Case Note & Summary
The appeal concerned seven shareholders of Navjivan Mills Ltd., a public limited company. They challenged the reassessment of their income by the Income Tax Officer under Section 34(1)(a) of the Indian Income-tax Act, 1922, treating the distribution of rights to acquire shares of Bank of India Ltd. as dividend. The appellants held 570 of 800 shares of Navjivan Mills. Between 1943 and 1947, the Mills purchased 5,000 shares of Bank of India Ltd. In May 1948, Bank of India increased its share capital and offered new shares to existing shareholders in proportion of one new share for every three held, at a price of Rs.100 per share (face value Rs.50 plus premium Rs.50). The Mills were entitled to approximately 1,666 new shares. The Directors resolved to subscribe for only 66 shares and distribute the right to the remaining 1,600 shares among the Mills' shareholders in proportion of two Bank shares for every one Mills share. The appellants, holding 570 Mills shares, became entitled to 1,140 Bank shares and ultimately transferred them to a private company. The Income Tax Officer reopened the assessments on the ground that the release of the right to the Bank shares amounted to distribution of dividend taxable under Section 12 and had escaped tax. The Appellate Assistant Commissioner and the Appellate Tribunal confirmed the reassessment. The Tribunal referred to the High Court the question whether the distribution of the right to apply for Bank of India shares amounted to dividend within the meaning of Section 2(6A). The High Court reframed the question without the restrictive phrase and answered in the affirmative, holding that the distribution was dividend both under the extended definition and the ordinary meaning. The appellants contended that the High Court had wrongly enlarged the scope of the referred question and that in nominating shareholders to exercise the option, the Mills did not distribute any dividend. The Supreme Court held that the definition of dividend in Section 2(6A) was inclusive and not exhaustive, and the expression included its ordinary meaning, which was a distributive share of profits or income given to shareholders. The right to apply for the Bank shares had a definite market value because the new shares were quoted at more than Rs.200 while the issue price was Rs.100. The Mills could have sold the right in the market and distributed the proceeds as dividend; directly transferring the right produced the same benefit. Dividend need not be in money; it may be by delivery of property or right having monetary value. The resolution's form could not alter the true character of the distribution. Therefore, the distribution of the right to obtain two Bank of India shares at half their market value for each share held in the Mills amounted to distribution of dividend. The appeal was dismissed with costs.
Headnote
A) Income Tax - Dividend - Definition and Scope - Indian Income-tax Act, 1922, Section 2(6A) - The term 'dividend' in its ordinary meaning is a distributive share of profits or income of a company given to its shareholders; Section 2(6A) is inclusive and not exhaustive and adds several categories of receipts to the normal meaning. The distribution by a company of a valuable right to acquire shares at half their market value to its shareholders falls within the ordinary meaning of dividend because it transfers a monetary benefit to shareholders. Held that such distribution of right to apply for shares amounted to distribution of dividend taxable as income. B) Income Tax - Assessment Reopening - Escaped Income - Indian Income-tax Act, 1922, Sections 34(1)(a), 12 - The Income Tax Officer reopened the assessment of shareholders under Section 34(1)(a) on the ground that the value of right to acquire Bank of India shares distributed by the company escaped tax as dividend under Section 12. The appellate authorities confirmed the reassessment. Held that reassessment was valid as the distribution constituted dividend. C) Income Tax - Reference to High Court - Scope of Question - Indian Income-tax Act, 1922, Section 66(1) - The High Court reframed the referred question to omit the phrase 'within the meaning of Section 2(6A)' because the definition is inclusive and not exhaustive; the court was entitled to consider the ordinary meaning of dividend. Held that the High Court did not err in enlarging the scope of the question as the reference required adjudication of whether the receipt was dividend in all senses.
Issue of Consideration
Whether distribution of right to apply for shares of Bank of India by Navjivan Mills Ltd. to its shareholders amounted to distribution of dividend within meaning of Section 2(6A) of Indian Income-tax Act, 1922
Final Decision
Appeal dismissed with costs. Supreme Court held distribution of right to apply for and obtain two shares of Bank of India at half their market value for each share held by shareholders of Mills amounted to distribution of dividend under Section 2(6A) of Indian Income-tax Act, 1922.
Law Points
- Dividend in ordinary meaning is distributive share of profits or income
- Section 2(6A) inclusive and not exhaustive
- distribution of valuable right by company to shareholders amounts to dividend
- dividend need not be in money
- form of resolution cannot alter substance of transaction
- High Court in reference could consider ordinary meaning of dividend
