CALICO PRINTERS ASSOCIATION, LTD (MANCHESTER) BY AGENTS, THE METTUR INDUSTRIES, LTD Vs. COMMISSIONER OF INCOME-TAX

JUDGEMENT

(1.) The appellant is a sterling company incorporated in the United Kingdom. Messrs W. A. Beardsell & Co., Ltd., is a company incorporated under the Indian Companies Act, 1913, and has its registered office at Madras. Sir William Beardsell owned or controlled practically all the shares in the latter company. The applicant purchased from him 8190 ordinary shares sometime in 1940. Previously, it had purchased 4110 preference shares of the same company. A copy of the agreement relating to the purchase by the applicant from Sir William Beardsell is marked as Ex. T.A. It is necessary to set out material portions of this agreement on which ultimately the decision of the question referred to us in this case must depend. The preamble is as follows: Whereas (a) The vendor owns or controls all the shares in W. A. Beardsell & Co., Ltd (hereinafter called The Company ) a company incorporated under the Indian Companies Act, 1913, and having its registered office at Madras aforesaid. (b) The nominal capital of the company is Rs. 15,00,000 divided into 5,000 preference shares of Rs. 100 each and 10,000 ordinary shares of Rs. 100 each and all of the said capital has been issued. (c) The association has agreed to purchase from the vendor acting for himself and all other holders of shares in the company all the shares in the Company and the vendor has agreed to sell the same or procure the same to be sold to the Association at the price and upon the terms and conditions hereinafter appearing. Then follows the operative portion of the agreement, of which paragraphs 1 and 5 are as follows: 1. The Association shall (subject to the vendor carrying out his obligations under this Agreement) purchase from the vendor and the other holders of shares in the Company and the vendor shall sell or procure to be sold to the Association all the shares in the company for the sum of Rs. 14,00,000 (such price being subject to adjustment as hereinafter provided.) The said purchase price shall be paid as hereinafter provided. 5. The vendor hereby warrants to the Association that the net asset of the company as on the transfer date shall amount to the net sum of Rs. 14,00,000. The net assets shall for such purpose be ascertained by deducting the total of (a) all sums owing by the Company to its creditors as on the transfer date, (b) all sums owing or accrued or accruing due by the Company in respect of commissions, pensions or other sums due to employees and in respect of taxes, rates similar liabilities up to the transfer date (apportionment being made if necessary) and (c) any amount set aside in respect of a gratuity and/or pension Fund or in respect of other provisions for employees, (d) all dividend (less Indian Income-tax) accrued or accruing due on the preference shares up to the transfer date (apportionment being made if necessary) from the total of (a) the stock-in-trade of the Company as on the transfer date valued as hereinafter provided. (b) The furniture, baling press and other items like moveable assets valued in accordance with the past practice of the Company. (c) The amount owing to the Company by its debtors in respect of goods sold as on the transfer date assessed as hereinafter provided. (d) The cash in hand and at the Bank. (e) The shares held by the Company in Mettur Industries Limited taken at cost price. Paragraph 7 provides that the vendor, that is, Sir William Beardsell, shall be entitled to purchase and undertakes to purchase from the company all investments held by the Company other than the shares in Mettur Industrials Limited and such stock-in-trade of the company in excess of a total value of Rs. 5,50,000. Paragraph 9 is the most important for the purpose of this case, and it runs thus; The Association shall procure the Company to distribute to the vendor and the other persons who were on the 30 day of September, 1939, the holders of Ordinary shares in the Company by way of dividend on the ordinary shares a sum equal to the surplus of the assets over the liabilities of the Company as on the transfer date such surplus to be computed for the purpose of this clause by deducting from the value of the net assets ascertained in accordance with Clause 3 hereof the sum of Rs. 14,00,000 after all capital and revenue payments and liabilities (exclusive of share capital but including any liabilities which may arise in respect of taxation and trading losses up to the transfer date such liabilities to be apportioned to that date so far as may be necessary) due by the Company other than those mentioned in Clause 3 hereof shall have been paid or provided for together with all liability in respect of the dividend on the preference share up to the transfer date. Payment of such sum by way of dividend if any shall be made to the vendor and the other persons who were on the 30 day of September, 1939, the holders of ordinary shares in the Company as soon as is reasonably possible after the vendor shall have purchased from the Company the assets mentioned in Clause 7 hereof and a computation shall be made as soon as possible showing whether or not for the purpose of this clause such surplus exists. The vendor shall give to the Company a written indemnity in respect of all tax payable in respect of any dividend so paid. Paragraph 10 provides for the payment of the purchase price of Rs. 14,00,000 subject to such increase or diminution thereof as provided therein, and paragraph 12 for the delivery on the transfer date of share certificates held by the vendor and the other holders of shares in the company together with transfers executed by him and such other shareholders in favour of the applicant association or its nominees, whereupon the association shall become entitled to be registered or have its nominees registered as holders of the said shares.

(2.) The transfer date was 22nd April, 1940. On 5 October, 1942, Beardsell & Co., declared two dividends (1) a dividend on the ordinary share capital or 5 per cent. free of income-tax and surcharge, and (2) a bonus on the ordinary share capital of 8 3/4 per cent. free of income-tax and surcharge representing a sum equal to the excess over Rs. 14,00,000 of the net surplus of assets over liabilities of the company as on 30 September, 1939. The latter bonus was apparently declared in accordance with the provision in paragraph 9 of the agreement above

(3.) Under instructions from the assessee association a dividend warrant in respect of the bonus amount, Rs. 71,662-8-0 net was issued in the name of St. James Nominees, Ltd., Manchester, the nominees of the assessees. The dividend warrant was not endorsed in favour of Sir William Beardsell's executors, he having died before that date, but the dividend was sent by telegraphic transfer to the District Bank, Ltd., 55 King Street, Manchester, to the credit of J. B. Beardsell and A. E. Scott, through the Chartered Bank of India, Australia and China, and Madras, on 29 March, 1943. The assessee received the net amount of Rs. 40,950 as dividend at 5 per cent, mentioned above.