalised its undivided profits and in respect of those profits which were capitalised it created an issue of 5 per cent. debenture stock to its ordinary shareholders, and the question that arose for the decision of the House of Lords was whether the issue of this debenture stock was a distribution of profits and the House of Lords held that it was not and did not constitute income in the hands of the shareholders for the purposes of tax. Lord Chancellor Viscount Cave at page 333 says: "My Lords, if the tests which are to be found in these judgments are applied to the transactions now in question, I think that it will be found impossible to escape from the conclusion that the issue of debenture stock in the present case falls within the same category as the issue of shares in Blott's case (supra ). Here, as in that case, the fund representing reserves and accumulated profits was at the disposal of the company, which could determine as against the w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t use the expression "income of the company" in the sense in which Mr. Palkhivala suggests. He uses the expression "income of the company" in contradistinction to its capital and what Lord Sumner is emphasising is that if at the date of the distribution the asset of the company is an asset which could be distributed as dividend and which did not constitute the capital of the company which could not be distributed, then the distribution to the shareholders in law would be dividend. Mr. Palkhivala also relied on a judgment of the Madras High Court in Commissioner of Income-tax v. M.P. Viswanatha Rao [1950] 18 ITR 68. In that case the Tata Iron and Steel Company, instead of paying dividend to the shareholder in cash, issued bearer deposit certificates which were payable on or before a certain date with interest, and the question that the Madras High Court had to consider was whether the sum represented by the deposit certificates could be considered dividend and the High Court held that there had not been a release of assets of the company and that the deposit certificate was something like a post dated cheque or a promissory note or a promise in the form of a negotiable instrument a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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