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PETITIONER: KANTILAL MANILAL AND ORS.

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME-TAX, BOMBAY

DATE OF JUDGMENT: 22/11/1960

BENCH: SHAH, J.C. BENCH: SHAH, J.C. KAPUR, J.L. HIDAYATULLAH, M.

CITATION:  1961 AIR 1038            1961 SCR  (2) 584

ACT: Income-tax--Distribution  of new shares at half  the  market value--If       amounts       to       distribution       of dividend--Assessment--Reopening  of--The  Indian  Income-tax Act, 1922 (11 of 1922), SS. 2(6A) (a), 66(1).

HEADNOTE: The  appellants  were  shareholders of a  company  known  as Navjivan  Mills Ltd. which held a large number of shares  of the  Bank of India.  The Bank with the object of  increasing their  share capital offered some more shares to  the  Mills for  a  price  including premium which was  about  half  the market  value.   The Mills purchased a small number  of  the shares so offered with their own funds and distributed their right to acquire the remaining shares to their  shareholders in  the proportion of two shares of the Bank for  one  share held by them.  The assessment of   the     appellant     was reopened by the Income Tax Officer under s.  34(1)(a) of the Income-tax Act on the footing that the release of the  right to the shares of the Bank of India amounted to  distribution of  dividend.  Appeals against the order of the  Income  Tax Officer having failed, the High Court at the instance of the appellants framed the following question:- "Whether  on  the facts and circumstances of the  case,  the distribution  of  the right to apply for the shares  of  the Bank  of  India  by Navjivan Mills Ltd.  in  favour  of  the assessees amounted to a distribution of "dividend"? 585 The High Court answered the question in the affirmative.  On appeal with a certificate of the High Court, Held, that the view taken by the High Court was correct. The  distribution  to the shareholders of the Mills  of  the right  to  obtain two shares of the Bank of India  for  each share  held  by them at half the market  value  amounted  to distribution of "dividend" which was liable to be taxed.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 364 of 1957. Appeal from the judgment and order dated February 22,  1956,

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of the former Bombay High Court in I.T.R. No. 31/1955. N.   A. Palkhivala and I..N. Shroff, for the Appellants. A. N. Kripal and D. Gupta, for the Respondent. 1960.  November 22.  The Judgment of the Court was delivered by SHAH,  J.-This is an appeal by seven appellants  with  leave granted by the High Court of Judicature at Bombay certifying that it involves a question of importance. The  appellants held 570 out of a total issue of 800  shares of the Navjivan Mills Ltd., Kalol, a public limited company- hereinafter  referred  to as the Mills.  Between  the  years 1943-47,  the  Mills purchased 5,000 shares of the  Bank  of India  Ltd.   At  an extraordinary general  meeting  of  the shareholders  of  the Bank of India held on May 6,  1948,  a resolution  was passed increasing the share capital  of  the Bank  and  for  that  purpose offering  new  shares  to  the existing shareholders in the proportion of one new share for every three shares held by the shareholders.  The face value of  the  new shares was to be Rs. 50, but  the  shares  were issued at a premium of Rs. 50.  The shareholders had to  pay Rs.  100  for each new share.  The Mills as  the  holder  of 5,000 shares became entitled to receive 1,6662 shares of the Bank of India at the rate of Rs. 100 per share.  The Bank of India  communicated its resolution by letter dated  May  25, 1948  and  enclosed  therewith  three  forms,  form  A   for acceptance, form 586 B  for renunciation and ’form C which may  compendiously  be called  a form for allotment to nominees.  On receiving  the circular  letter,  the  Directors of the  Mills  passed  the following resolution: "Resolved  that  the  company  having  a  holding  of  5,000 ordinary  shares  in the capital of the Bank of  India  Ltd. having  now received an intimation from the said  Bank  that this company is entitled to get 1,6662 more ordinary  shares on  payment of Rs. 50 as capital and Rs. 50 as  premium  per each share and it is considered proper to invest in the said issue  of  the said Bank the funds of this  company  to  the extent of 66 shares only and to distribute the right of this company  to  the remaining 1,600 shares of  the  said  issue amongst  the shareholders of this company in the  proportion of  the shares held by them in this company.  IT  IS  HEREBY RESOLVED  that the funds of this company may be invested  in the  66 shares out of 1,666 shares offered by ’the  Bank  of India  Ltd., and the right to the remaining 1,600 shares  is hereby  distributed among 800 shares of this company in  the proportion  of  right  to two shares of  the  Bank  per  one ordinary share held in this company. The   Managing  Agents  may  take  steps  to  intimate   the shareholders to exercise the right if they like to do so." Accordingly, the Mills exercised the right to take over only 66  shares out of the shares offered and resolved  that  the right  to the remaining 1,600 shares be distributed  amongst its  800 share holders.  The seven appellants as holders  of 570  shares of the Mills became entitled to 1,140 shares  of the  Bank of India.  The appellants agreed to the  allotment of these shares and ultimately transferred them to a private company--Jesinghbai Investment Co.’ Ltd. The  assessment  of  the  seven  appellants  and  of   other shareholders of the Mills was reopened under s. 34(1)(a)  of the  Indian Income Tax Act by the Income Tax Officer on  the footing that, the release by the Mills of the shares of  the Bank  of India amounted to a distribution of "dividend"  and the   value  of  the  right  released  in  favour   of   the shareholders though taxable

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587 under  s. 12 of the Act, had escaped tax.  The order of  the Income  Tax  Officer  reassessing the income  of  the  seven appellants   was  confirmed  in  appeal  by  the   Appellate Assistant  Commissioner and by the Appellate  Tribunal.   At the instance of the appellants, the i following question was submitted by the Tribunal to the High Court at Bombay  under s. 66(1) of the Income Tax Act: "Whether  on  the facts and circumstances of  the  case  the distribution  of  the right to apply for the shares  of  the Bank  of  India  by Navjivan Mills Ltd.  in  favour  of  the assessees  amounted to a distribution of  "dividend"  within the meaning of s. 2(6A) of the Indian Income Tax Act." The High Court reframed the question as follows: "Whether  on  the facts and circumstances of the  case,  the distribution  of  the right to apply for the shares  of  the Bank  of  India  by Navjivan Mills Ltd., in  favour  of  the assessees  amounted  to a distribution of  "dividend"?"  and answered it in the affirmative. The High Court observed that the definition of "dividend" in s. 2(6A) was an inclusive and not an exhaustive  definition, and  even if the distribution of the right to the shares  of the  Bank of India could not be regarded as dividend  within the extended meaning of that expression in s. 2(6A), it  was still   dividend  within  the  ordinary  meaning   of   that expression  and  was taxable as income in the hands  of  the appellants. Counsel for the appellants contended that the High Court was not  justified,  having regard to the form of  the  question which expressly related to the distribution of the right  to the  Bank of India shares being dividend within the  meaning of  the  definition in s. 2(6A) of the Income  Tax  Act,  in enlarging  the scope of the question and in answering it  in the light of its ordinary meaning.  There is no substance in this  contention.   "Dividend"  is defined in  s.  2(6A)  as inclusive  of various items and exclusive of certain  others which it is not necessary to set out for the purpose of this appeal.  "Dividend" in its ordinary meaning is a 588 distributive  share  of the profits or income of  a  company given to its shareholders.  When the Legislature by s. 2(6A) sought  to define the expression "dividend" it added to  the normal meaning of the expression several other categories of receipts  which may not otherwise be included  therein.   By the  definition  in s. 2(6A), "dividend" means  dividend  as normally understood and includes in its 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 s. 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.   In the question framed by the Tribunal,  there is  nothing to indicate that the High Court was called  upon to  advise  on  the question whether  the  receipts  by  the appellants  amounted  to dividend only within  the  extended definition of that expression in s. 2(6A). It  was  also urged that in nominating its  shareholders  to exercise the option to purchase the new issue of the Bank of India, the Mills did not distribute any dividend.  The Mills were,  it is true, not obliged to accept the offer  made  by the  Bank of India, however advantageous it might have  been to  the Mills to accept the offer: it was open to the  Mills to renounce the offer.  The Mills had three options, (1)  to accept  the shares, (2) to decline to accept the shares,  or

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(3)  to  surrender  them in favour of its  nominee.   It  is undisputed that when the shares were offered by the Bank  of India to its shareholders, the right to apply for the shares had a market value of Rs. 100 per share.  The face value  of the  new share was Rs. 50 but the shareholders had to pay  a premium  of Rs. 50, thus making a total payment of  Rs.  100 for acquiring the new share.  The new shares were quoted  in the market at more than Rs. 200: and the difference  between the amount payable for acquiring the shares under the  right offered by the Bank of India and the market quotation of the shares  was indisputably the value of the right.  The  Mills could not be compelled to obtain 589 this benefit if it did not desire to do so: it could  accept the shares or decline to accept those shares or exercise the option of surrendering them in favour of its nominees.  This last option could be exercised by nominating the persons who were to take over the shares and that is what the Mills did. The Mills requested the Bank of India to allot the shares to its nominees, and the request for allotment to its  nominees amounted  to transfer of the right.  By its resolution,  the Mills  in truth transferred a right of the value of Rs.  200 for   each  share  held  by  its  shareholders.   This   was manifestly not distribution of the capital of the Mills.  It was open to the Mills to sell the right to the shares of the Bank of India in the market, and to distribute the  proceeds among   the   shareholders.   Such  a   distribution   would undoubtedly have been distribution of dividend.  If  instead of selling the right in the market and then distributing the proceeds,  the  Mills directly transferred  the  right,  the benefit in the hands of the shareholders was still dividend. Dividend  need  not  be  distributed in  money;  it  may  be distributed by delivery of property or right having monetary value.   The  resolution,  it is true, did  not  purport  to distribute  the right amongst the shareholders as  dividend. It  did  not  also  take  the  form  of  a  resolution   for distribution  of dividend; it took the form of  distribution of  a right which had a monetary value.  But by the form  of the  resolution  sanctioning  the  distribution,  the   true character  of the resolution could not be altered.   We  are therefore  of  the  view that the High Court  was  right  in holding that the distribution of the right to apply for  and obtain two shares of the Bank of India (at half their market value) for each share held by the shareholders of the  Mills amounted to distribution of dividend. The appeal fails and is dismissed with costs.                                      Appeal dismissed. 75 590