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TMI Blog1962 (3) TMI 85X X X X Extracts X X X X X X X X Extracts X X X X ..... spective assessee's under the provisions of the Indian Income- tax Act, 1922? (ii) Whether, in the facts and circumstances of this case, the Appellate Assistant Commissioner could enhance the assessment, as made by the Income-tax Officer on the assessee company, either at the instance of the Income-tax Officer or suo motu under section 31(3)(a) of the Indian Income-tax Act?" The material facts are that the assessees, one a private limited company doing business under the name and style of M/s. Nandlal Bhandari & Sons and the other, a Hindu undivided family doing business under the name of M/s. Shrikrishan Chandmal, Indore, are shareholders of Nandlal Bhandari Mills Ltd., Indore. In 1929 this company purchased a textile mill situated at Kalyan, in Maharashtra State, for ₹ 7,00,000. The machinery, stores and other material of the purchased mill were removed from Kalyan to Indore for the expansion of the Nandlal Bhandari Mills Ltd. The cost of this machinery, material, etc., was determined at ₹ 6,40,000 and debited in the account books of the Nandlal Bhandari Mills Ltd., Indore. The balance of ₹ 60,000 was treated as cost of land and building at Kalyan. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of ₹ 3,91,381 received by the assessee, M/s. Nandlal Bhandari & Sons, was dividend and properly chargeable to tax and that he had committed an error in not assessing it. The Appellate Assistant Commissioner, therefore, issued a notice to the said assessee to show cause why the assessment should not be enhanced and the dividend amount received by it should not be taxed. The Appellate Assistant Commissioner took the view that the amounts received by the two assessee's were dividends and were taxable. The assessee's then appealed to the Tribunal against the orders of the Appellate Assistant Commissioner. The Tribunal held that what the two assessee's received was only a distribution of a capital asset and not anything out of the profits of M/s. Nandlal Bhandari Mills Ltd. and what was sought to be taxed was the distribution made by the said mills out of the "capital appreciation of an asset" and that this capital appreciation being in 1949 could not be regarded as accumulated profits under the second proviso to section 2(6A). Accordingly, the exemption claimed by the two assessee's was allowed by the Tribunal. The provision of the Act that requires c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e definition given in section 2(6A) the amount received by the assessee's was dividend; that the amount of ₹ 6,40,000 obtained by the mills on account of the enhanced value of the land and building at Kalyan and distributed amongst the shareholders was "profit" and in the distribution of it to the shareholders there was a release by the mills of a part of its assets and thus it was dividend within the meaning of sub-clause (a) of section 2(6A); and that the second proviso to section 2(6A) had no applicability because the property was not voluntarily sold by the mills but was compulsorily acquired by the Government and, consequently, the amount of ₹ 6,40,000 obtained by the mills could not be regarded as capital gains. In support of his contention the learned Advocate-General relied on Kantilal Manilal v. Commissioner of Income-tax [1956] 30 I.T.R. 569, which was affirmed by the Supreme court in Kantilal Manilal v. commissioner of Income-tax and Calcutta Electric Supply Corpn. Ltd. v. Commissioner of Income-tax ([1951] 19 I.T.R. 406). In reply, Shri Chitale, learned counsel for the assessees, submitted that the definition of "dividend" given in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the company to its shareholders of all or any part of the assets of the company. Now, the Act does not define "profits" but the ordinary meaning of the term is "advantage or gain in money or in money's worth". If by the sale of a capital asset a company realises an amount higher than the valuation put by it, the excess amount would be profit in the hands of the company. The mere fact that the profit follows from some capital asset does not prevent it from being profit. It would of course be capital gain and not a revenue receipt if the company does not carry on the business of selling or purchasing the property constituting the capital asset sold. The second proviso excludes capital gain arising before 1st April, 1946, or after 31st March, 1948, from the scope of the expression "accumulated profits". That being so, any distribution to the shareholders out of the profits realised by a company on the sale of a capital asset if it constitutes capital gains arising before or after the dates specified in the second proviso cannot be regarded as dividend under sub-clause (a) read with the said proviso. If a distribution out of such capital gain canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts connotation several other receipts set out in the definition. The Tribunal had referred the question whether the distribution of the right to apply for the Bank of India shares amounted to distribution of dividend within the meaning of section 2(6A) and, in answering that question, the High Court had to take into account both the normal and the extended meaning of that expression." The fact that the ordinary meaning of the term "dividend" and section 2(6A) cannot be considered as distinct and mutually exclusive has an important bearing on the operation of what is excluded under section 2(6A) from the definition of "dividend". If it be assumed that the distribution of the kind described, say in sub-clause (a) of section 2(6A), is dividend even under the ordinary meaning of the term and that sub- clause (a) is really otiose and one inserted out of abundant caution, then the second proviso excluding certain capital gains from accumulated profits would have the effect of excluding from the ordinary meaning of "dividend" the distribution contemplated by that sub-clause. If, on the other hand, the ordinary meaning of the word "dividend" do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 10(2)(vii) of the Act. The question whether it was a capital gain arising from the transfer of a capital asset did not arise for consideration in that case. It was then said by the learned Advocate-General that the distribution by the mills to the shareholders was in fact in the form of dividend. In our opinion nothing turns on the circumstance that in the resolution passed by the directors the distribution of ₹ 6,40,000 to the shareholders was described as "dividend at ₹ 64 per share", What is material is the real and true nature of the distribution and not its form. The distribution is clearly exclude from the definition given in section 2(6A)(a) read with the second proviso. If, as we think, the distribution of ₹ 6,40,000 is expressly excluded from the extended definition of "dividend" given in section 2(6A) (a), then, as we have pointer out earlier it cannot be regarded as dividend even within the ordinary definition of that word. The first question must, therefore, be answered in the negative. It is not necessary to decide the issue raised by the second question. Shri Chitale, learned counsel appearing for the assessees, did no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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