COMMISSIONER OF INCOME-TAX Vs. PRAMASWAMY CHETTIAR

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 the 11 July, 1939. During the year ending the 31 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.

(3.) 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/s. 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/s. Mercantile Bank of India,. Ltd. (1936) 71 M.L.J. 525 : L.R. 63 I.A. 457 : I.L.R. (1937) 1 Cal. 180 (P.C.) 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.