Commissioner of Income Tax vs P. Ramaswamy Chettiar

Alfred Henry Lionel Leach, C.J.—The question referred must be answered against the assessee and in the manner indicated by the

Commissioner in his statement of the case. There is overwhelming authority for the opinion expressed by the Department.

The assessee is a shareholder in the Lakshmi Mills Company, Limited, which carries on a spinning business at Coimbatore. For the year of

assessment (1940-1941) the assessee returned an income of Rs. 11,213-14-0 which included a sum of Rs. 10,000 said to be a dividend received

from the Lakshmi Mills Company, Limited. The Income Tax Officer discovered that the Rs. 10,000 had not been paid to the assessee in cash, but

represented the nominal value of certain bonus shares which had been allotted to the assessee in accordance with a resolution passed at a general

meeting of the company held on the 11th July, 1939. During the year ending the 31st March, 1939, the company had made a profit of Rs.

4,51,946-8-1. In the previous year a profit of Rs. 5,320-8-11 had been earned, but had not been distributed. The directors proposed that these

profits together with a sum of Rs. 1,42,732-15-0 taken from the general reserves of the company, making in all Rs. 6,00,000 should be capitalised

in the form of bonus shares and distributed to the shareholders in proportion to their holdings. This resolution was passed and in due course the

assessee received bonus shares of the value of Rs. 10,000, which represented the ""dividend"". The company had, of course, paid Income Tax on

its profits and was taxed at a higher rate than the assessee. Consequently he sought to recover from the Income Tax authorities the difference

between the amount the company had paid on the Rs. 10,000 and what he would have paid if the tax had been levied according to the rate

appropriate to his income. Section 2 (6-A) of the Income Tax Act says that the word ""dividend"" includes? inter alia distribution by a company of

accumulated profits, whether capitalised or not, if the distribution entails the release by the company to its shareholders of all or any part of the

assets of the company. By reason of this section the Income Tax authorities refused to recognise the claim for a refund. They said that the delivery

to the assessee of the bonus shares did not represent the payment of a dividend within the meaning of the Act. This is the question which forms the

subject-matter of the reference.

Now it is manifest that, unless the distribution of bonus shares amounts to a ""release"" of assets by the company to the shareholders, the assessee

cannot claim the Rs. 10,000 to be a dividend within the meaning of the Act. The House of Lords in Inland Revenue Commissioners v. Blott: Inland

Revenue Commissioners v. Greenwood (1921) 2 A.C. 171 held that a distribution of bonus shares does not represent the payment of a dividend,

and the reasoning there was applied by the Privy Council in Commissioner of Income Tax, Bengal v. Mercantile Bank of India, Ltd. In the former

case Lord Haldane said:

For the reasons I have given I think that it is, as matter of principle within the power of an ordinary joint stock company with articles such as those

in the case before us to determine conclusively against the whole world whether it will withhold profits it has accumulated from distribution to its

shareholders as income, and as an alternative not distribute them at all, but apply them in paying up the capital sums which shareholders electing to

take up unissued shares would otherwise have to contribute. If this is done the money so applied is capital and never becomes profits in the hands

of the shareholder at all. What the latter gets is no doubt a valuable thing. But it is a thing in the nature of an extra share certificate in the company-

His new shares do not give him an immediate right to a larger amount of the existing assets. These remain where they were. . The new shares

simply confer a title to a larger proportion of the surplus assets, if and when a general distribution takes place as in a winding up.

In the same case Viscount Finlay said:

The second contention of the Crown is that the allotment of the preference shares was equivalent to the payment of the bonus. To appreciate this

point it is necessary to consider closely what it was that the shareholder got. Did he get anything in the nature of payment of income? It is obvious

that he did not. He gave up any claim to the income. What might have been paid as income went to increase the capital of the company. The

shareholder got his proportionate share in the business of the company as increased by the additional capital.... Instead of his getting any dividend,

or anything in the nature of a dividend, the fund which might have been divided was impounded to increase the capital of the business. How is it

possible to treat any advantage accruing from this as a payment of income? The case differs toto coelo from a case in which a dividend is paid not

in money but in money''s worth by the delivery, say, of goods or of securities.

Coutts-Trotter, C.J., and Ramesam, J., applied the decision in Inland Revenue Commissioners v. Blott: Inland Revenue Commissioners v.

Greenwood (1921) 2 A.C. 171 in deciding The Commissioner of Income Tax Vs. Binny and Co. Ltd., , where it was sought to make the assessee

liable to super-tax on the value of bonus shares. It was held that the Indian Income Tax Act contained no such power. After quoting from the

judgment of Viscount Finlay in Inland Revenue Commissioners v. Blott; Inland Revenue Commissioners v. Greenivood (1921) 2 A.C. 171 Coutts-

Trotter, C.J., observed:

You cannot say that there is a notional payment of a dividend to a shareholder when the position is that, if he sued for it, his action must be

dismissed, that is to say, when the whole conception that he is entitled to the dividend is one that the law refuses to countenance.

The shareholders of the Lakshmi Mills Company have received no portion of the profits which were made in the years ending the 31st March,

1938 and the 31st March, 1939. The money representing the profits remains with the company. All that the shareholders have got are share

certificates representing the capitalisation of these profits and an additional sum taken from the reserve. Therefore there has been no release of

assets of the company to the shareholders.

It has been said by Mr. Subbaraya Aiyar that the capitalisation of these moneys has not been lawfully carried out. He admits that the company

has by reason of its memorandum and articles of association power to capitalise profits, but'' he says that the notice of the meeting contained no

intimation that this would be part of the business before the meeting. In saying this the learned advocate overlooks the fact that with this notice the

shareholders received a copy of the annual report in which the directors make the proposal to capitalise the sums making up the Rs. 6,00,000. The

Court is only concerned with the question referred, but assuming that the resolution had not been validly passed, even assuming that the meeting

had done something which by reason of the memorandum and articles of association it had no power to do, the assessee''s position here would be

in no way improved. The bonus shares received by him would still not represent dividend income, and he has received nothing but the bonus

shares.

We answer the question referred in the negative, and the assessee will pay the Commissioner''s costs Rs. 250.