A VEERAPPAN Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THESE three references raise a common question and it is whether certain amounts received by the respective assessees as dividends from a foreign company are assessable under the Indian Income-tax Act The facts are identical in the three cases, and we shall refer to these in T.C. No. 107 of 1960. The assessee is a merchant at Colombo. He held 2125 shares in a company called "Avra Ltd." which has its registered office in Colombo. During the accounting year relevant to the assessment year 1954-55, the assessee received as dividend a sum of Rs. 10 per share and this amount of Rs. 21, 250 so received by him was remitted to the taxable territory. The Income-tax Officer brought this amount to tax. Before him this amount was claimed to be exempt on the ground that it was paid out of the capital profits of the company. But the Income-tax Officer held that no materials had been placed before him as to the nature of the capital profits nor the period during which such profits had been made by the company.

(2.) HE accordingly proceeded to apply section 2(6A)(a) of the Indian Income-tax Act and held that this amount was assessable as dividend under the Act. An appeal was taken to the Appellate Assistant Commissioner. Before the appellate authority also it was not established how this amount represented capital profits. In the view of the Appellate Assistant Commissioner, this was a revenue receipt includible in the taxable income of the assessee. A further appeal to the Tribunal also failed. The Tribunal expressed its view that in so far as the sum invested in the purchase of the shares by the assessee was concerned, that represented his capital and that sum had been invested for the purpose of earning profits. The Tribunal stated that what the assessee received from the company was the profits of the company and while in the hands of the company they might be capital profits, in the hands of the assessee they were merely profits.

(3.) A net profit of Rs. 1, 28, 324-15 nP. was derived from the sale of these items. At a meeting of the directors of the company, it was resolved to declare a ten per cent. dividend on the paid-up capital. In pursuance of this resolution, dividend warrants were issued. According to the warrants, no deduction of income-tax was made, apparently for the reason that the company was not liable to pay income-tax on the profits of which the dividend formed part. It is not denied that the three assessees received the sum of Rs. 21, 250, Rs. 21, 250 and Rs. 27, 450, on the shares held by them It is contended by Mr. Narayanaswami, learned counsel for the assessee, that this is a capital profit which is not liable to the tax. Apart from these contentions which will be referred to, reliance is placed in this regard upon the Explanation to section 2(6A), which reads