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PETITIONER: COMMISSIONER OF INCOME-TAX, WEST BENGAL

       Vs.

RESPONDENT: CENTRAL INDIA INDUSTRIES LTD.

DATE OF JUDGMENT07/09/1971

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. GROVER, A.N.

CITATION:  1972 AIR  397            1972 SCR  (1) 619

ACT: Income  tax Act 1922, s. 16(2)--Parent company  distributing dividend  to assessee company partly in cash and  partly  in scrips-In computing income of assessee company from dividend said  scrips  whether to be valued at face value  or  market value-Considerations.

HEADNOTE: The  assessee  company  was holding  certain  shares  in  an investment company which was its parent company.  The amount of  dividend receivable by the assessee company was paid  to it  partly in cash and partly in share scrips of  two  other companies.   The relevant assessment year was 1959-60.   For the purpose of assessment under the Income-tax Act, 1922 the Income-tax  Officer valued those shares as per their  market value on the date on which those shares became the assets of the  assessee company.  He therefore added to the amount  of dividend  purported  to  have been declared  a  sum  of  Rs. 61,500/- in computing the assessable income of the  assessee company.   The Appellant Assistant commissioner  upheld  the order of the Income-tax Officer and rejected the  contention of  the assessee company that those shares should be  valued as   per  their  face  value.   The  Tribunal  allowed   the assessee’s appeal on the grounds that : (i) the distribution of share scrips was not a distribution of dividend, (ii) the share  scrips  received  by the assessee  company  had  been valued  at  their  face value in the  hands  of  the  parent company  for  the purpose of assessment of its  profits  and (iii)  the assessee company had not sold the shares  and  so there  could be no profit in respect of those  shares.   The High.  Court accepted the first two grounds relied on by the Tribunal.   In addition it relied on the  circumstance  that under  s. 18(5) of the Act, the assessee can get  refund  of tax only on the basis on which the parent company was taxed. The  certificate  granted by the High Court for  appeal  to, this  Court was found to be invalid because it did not  give any  reasons.   This Court however allowed  the  revenue  to appeal  by  special  leave.  On  behalf  of  the  respondent assessee it was submitted that on a proper interpretation of the  relevant  provisions of the Income-tax  Act,  1922  the scheme  of the Act in the matter of levying tax on  dividend income  was  that  the Income-tax  Officer  should  adopt  a uniform  method  in  assessing both  the  company  declaring

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dividend  as  well  as  its  shareholders  who  receive  the dividend. HELD  : (i) It is well settled by the decision  in  Kantilal Manilal’s  case  that dividend need not  be  distributed  in money  only.  It may be distributed by delivery of  property or right having monetary value., [623 B] Kantilal  Manilal  and Ors. v. Commissioner  of  Income-tax, Bombay  North,  Kutch and Saurashtra, Ahmedabad,  67  I.T.R. 315, applied. Further  the question whether a dividend has  been  lawfully distributed  or  not  is also irrelevant in  the  matter  of bringing  the  dividend  declared  to tax  so  long  as  the distributing   company  passes  a  resolution   distributing dividends.   In  so doing the distributing company  may  act illegally  and thereby incur penalties.  But yet the  amount so  distributed as dividend is assessable in the,  hands  of receiver of the dividend in view of s. 16(2) which  provides that for the purpose of inclusion in the total income of an 620 assessee,  any dividend shall be deemed to be income of  the previous year in which it is paid. [623 C-D] Kishnichand  Chellaram and Ors. v. Commissioner  of  Income- tax, Bombay, 36 I.T.R. 640, relied on. (ii)It is well known that the face value of shares need not be  their real value at a given point of time.  It would  be wrong  to say that when shares are distributed as  dividend, the  person who receives them gets only their face value  in terms of money.  What he really receives is the market value of those shares as on the date he ’became entitled to  those shares.  The value of the shares distributed does not depend on  the  valuation made by the  distributing  company.   The income  earned  by an assessee has to be determined  by  the authorities under the Act and not by a third person.  If  it is otherwise several companies may distribute their dividend in  kind  and undervalue the goods distributed  and  thereby facilitate evasion of tax by their share-holders. [623 G-624 B] (iii)The question whether the shareholder retains those shares  or  sells  them  to others  at  profit  or  loss  is irrelevant.  An income does not cease to be an income merely because the person who receives it retains it in his  hands. The  fact  that  he receives it in kind does  not  make  any difference  in  principle.   The  Tribunal  went  wrong   in thinking  that  as the assessee company had  retained  those shares  in  its own hands those shares should be  valued  at their face value. [623 E-H] (iv)The  Tribunal  and the High Court also  went  wrong  in holding  that it was not open to the authorities  under  the Act  to  value the shares differently in the  hands  of  the assessee  company  when they had valued them at  their  face value in assessing the parent company.  The assessee company could  not insist that the error should also be  carried  to the  assessment  of the assessee company.  No one  gets  any vested right in an erroneous order. [624 G-H] (v)Because  of  erroneous valuation of the shares  in  the hands  of the parent company, the assessee  may  conceivably get  a  lesser  amount as refund under  s.  18(5)  but  that circumstance  could not alter the levy to be imposed on  the assessee  company.  There is no provision in the  Act  which makes  the  assessment of income dependent on  refund.   The provisions relating to assessment are independent of  refund through  the  provisions relating to refund  may  depend  on assessment. [625 E-G] The appeal must accordingly be allowed.

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JUDGMENT: CIVIL  APPELLATE  JURISDICTION: Civil Appeals Nos.  2347  of 1968 and 1175 of 1971. Appeals  by certificate/special leave from the judgment  and order dated November 15, 1967 of the Calcutta High Court  in Income-tax Reference No. 155 of 1963. S.T. Desai, B. B. Ahuja, R. N. Sachthey and B. D. Sharma, for the appellant (in both the appeals). B.Sen,  N. R. Khaitan, B. P. Maheshwari and Krishna  Sen, for the respondent (in both the appeals). 621 The Judgment of the Court was delivered by Hegde, J. These appeals arise from the decision of the High. Court  of  Calcutta  in a Reference under s.  66(1)  of  the Indian  Income-tax Act, 1922 (to be hereinafter referred  to as  the Act).  That was a Reference made by  the  Income-tax Appellate Tribunal, ’A’ bench, Calcutta.  In that  Reference after stating the case, the Tribunal referred the  following question for obtaining the opinion of the High Court.               "Whether   on    the   facts   and   in    the               circumstances of the case the  Tribunal               rightly excluded the sum of Rs. 61,656/- from               being assessed as an extra dividend income  of               the assessee." The  High Court answered that question in  the  affirmative. Aggrieved by that decision, the Commissioner of West  Bengal has brought Civil Appeal No. 2347 of 1968 on the strength of the certificate issued by the High Court under s. 66-A(2) of the Act.  But the certificate given by the High Court is not supported  by any reason.  Hence the same cannot be held  to be  a valid certificate.  Because of the invalidity  of  the certificate that appeal must be held to be not maintainable. In  order  to get over this  difficulty,  the,  Commissioner moved  this  Court for special leave to appeal  against  the judgment  of  the High Court.  Special Leave asked  for  was granted  after condoning the delay in filing the appeal  and the  appeal arising therefrom was numbered as  Civil  Appeal No. 1175 of 1971. The assessee is a company.  Herein we are concerned with its assessment  for  the assessment year 1959-60,  the  relevant previous  year  ending  on March  31,  1959.   The  assessee company  was  holding 458,071 shares  In  Pilani  Investment Corporation  Ltd. (which will hereinafter be referred to  as the "parent company").  As per the resolution of the  parent company declaring the dividends, the assessee company became entitled to receive on November 18, 1958 dividend  amounting to  Rs. 1,83,228/40 Np. That was at the rate of 40 N.P.  per share.   The amount of dividend receivable by  the  assessee company  was paid to it partly in cash and partly  in  share scrips.   It  may  be noted at this stage  that  the  parent company   is  an  investment  company.   The  share   scrips delivered  to  the assessee company were  of  M/s.   Gwalior Rayon  and Silk Manufacturing Co. Ltd. and Hind Cycles  Ltd. The  Income-tax  Officer valued those shares  as  per  their market  value on the date on which those shares  became  the assets  of the assessee company.  The market value of  those shares  on  that date was Rs.  2,44,526/-.   He,  therefore, added  to  the  amount of dividend purported  to  have  been declared, a sum of Rs. 61,500/- in computing the  assessable income of the assessee 622 ,company.   Aggrieved  by that order, the  assessee  company went ,up in appeal to the Appellate Assistant  Commissioner.

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The Appellate Assistant Commissioner upheld the order of the Income-tax  Officer  and  rejected  the  contention  of  the assessee company, that those shares should be valued as  per their  face value.  Thereafter the assessee company took  up the matter in second appeal to the Appellate Tribunal.   The Tribunal  allowed  the assessee’s appeal.  It held  that  in order  to  bring  any distribution within  the  category  of dividend,  it  must  be  proved as  a  fact  that  what  was distributed by the company was its accumulated profits.  The Tribunal  appears  to  have  been  of  the  view  that   the distribution  of  share  scrips was not  a  distribution  of profits.    Hence  their  value  cannot  be  considered   as dividend.  One other reason which persuaded the Tribunal  to accept the appeal of the assessee company was that the share scrips  received by the assessee company had been valued  at their face value in the hands of the parent company ’for the purpose of assessment of its profits.  The Tribunal  thought that  it  was impermissible for the  Income-tax  Officer  to value those shares in one manner in the hands of the  parent company  and in another manner in the hands of the  assessee company.   Yet another consideration that weighed with  the, Tribunal  was that the assessee company had not  sold  those shares.   Therefore it made no profits in respect  of  those shares.   So  long as it retained those shares in  its  ,own hands, it cannot be said that it made any profits in respect of  those  shares as it cannot be said that  it  sold  those shares  to  itself  for  a higher  price.   The  High  Court accepted  the first two grounds relied on by  the  Tribunal. In  addition  it relied on the circumstance  that  under  s. 18(5) of the Act, the assessee can get refund of tax only on the basis on which the parent company was taxed. Before proceeding to examine the correctness of the  conclu- sions  reached  by the Tribunal and the High  Court,  it  is necessary  to note at this stage that one other  firm  which was  a shareholder of the parent company is  Ujjain  General Trading  Society (P) Ltd.  During the assessment year  1959- 60. the assessment year with which we are concerned in these appeals  in  accordance with the  aforementioned  resolution dated  November  18, 1958, that Company had also  been  paid dividend by the parent company partly in cash and partly  in shares of Gwalior Rayon and Silk Manufacturing Co. Ltd.  and Hind  Cycles Ltd.  In the assessment of that firm also,  the question arose whether it was open to the Income-tax Officer to  value the shares distributed to that company at a  price higher  than  its face value.  The facts of  this  case  and that, case are identical.  Therein the Appellate Tribunal (a different  Tribunal)  held that it was  permisible  for  the Income- 623 tax  Officer  to do so.  In appeal the Madhya  Pradesh  High Court upheld the decision of the Tribunal-see Ujjain General Trading  Society  (P) Ltd. v.  Commissioner  of  Income-tax, Delhi(1).   Thus, on the same question of law two  different High Courts have arrived at two different conclusions. It  is  now well settled by the decision of  this  Court  in Kantilal  Manilal  and ors. v.  Commisioner  of  Income-tax, Bombay  North,  Kutch  and  Saurashtra,  Ahmedabad(1)   that dividend  need not be distributed in money only.  It may  be distributed by delivery of property or right having monetary value.   Further, the question whether a dividend  has  been lawfully  distributed or not, in the matter of bringing  the dividend  declared to tax is also irrelevant so long as  the distributing   company  passes  a  resolution   distributing dividends.   In so doing, the distributing company  may  act illegally  and thereby incur penalties.  But yet the  amount

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so distributed as dividend is assessable in the hands of the receiver of the dividends in view of S. 16(2) which provides that for the purpose of inclusion in the total income of  an assessee,  any dividend shall be deemed to be income of  the previous  year in which it is paid.  This position  is  made clear by the decision of this Court in Kishinchand Chellaram and ors. v. Commissioner of Income-tax Bombay(3).  Therefore the  question  whether dividend distributed  by  the  parent company  was  out of the profits of that company or  not  is immaterial  though in view of s. 205 of the  Companies  Act, 1956 and S. 2(6A) of the Act, only the profits earned in the year  of assessment and the accumulated profits  could  have been  distributed as dividends.  All that we have to see  is as to what is the income received by the assessee company in the  shape  of  dividends.  We have earlier  seen  that  the income  received by the assessee company need not be in  the shape  of cash only.  It may also be some other property  or right which has monetary value.  Therefore when dividend  is received  in  kind,  in order to find out  the  true  income received by an assessee, the property that has been received by  him has to be valued on the basis of its  market  value. Otherwise it is not possible to compute the income  received by him.  It is well known that the face value of shares need not  be  their  real value at a given point  of  time.   The market price of particular shares may be very much more than their  face value or very much less.  It would be  wrong  to say  that  when  shares a-re distributed  as  dividend,  the person who receives them gets only their face value in terms of  money.  What he really receives is the market  value  of those  shares  as on the date he became  entitled  to  those shares.  The value of (1) 67 I.T.R. 315.       (2) 41 T.T.R. 275. (3)46 T.T.R. 640. 624 the shares distributed does not depend on the valuation made by  the  distributing  company.  The  income  earned  by  an assessee  has to be determined by the authorities under  the Act  and not by a third person.  If it is otherwise  several companies may distribute their dividends in kind and  under- value  the goods distributed and thereby facilitate  evasion of  tax  by  their  share holders.   Acceptance  of  such  a contention  will  be  destructive  of  ,the  very  basis  of taxation   of   dividends.    The   question   whether   the shareholder- retains those shares or sells them to others at profit  or loss is irrelevant.  An income does not cease  to be  an  Income  merely because the person  who  receives  it retains  it in his hands.  The fact that he receives  it  in kind  makes no difference in principle. What is  brought  to tax in the concerned assessment year is theincome received by the assessee and not the profits earned by himby dealing with  that income.  In our opinion, the Tribunal went  wrong in thinking that as the assessee company had retained  those shares  in  its own hands those shares should be  valued  at their  face  value.  At this juncture, it  is  necessary  to mention that in some previous years also the parent  company had  distributed a portion of its share holding as  dividend to its share holders.  It appears, in those years the market value of those shares was less than their face value and the parent  company valued those shares for the purpose  of  its income tax on the basis of market value and not according to their face value.  The parent company appears to believe  in the saying "Heads I win tails you loose".  But that is  only by  the  way.  The only question that we have to  decide  is what  is the income received by the assessee company  during the  assessment  year  in question-the income  in  the  real

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sense.  On this question there can be no two answers and the only  answer is that the income received by it is  the  cash amount  received plus the value of the  shares  received-the real value of the shares as on the date the asesssee company became entitled to it. Both  the  Tribunal and the High Court  have  attached  con- siderable  importance to the fact that while  assessing  the parent  company,  the assessing authority had  valued  those shares at their face value.  That being so, they have opined that  it  was not open to the authorities under the  Act  to value those shares differently in the bands of the  assessee company.   Here  again  we are unable  to  appreciate  their reasoning.  Ile fact that the Department incorrectly  valued those  shares  in the hands of the parent company  does  not confer  a right on the assessee company to insist  that  the error  should  also  be carried to  the  assessment  of  the assessee  company.   No  one  gets  a  vested  right  in  an erroneous  order.   Because of erroneous  valuation  of  the shares in the hands of the parent company, the assessee  may conceivably get a lesser amount 625 as refund under s. 18(5) but that circumstance cannot  alter the levy to be imposed on the assessee company. Mr. B. Sen, learned Counsel for the assessee company,  tried to  give a different shape to the case in the course of  his argument.  He,  in our opinion , rightly did  not  base  his arguments on thegrounds  relied on by the  Tribunal  and the  High Court. On theo ther hand, he contended that  on  a proper interpretation of therelevant  provisions  of   the Act,  it  would be seen that the schemeof the  Act,  in  the matter of levying tax on dividend income is that the Income- tax Officer should adopt a uniform method in assessing  both the company declaring dividends as well as its  shareholders who receive the dividend.  In support of this theory of  his he relied on ss. 12(1-A), 16(2), 18(5), 20 and 35 (9) of the Act.   Dividend is treated as income in view of S.  12(1-A). Net  dividend received by the shareholder is grossed up  for inclusion  in  the  total income of the  assessee  under  s. 16(2).  Section 18(5) provides for refund of the tax paid on the  dividend  income by the company which  has  distributed dividend.   Section  20  provides  for  the  issuance  of  a certificate showing the gross dividend, tax payable on  that dividend  and the net dividend.  Section 35(9) empowers  the Income-tax  Officer to recover from the person who  receives dividend  the  tax in respect of the same,  payable  by  the company which distributed the dividend but in fact not  paid by that company within the prescribed time.  On the basis of these provisions, he urged that if the dividend paid in kind is  valued in one manner in the hands of the  company  which distributed it and in a different manner in the hands of the person  who received it, then the assessee will not be  able to  get the refund to which he would have been  entitled  to had  that property been valued properly in the hands of  the distributing  company.   Therefore, he urged  that  we  must spell out the scheme put forward by him.  Ingenious,  though the  argument  is, it rests on no foundation.  There  is  no provision  in the Act which makes the assessment  of  income dependent on refund.  The provisions relating to  assessment are independent of refund though the provisions relating  to refund  may depend on assessment.  Equitable  considerations are not relevant in interpreting the provisions of a  taxing statute, apart from the fact the equity pleaded in this case is remote possibility.  None of the provisions relied on  by Mr.  Sen  afford  any  basis for the  scheme  sought  to  be established by him.

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In  our  opinion  the  High Court  erred  in  answering  the question referred to it in the affirmative and in favour  of the assessee.  For the reasons’ mentioned above we discharge that answer and answer that question in the negative and  in favour of the Department. L 3Sup.C.T./-/2 626 costs.  Civil Appeal No. 2347 of 1968 is dismissed as  being not maintainable but without any order as to costs. G.C, C.A. No. 1175 of 1971 allowed. C.A. No. 2347 of 1968 dismissed. 627