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TMI BlogRIGHT OF A SHAREHOLDER ON THE PROPERTY OF THE COMPANYX X X X Extracts X X X X X X X X Extracts X X X X ..... RIGHT OF A SHAREHOLDER ON THE PROPERTY OF THE COMPANY - By: - Mr. M. GOVINDARAJAN - Income Tax - Dated:- 22-2-2016 - - The company incorporated under the Companies Act is formed by the promoters who are also the shareholders of the company. The number of shareholders may differ according to the nature of the company. The private company has prescribed number of members (200 members as on now) and the public limited company has no maximum limit. The company is a separate legal entity and separate from its shareholders. The company is having perpetual succession. Members may come and may go but the company will survive until it is wound up. The equity shareholders are the owners of the company. The affairs of the company are run by the Boar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of Directors. But certain powers are given only to the shareholders that can be executed in the general meetings. The shares of the shareholders may be transferred and may be traded if such shares are listed in the stock exchange. The liability of the shareholder is limited to the extent of the value of shares held by him. Beyond that the shareholder is not having liability. If the company is wound up the equity shareholders is having the last in the queue. The employees, secured credits, taxes etc., are given priority for settlement. If there is no excess after full settlement the equity shareholders may not get anything. The author came across on interesting Supreme Court judgment on the right of the shareholder on the property of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company which has been decided in the year 1954. The said judgment is discussed in this article. In Bacha F. Guzdar V. Commissioner of Income Tax 1954 (10) TMI 2 - SUPREME Court the appellant as a shareholder in two tea companies received dividends totaling to ₹ 2750/-. The two companies carried on business of growing, manufacturing and sale of tea. 40% of the income of the tea companies was taxed as income from the manufacture and sale of tea and 60% of the income was exempt from Income Tax as agricultural income. The Income tax Department claimed tax on the total dividend received. The appellant contended that the income of the tea companies to the extent of 60% agricultural income which is exempted from income tax. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As such the tax proportionate to the exempted income is also to be exempted. The Department contended that the dividend is not an agricultural income and therefore the whole of income is liable to be taxed. The Supreme Court held that agricultural income as defined in the Act is obviously intended to refer to the revenue received by direct association with the land which is used for agricultural purposes and not by directly extending it to cases where that revenue or part thereof changes hands either by way of distribution of dividends or otherwise. The Supreme Court explained the nature of dividend payment. The dividend is derived from the investment made in the shares of the company. The foundation of paying dividend rests on the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntractual relations made between the company and the shareholders. The dividend is payable only if the company acquires profit. The dividend is not derived by a shareholder by his direct relationship with the land. Initial source which has produced the revenue is land used for agricultural purposes. The Supreme Court held that to give the words revenue derived from land the unrestricted meaning, apart from its direct association or relation with the land, would be quite unwarranted. The Supreme Court further held that a shareholder acquires a right to participate in the profits of the company may be readily conceded but it is not possible to accept the contention that the shareholder acquires any interest in the assets of the company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The use of the word assets cannot be exploited to warrant the inference that a shareholder, on investing money in the purchase of shares becomes entitled to the assets of the company and has any share in the property of the company. A shareholder has got no interest in the property of the company though he has undoubtedly a right to participate in the profits if and when the company decides to divide them. The Supreme Court further analyzed the role of the shareholders. The shareholders of the company have the sole determining voice in administering the affairs of the company. The shareholders are having the right by the provisions of the Company Law and Articles of association to participate in the profit of the company by means of di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vidend. The interest of the shareholder either individually or collectively does not amount to more than a right to participate in the profits of the company. The Supreme Court held that the company is a juristic person and is distinct from the shareholders. It is the company which owns the property and not the shareholders. There is nothing in the Indian law to warrant the assumption that a shareholder who buys shares buys any interest in the property of the company which is a juristic person entirely distinct from the shareholders. The appellant contended that the position of shareholders in a company is analogous to that of partners in the partnership. The Supreme Court rejected this contention as inaccurate. Partnership is merely an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... association of person for carrying on the business of partnership and in law the firm name is a compendious method of describing the partners. Such is not the case of a company which stands as a separate juristic entity distinct from the shareholders. The Supreme Court relied on the law regarding the attributes of shares as stated in Halsbury s Laws of England. According to this a share is a right to a specified amount of the share capital of a company carrying with it certain rights and liabilities while the company is a going concern and in its winding up. The shares or other interest of any member in a company are personal estate transferable in the manner provided by its articles and are not of the nature of real estate. The Supre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court further held that if the contention of the appellant is accepted will be tantamount to saying that the creditor recovering interest on money debt due from the agriculturists who pays out of the produce of the land is equally entitled to the exemption. The above discussion of the Supreme Court clearly lays that a shareholder has no vested interest in the properties of the company. - - Scholarly articles for knowledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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