LAWS(MAD)-1941-9-4

COMMISSIONER OF INCOME TAX Vs. P RAMASWAMY CHETTIAR

Decided On September 15, 1941
COMMISSIONER OF INCOME-TAX, MADRAS Appellant
V/S
P RAMASWAMY CHETTIAR. Respondents

JUDGEMENT

(1.) 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.

(2.) 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 July 11, 1939. During the year ending March 31, 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(6A) 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.

(3.) THE shareholders of the Laxmi Mills Company have received no portion of the profits which were made in the years ending March 31, 1938 and the March 31, 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.