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PETITIONER: COMMISSIONER OF INCOME-TAX,  CALCUTTA

       Vs.

RESPONDENT: NALIN BEHARI LAL SINGHA ETC.

DATE OF JUDGMENT: 25/07/1969

BENCH: SHAH, J.C. (CJ) BENCH: SHAH, J.C. (CJ) RAMASWAMI, V. GROVER, A.N.

CITATION:  1970 AIR  388            1970 SCR  (1) 665  1969 SCC  (2) 310  CITATOR INFO :  F          1971 SC2375  (5)  F          1992 SC1495  (37)

ACT:     Income-tax Act, 1922, s. 2(6A)--Definition of  dividend- If  taxable dividend is exclusive of component  representing capital gains and not accumulated profits.

HEADNOTE:     In  assessment  proceedings for the  year  1949-50  the, respondents  claimed  that certain dividend  distributed  to them  by  a company was exempt from tax as the fund  out  of which  it was distributed represented capital gains and  not "accumulated profit" of the company.  The Income-tax Officer rejected the claim, but the Appellate Assistant CommissiOner held that a part of the total amount distributed represented capital  gains and not being dividend within the meaning  of s. 2(6A) of the Income-tax Act, 1922, the share  distributed to  the  share-holders out of that amount  was  exempt  from income  tax.   This  order was reversed  in  appeal  by  the Tribunal but the High Court, on a reference, held in  favour of the assessee.     On appeal to this Court,     HELD:   Dismissing  the  appeal:  The  proviso  to   the explanation  to  s. 2(6A)(a) clearly  enacted  that  capital gains  arising  after March 31, 1948 are not  liable  to  be included  within  the expression "Dividend".   Although  the definition   of  dividend  in  s.  2(6A)  is  an   inclusive definition  and  a receipt by share-holders which  does  not fall  within  the definition  may,  in  some  circumstances, regarded  as dividend within the meaning of the Act,  it  is difficult  on  that  account  to  hold  that  capital  gains excluded   from  the  definition  of  dividend  by   express enactment still fall within the charge of tax. According  to the  definition in s. 2(6A) only the proportionate share  of the member out of the accumulated profits (excluding capital gains  arising  in the excepted period) distributed  by  the company alone will be deemed the taxable component. [667 D]

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JUDGMENT:     CIVIL  APPELLATE JURISDICTION: Civil Appeal Nos. 736  to 739, 91-3 and 1621 of 1968.     Appeal  from  the judgment and order dated  December  2, 1964 of the Calcutta High Court in Income-tax Reference Nos. 131 of 1961 etc.     Jagdish Swarup,  Solicitor-General,  T.A.  Ramachandran, R.N.  Sachthey and B.D. Sharma, for the appellant  (in  ’all the appeals).     P.  Barman   Ranjit  Ghose and Sukumar  Ghose,  for  the respondents (in all the appeals). 666     The Judgment of the Court was delivered by     Shah,  Ag.  C.J.   In a  proceeding  for  assessment  to Income-tax  for  the year 1949-50 the respondents  in  these appeals  claimed that the dividend distributed by the  Ukhra Estate  Zamindaries  Ltd. was exempt from tax,  because  the fund  out  of  which  the dividend was distributed  did  not form  part of the "accumulated profits" of the Company.  The Income-tax  Officer rejected the contention and brought  the dividend  ’to  tax  in the hands  of  the  respondents.  The Appellate Assistant Commissioner held that Rs. 1,12,500  out of  a  total  amount of Rs.  2,24,000   distributed  by  the Company, represented capital gains arising to the Company on or  after April 1, 1948 and not being  dividend within   the meaning  of s. 2(6A)of the Income Tax Act, 1922,  the  share distributed  to  the  shareholders out of  that  amount  was exempt from income-tax. The order of the Appellate Assistant Commissioner was reversed in appeal by the Tribunal. In  the view  of  the Tribunal the definition of  ’dividend’  in  s. 2(6A) in force in the year of assessment was not exhaustive, and  if  the amount distributed was  "dividend  in  ordinary parlance  it became  chargeable under the  general  charging section",  and that clause 2(6A) "was concerned with  deemed dividends,  and  exclusion of certain capital gains  by  the proviso had no beating on the issue raised by the revenue"     The  following question referred by the Tribunal to  the High  Court  of  Calcutta .under s. 66( 1 )  of  the  Indian Income-tax Act:                   "Whether   on   the  facts  and   in   the               circumstances   of the case the amount of  Rs.               28,125 was rightly included as dividend in the               total   income   of  the  assessee   for   the               assessment year 1949-50?"               was answered in the negative. The Commissioner               has appealed to this Court.  with certificates               granted by the High Court.                   "Dividend’  in  its  ordinary  connotation               means the sum paid to or received by a  share-               holder proportionate to his share holding in a               company out of the total sum distributed.  The               relevant  part of the definition contained  in               s.  2(6A) of the Income-tax Act, 1922, in  the               year of assessment 1949-50 was as follows:                   "Dividend" includes--                    (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;                     Explanation.--The   words   ’accumulated               profits’  wherever they occur in  the  clause,               shall  not include ’capital profit’; 667

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                   Provided  further  that  the  expression               "accumulated  profits", wherever it occurs  in               this   clause,   shall   not  include  capital               gains arising before the I st day of April               1946 or after the 31st day of March, 1948." Dividend  distributed  by  a Company being a  share  of  its profits  declared as distributable among the  shareholders,’ is  not  impressed with the character of  the  profits  from which  it reaches the hands of the shareholder. It would  be therefore  difficult  to  hold that the  mere  fact  that  a distribution has been made out of the capital gains, it  has the  attributes  of  capital  gains  in  the  hands  of  the shareholders.  But  that  does not assist the  case  of  the Revenue, for the Legislature has expressly excluded from the content of dividend’, capital gains arising after March  31, 1948.     The  proviso  to the Explanation  clearly  enacted  that capital gains arising-after March 31, 1948 are not liable to be   included   within  the  expression   "dividend".    The definition  is,  it is true, an inclusive definition  and  a receipt  by  a shareholder which  does not fall  within  the definition  may possibly be regarded as dividend within  the meaning  of the Act unless the context negatives that  view. But  it  is difficult on that account to hold  that  capital gains  excluded from the definition of dividend  by  express enactment still fall within the charge of tax. According  to the  definition in s. 2(6A) of the Income-tax Act  only  the proportionate  share  of the member out of  the  accumulated profits   (excluding  capital gains arising in the  excepted period) distributed by the Company, alone will be deemed the taxable component.     There  is  now  warrant for the view  expressed  by  the Tribunal  that  the definition of ’dividend’  only  includes deemed  dividend. To hold that the capital gains within  the excepted period are not part of the accumulated profits  for the  purpose  of  the  definition  under  s.  2(6A)  and   a distributive  share  thereof does not on that  account  fall within the definition of ’dividend’ and  therefore of income chargeable to tax and still to regard them     as a part of accumulated  profits for the purpose of dividend  in     the popular  connotation  and to bring the share to tax  in  the hands of the shareholders is to nullify an express provision of  the  statute.   We  do not see any  reason  why  such  a strained construction should be adopted.     We  agree  with the High Court  that  the  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.     Counsel  for the Revenue sought to argue that  share  of dividend  which  is not chargeable to tax by virtue  of  the exemption clause is still liable to tax as income other than dividend.  But  no  such contention was  raised  before  the Tribunal or the High Court 668 and  no question was raised in that behalf. We will  not  be justified in entering upon the question which was not raised or argued before the Tribunal and before the High Court. The appeals fail and are dismissed with costs.  One hearing fee. R.K.P.S.           Appeals dismissed. 669