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PETITIONER: COMMSSIONER OF INCOME TAX,  WEST BENGAL.

       Vs.

RESPONDENT: KAMAL BEHARI LAL SINGHA ETC.

DATE OF JUDGMENT16/08/1971

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

CITATION:  1971 AIR 2375            1972 SCR  (1) 225  CITATOR INFO :  R          1992 SC1495  (17,37)

ACT: Income Tax-Capital or Revenue-Tests for determining-Dividend paid by company out of accumulated capital gains received by company  in the shape of Salamis and Land  Acquisition  Com- pensation-Since  share holders took a share of  the  capital asset in which they were beneficially interested, receipt is capital receipt.

HEADNOTE: During   the  relevant  accounting  year  the   respondents- assesseereceived  a  certain  amount  as  dividend  from   a company.   A  part  of  the  amount  was  paid  out  of  the accumulated  capital  gains received by the company  in  the shape  of Salamis and land acquisition  compensation.   Such capital gains were taken to the reserve fund and  thereafter distributed as dividend.  On the question of the  taxability of that share of the dividend paid out of the capital  gains in the hands of the company the Income-tax Officer held  the same  was  taxable as "dividend."  The  Appellate  Assistant Commissioner held that the amount could not be considered as "dividend"  within  the  meaning of section,  2(6A)  of  the Income-tax Act, 1922, but the same was taxable as income  in the hands of the assessee.  The Tribunal confirmed the order of the Appellate Assistant Commissioner.  ’the High Court on reference answered in favour of the assessee. Dismissing the appeals, HELD:     It  is  well-settled  that in order  to  find  out whether  a receipt is a capital receipt or revenue  receipt, it  has to be seen what it is in the hands of  the  receiver and  not  its nature in the hands of the  payer.   In  other words,  the nature of the receipt is determined entirely  by its  character In the hands of the receiver and  the  source from  which  the  payment  is made has  no  bearing  on  the question. [417 G] The  assessees  Who were share-holders in the  company  were beneficially  entitled to the capital of the  company.   The amount  in question was not something earned by the  company in the course of its business.  Undoubtedly it was a capital receipt  in the hands of the company but that by  itself  is not sufficient.  It has to be seen whether it was a  capital receipt  in the hands of the assessee.  Since  the  assessee

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had  a  beneficial interest in the sum when it  was  in  the hands of the company, when that sum was distributed  amongst the share-holders of the company, each of the  share-holders took  a  share  of  the capital asset  in  which  they  were beneficially  entitled.  That being so, the receipt, in  the present casement also be considered as capital receipt.  The fact  that those sums were distributed as  "dividends"  does not change the true nature of the receipt. [229 D-G] 226 Commissioner of Income-tax, West Bengal v. Nalin Behari Lall Singha,  74  I.T.R.  749 and Trustees of the  will  of  H.K. Brodie (Deceased) v.     Commissioner of Inland Revenue,  17 T.C. 432, referred to.

JUDGMENT: CIVIL  APPELLATE JURISDICTION : Civil Appeals Nos.  1667  to 1673 to 1968. Appeals from the judgment and order dated August 30, 1967 of the  Calcutta High Court in Income-tax Reference Nos. 3,  6, 7, 8, 9, 10 and II of 1964. B. D. Sharma, for the appellant (in all the appeals). Sukumar-  Ghose and Swapna Ghosh, for the appellant  in  all the appeals), The Judgment of the Court was delivered by Hegde,  J. Two questions of law which arise for decision  in these appeals are:               "(1)  Whether on the facts and in the  circum-               stances  of the case of Tribunal was right  in               holding that the distribution to the  assessee               of the amount attributable to land acquisition               compensation  received  by the  Ukhara  Estate               Zamindaries Ltd. after 31st March, 1948 was in               the hands of the assessee, receipt  of               dividend within the meaning of Section 2(A) of               the   Indian Income-tax Act, 1922 ?               (2)   Whether   on  the  facts  and   in   the               circumstances  of  the case the  Tribunal  was               right  in  holding  that the  receipt  by  the               assessee of the amount attributable to selamis               realised  by  the  Ukhara  Estate  Zamindaries               Ltd., for grant of long-term leases after 31st               March,  1948  was a receipt of income  of  the               assessee  and  tax,able as the income  of  the               assessee from other sources?" On  both  these questions the decision  of  the  authorities under  the Indian Income-tax Act, 1922 (in brief the  Act  ) ,as well as that of the Tribunal was against the  assessees. But  disagreeing with the,, view taken by these  authorities ,the High Court answered both these questions in favour  -of the assessees.  The Commissioner of Income-tax, West  Bengal aggrieved  by  this decisions has brought these  appeals  to this Court on the strength of the certificates given by  the High Court. 227 As facts in each of these appeals are more or less  similar, it  is  sufficient if we set out the facts in  the  case  of Kamal  Behari Lal Singha, for the assessment  year  1950-51, the corresponding accounting year being 1356 B. S. ending On April  13, 1950.  It is said that Kamal Behari  Lal  Singha, who  will hereinafter be referred to as the assessee  was  a shareholder  in  the Ukhara Estate Zamindaries Ltd.  (to  be hereinafter  referred  to  as the  "company").   During  the relevant accounting year, the assessee received a sum of Rs.

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13,200 as dividend from the said company.  The said dividend was declared on October 19, 1949.  Out of that amount a  sum of Rs. 8,829 was paid out of the accumulated capital  gains, received  by  the company in the shape of Selamis  and  land acquisition compensation receipts after March 31, 1948. Such capital gains were taken to the reserve fund and  thereafter distributed  as dividends.  The remainder of  the  dividends was paid out of the balance of the profit and loss  account: In these appeals the dispute centers round the taxability of that  share of the dividend which has been paid out  of  the capital gains in the hands, of the company.  The  Income-tax Officer came to the conclusion that no dividend  distributed can  be considered as having been paid out of  the  "capital gains"  of  the company, therefore the same  is  taxable  as "dividend".  In appeal the Appellate Assistant  Commissioner accepted the contention of the assessee that the receipt  of Rs. 8,829cannot be considered as dividend within the meaning of s.2 (6A) of the Act but he held that the same is  taxable as  income in the hands of the assessee.  The Tribunal  con- firmed the order of the Appellate Assistant Commissioner It  is now well settled that in order to find out whether  a receipt  is a capital receipt or a Revenue receipt  one  has to. see what it is in the hands of the receiver and not  its nature  in  the  hands of the payer.  In  other  words,  the nature  of’ receipt is determined entirely by its  character in the hands. of the receiver and the source from which  the payment  is. made has no bearing on the question.  Where  an amount  is paid which, so far as the payer is concerned,  is paid  wholly or partly out of the capital, and the  receiver receives  it  as income on his part, the entire  receipt  is taxable  in the hands of the receiver.  Therefore  the  fact that  the  amount sought to be taxed in  these  appeals  was capital gains in the hands of the company is not a  relevant circumstance.  What 228 we have to see is what it was in the hands of the assessees. The  question  whether  a particular receipt  is  a  capital receipt  or  a  revenue  receipt  is  a  somewhat  difficult question  -,to decide though the principles bearing  on  the question  are  welt  settled.   The  application  of   those principles   to   a  given  set  of  facts   often   creates difficulties.  The decision by and ’,large depends upon  the facts of each case. So  far as the first question set out earlier  is  concerned the  same  is  settled  by the decision  of  this  Court  in Commissioner of Income-tax, West Bengal v. Nalin Behari Lall Singha (1).  The assessee therein was also one of the share- holders  of Ukhara Estate Zamindaries Ltd.  His case was  no different from that of the respondents herein.  But the only point that arose for decision in that appeal was whether the receipts  similar  to those we are considering here  can  be considered   as  ’dividends’?   This  court  answered   that question  in the negative.  This Court refused to go  in  to the question whether the same could be considered as  income @other than dividend.  Dealing with that contention this Court observed :               "Counsel for there venues ought to argue  that               the share of dividend which is not  chargeable               total  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 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

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             Tribunal and before the High Court." In  these appeals we have to decide what was left  undecided in that case. Coming  back to the question how Inexactly to draw the  line between a capital receipt and a revenue receipt in cases  of the  type  that are before us, one, can do  no  better  than refer  to the observations of Finley J. in Trustees  of  the Will  of  H. K. Brodie (deceased)  v.  Commissioner  Inland. Revenue (2).               "But, I think, the governing consideration  is               this:  the  question  be  ing,  was  the   sum               received  as income, one has to consider  what               was the source from which               (1) 74 I.T.R. 749.               (2) 17 T.C. 432 at p. 439.               2 29               it   was   received   and   what   were    the               circumstances  in which it was  received.   If               the  capital belonged to the person  receiving               the  sums--if  he  or  she  was   beneficially               entitled  not  only to the income but  to  the               capital  then  I should think that,  when  the               payments were made, they ought to be regarded,               and  would  be regarded, as  payments  out  of               capital,  but  where there is a right  to  the               income,  but the capital belongs  to  somebody               else,  then,  if payments out of  capital  are               made  and made in such a form that  they  come               into the hands of the beneficiaries as income,               it  seems to me that they are income  and  not               the  less income, not of the person  receiving               them,  but  in  the  hands  of  somebody  else               -capital." The  above observations, in our opinion, correctly  set  out the law. Let  us now turn to the facts of this case.   The  assessees were  shareholders in the company.  They  were  beneficially entitled  to  the capital of the company.  The  amount  with which we are concerned in these appeals was received by  the company  as Salamis and as compensation for the  acquisition of the lands of the company.  It was not something earned by the  company in the course of its business.  Undoubtedly  it was  a capital receipt in the hands of the company but  that by itself is not sufficient.’ We have next to see whether it was  a  capital receipt in the hands of  the  assessee.   As mentioned earlier, the assessee had a beneficial interest in that sum when it was in the hands of the company.  Therefore when  that sum was distributed amongst the  shareholders  of the  company, each of the shareholders took a share  of  the capital set in which they were beneficially entitled.   That being  so the receipt with which we are concerned  in  these appeals  must  also be considered as capital  receipt.   The fact  that those sums were distributed as  ’dividends’  does not  change  the true nature of the receipt.  A  receipt  is what it is and not what it is called. In the result these appeals fail and they are dismissed with costs-hearing fee one set. K.B.N.                                    ApPeal dismissed. 230