Kantilal Manilal And Ors. vs Commissioner Of Income-Tax

Equivalent citations: AIR 1956 Bom 381, (1956) 58 BOMLR 689, 1956 26 CompCas 357 Bom, ILR 1956 Bom 640 Bench: Chagla, Tendolkar
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Topics Covered in this article

Facts

The actualities giving rise to this reference are or may be abnormal and since they are bizarre the address that we ought to reply to appears to be a small nuisance. The assessees were share-holders of the Navjivan Mills and the Navjivan Mills had contributed its benefits within the buy of 5,000 offers of the Bank of India. On, 25-5-1948 the Bank of India advertised to its share-holders one share for every three offers held on the installment of Rs. 100/- per share, and the chiefs of the Navjivan Plants passed a determination that they would contribute the reserves of the company within the buy of 66 shares out of 1666 shares to which they were entitled and the proper to the remaining 1600 offers was disseminated among the 800 shareholders of the company within the extent of the right to two offers of the Bank for one conventional share held within the company.

The assessees between them held 570 shares of these Plants, and the assessees asked the Plants grant up to deliver up their right with respect to 1,140 shares to which they were entitled in support of Jesingbhai Speculation Co., and the address that emerged for choice by the Tribunal was whether the assessees were liable to charge on the correct obtained by them to the offers of the Bank of India, on the premise that that right constituted profit for the reason of the Income-tax Act. There are certain imperative actualities to which consideration must be drawn. It is found as a truth that this right which a share-holder of the Bank of India obtained to obtain one share for three offers had an advertised esteem which was Rs. 100/- per share.

It was hence open to the Navjivan Mills to offer this right and get for it cash. Hence, it is evident that what Navjivan Mills was arranging was a resource of the Plants, a resource which the Plants had obtained by reason of its holding 5,000 shares of the Bank of India, a resource which was an important resource and had a cash equivalent value. 

It may be acknowledged as a common recommendation that when a shareholder of a company, by reason of his being a share-holder and by ideals of being a share-holder, gets a portion of the resources having a place in the company of which he may be a shareholder or part of the stores of the company of which he could be a ‘share-holder, he can as it got it in one of two capacities.

He either gets it as pay, the resource, or the support coming to him from the company out of benefits made by the company, in which case the salary within the hands of the share-holder is profit which he has gotten from the company. A shareholder may moreover get a portion of the resource or the stores in another capacity. 

This company of which he may be a share-holder may choose to extend the capital or it may choose to capitalize its collected benefits, and rather than conveying these benefits it may issue to its share-holders reward offers or a right to get new offers for the installment of a certain thought. In that case, the’ share-holder does not get a profit from the company but he gets a right to take an interest within the extra capital raised by the company.

In this case, it cannot be debated that the correct which the Plants obtained did not constitute a part of its capital. Whether the proper remained unrealized or was figured out, it may as it constituted its salary or its benefits in contradistinction to the subscribed capital. 

An exceptionally vital result takes after from this that it was open and competent to the Mills to disperse either this right or continues of this right as profit. In law, there’s a disallowance against any company conveying its capital as profit, but the law grants a company to disseminate its salary or its benefits, which does not shape a portion of this capital, as dividend.

Issues

  • The address that has been, disturbed at the bar and which we need to consider is whether the receipt of a shareholder, by reason of the truth that he may be a shareholder of a portion of the benefits of the company dispersed master rata among all the shareholders, can be considered to be profitable for the reason of the saddling law in spite of the fact that the customs required by the Companies Act for the dissemination of profit have not been complied with.

Mr. Palkhivala is impeccably right when he says that from the point of view of company law the determination of the chiefs cannot conceivably be looked upon as a statement of profit. It is well built up and the law is very clear that a profit can as it was announced by the shareholders of the company. The as it were right that the chiefs have is to prescribe a dividend to the assembly of the shareholders.

  • In this case, there’s not a single one or the other a formal proposal by the executives that a dividend ought to be paid, nor is there any acknowledgment, formal or something else, by the company of that proposal. But would it be genuine to say that since the company has not complied with the strategy required for the affirmation of profit beneath the Companies Act? It is competent for a shareholder who has gotten a portion of the benefit from the company conveyed among all the shareholders to tell the burdening authorities that he isn’t at risk to pay the charge on that pay as profit since his company has fizzled to carry out the conventions and the strategy required by law.

In the event that we are right within the view that we take, apart from specialists which we’ll directly consider, at that point, there cannot be the scariest question in this case as to the genuine nature of the transaction. 

In this case, the executives could have gone to the advertising, cashed their rights, gotten the cash, and suggested to the common body of the shareholders that that specific sum ought to be disseminated among the shareholders as profit and the common body would have had the specialist to endorse the proposal made by the directors.

  • What the chiefs have done – which is the shape that the exchange has taken – is that rather than going through that custom they have passed a determination exchanging this right to the shareholders and ceased at that. Can the unimportant reality that a particular transaction takes a specific shape to overcome the correctness of the saddling specialist to claim charge when agreeing to the genuine nature of the exchange the assessee is at risk on the receipt gotten by him as a result of that transaction? 

This isn’t a case where the executives would have been prevented from suggesting this specific sum to be dispersed as a dividend, or the common assembly of the company would have been prevented from doing so. Rather than going through that custom which the executives and the common body might have gone through, the executives embraced a plan by which it might be said actually and formally that there was no affirmation of dividend.

  • Can that detail that needs formality to come within the way of our considering the genuine nature of the exchange? In our supposition, on the off chance that we underscored the genuine and genuine nature of the transaction and ignored the need of custom, at that point it is evident that what the executives did was to allow to the shareholders a part of the resources of the company, and once it is set up, because it is clearly built up in this case, that that portion of the assets did not constitute the capital of the company, at that point what the shareholders gotten was pay within the nature of dividend.
  • “Whether on the truths and circumstances of the case the dissemination of the proper to apply for the offers of the Bank of India by Navjivan Plants Ltd., in support of the assessees summed to a distribution of “dividend”? To the address so re-framed our reply will be within the certifiable.

Judgment

The Tribunal tended to itself as it were to one viewpoint of the definition of profit given within the Income-tax Act. It’ll be remembered that the definition of profit within the Income-tax Act is a comprehensive and not a thorough definition and the Tribunal took the view that the case of the assessees fell beneath that definition. 

The definition of profit is contained in Section 2(6A) and the see of the Tribunal was that this specific Income gotten by the assessees was profit inside the meaning of Section 2(6A) (a). Clause (a) is to the taking after effect:

  • “Any dissemination by a company of amassed benefits whether capitalized or not, on the off chance that such commitment involves the discharge by the company to its shareholders of all or any portion of the ‘assets of the company”. 

In the supposition, there cannot be many questions that there was, in this case, a discharge to the shareholders by the company of a portion of its resources, but what Mr. Palkhivala has encouraged and with a little drive is that the conveyance was not of collected benefits. What is encouraged is that the proper, which was dispersed by the company was, on the off chance that at all, current benefits, and one cannot talk of gathered benefits till after the benefits of the year, have been ascertained and it is as it were within the taking after year after fundamental dissemination and allotment a few benefits are cleared out which can be called amassed profits.

It is pointless to consider this perspective of the case and to choose whether Mr. Palkhivala is right within the dispute he has put forward. On the off chance that the definition of profit is inclusive and not thorough, there’s nothing to anticipate us from considering whether the display case does not drop inside the standard definition of profit and not the expanded definition, given by the Legislature in Section 2(6A) (a). 

The question that has to be considered isn’t which section of the Income-tax Act is appropriate or which specific portion of Section 2(6A) applies, but whether there’s an obligation upon the assessees to charge on the ground that their pay is profit inside the meaning of the Income Tax Act.

The standard meaning of profit is,  as of now recommended prior within the judgment, the receipt by the shareholder by reason of his being a shareholder of the portion of the benefits of the company of which he could be a shareholder. The customs and details joined to the affirmation of a profit cannot diminish from the conventional and ordinary meaning to be joined to that expression. 

It may be said in a specific case that the profit gotten by the shareholder was not appropriately announced or that the fundamental method was not taken after, but in its plain characteristic meaning the receipt by the shareholder beneath the circumstances fair alluded to must be depicted as profit and must have the characteristics of a dividend.

Subsequently, in our conclusion, whether the amplified definition beneath Section 2(6A) (a) is or isn’t attracted, this can be a clear case where the case falls beneath the standard meaning of profit which isn’t avoided by the definition given by the Assembly in Section 2(6A). Turning to the specialists depended upon by Mr. Palkhivala, he has depended, to begin with on an English case, the – ‘Commissioner of Inland Revenue v. Fisher’s Executors’, (1926) 10 Charge Cas 302.

That case was consistently taken after the prior English case detailed in – ‘Inland Income Com. Mrs. v. Blott’, 1921-3 Assess Cas 101 (B), and the realities appear that what the company did was that it capitalized its unified benefits and in regard of those benefits which were capitalized it made an issue of 5 percent debenture stock to its standard share-holders (and the address that emerged for the choice of the House of Lords was whether the issue of this debenture stock was a conveyance of profits and the House of Lords held that it was not and did not constitute pay within the hands of the shareholders for the purposes of assessment. Lord Chancellor Viscount Cave says: “My Masters, in case the tests which are to be found in these judgments are connected to the exchanges presently in question, I think that it’ll be found outlandish to elude from the conclusion that the issue of debenture stock within the showcase falls inside the same category as the issue of offers in Blott’s case.

The support speaking to save and gather benefits was at the transfer of the company, which might decide as against the entire world whether the finance ought to be dispersed to the shareholders as payor ought to be held and connected to capital purposes”. What the company did, in that case, was that it did not disperse to the shareholders the benefits like pay, but connected that wage to capital purposes and issued debenture stock. Mr. Palkhivala depended on certain perceptions of Lord Sumner, and Lord Sumner as a common recommendation lays down: “The suggestion, that the substance of exchange must be looked to and not only the frame, is by and large conjured against those who have carried it out. I think it is bizarre, where the frame of exchange is against those whose exchange it is, to conjure the substance in their support, in order to squeeze out what they have cleared out imperfectly in the form”.

The strife sometime recently isn’t between the substance and the shape of any determination passed by the company. The frame is obvious and no one proposes that that shape ought to be disregarded. But what we have looked at is the genuine nature of the exchange which is something very distinctive from overlooking the frame and attempting to go behind the shape to discover what the purpose of the company or the shareholders or the executives was. But the genuine proportion of the Judgment of Lord Sumner is to” and this is often what the learned Law Lord cays:

“The truth is that money’s worth isn’t a fabric of circumstance until the reward dispersion has been shown, when still within the company’s hands and at the time of conveyance, to be awed with the character of wage of the company”. 

Therefore, whether the proper had money’s worth or not and what money’s worth It had, the relevant and fabric address to consider is what was the nature of the correct which the company had obtained at the time when it chose to exchange it to the shareholders. On the off chance that the property was awed with the character of salary of the company, at that point it would be profit; something else it’ll not be a dividend. Mr. Palkhivala’s dispute was that as distant as the company was concerned, this specific right which it procured would constitute a capital pick up and it would not be salary and the company would not be at risk to assess in regard to this right.

In this way, it isn’t concerned in this reference with the risk of the company to assess with regard to the property which it obtained from the Bank of India, and Ruler Sumner does not USB the expression “wage of the company” Within the sense in which Mr. Palkhivala suggests. 

He uses the expression “Wage of the company” In contradistinction to its capital, and what Master Sumner is emphasizing is that in the case at the date of the dispersion the resource of the company is a resource which can be disseminated as a profit and Which did not constitute the capital of the company which seems not to be conveyed, at that point the dispersion to the shareholders in law would be the dividend.

Mr. Palkhivala moreover depended on a Judgment of the Madras High Court in — Commissioner of Income-tax v. M.P. Viswanatha Rao‘, AIR 1930 Mad 393 (C). In that case, the Tata Iron and Steel Company Rather than paying profit to the shareholder in cash, issued carrier store certificates which were payable on or sometime recently a certain date with intrigue, and the address that the Madras High Court had to consider was whether the whole spoken to by the store certificates might be considered profit and the High Court held that there had not been a discharge of resources of the company which the deposit certificate was something like a post-dated cheque or a promissory note or a guarantee within the shape of a debatable instrument which the entirety has spoken to by the store certificates was subsequently not at risk to be burdened as a dividend.

It’ll be taken note that the Madras High Court was as it was considering the definition of profit as shows up in Section 2(6A), it was not considering the common definition which has considered in this case, and the reason why the Madras High Court came to this conclusion was “that there was no discharge of resources by the company since It had paid nothing to the shareholder but only issued a store certificate and all the reserves and the resources of the company proceeded to remains with the company. The learned Judges said:

“Looking at the matter from the point of view of the company itself, no parcel of the entirety of Rs. 5,750/- (that was the whole in an address in that reference) cleared out the coffers of the company and no parcel of this sum comes to the stash of the shareholder. The money remains where it was within the hands of the company and there has been no discharge of the resources of the company as distant as this whole is concerned”.

Mr. Palkhivala too depended on a choice of the Court in – ‘Bacha P. Guzdar v. Commissioner of Income-tax Bombay City‘, where we have considered what the specialized meaning of the statement of profit Is. It is to be said, Palkhivala is right in his dispute that there’s no specialized statement of profit in this case. In the event that that point is conclusive of the matter, without a doubt Mr. Palkhivala is entitled to succeed.

There’s as it were one last viewpoint of the matter that we might consider. Specialists have laid down that a profit requires not to be pronounced in cash, it may be in species, and thus the fact that the company chosen to exchange the correct which It had procured from the Bank of India to its shareholders require not essentially militate against the dispute that the exchange of such right in specie was the installment of profit to the shareholders. 

In law, there’s no contrast between the company cashing this right and pronouncing a profit in regard to the sum gotten by the company, and the company exchanging this right itself which had cash esteem and which might have been cashed by the shareholders.

The address that has been submitted to us does not truly bring out the genuine discussion between the parties. As we have all the actualities sometime recently us we propose to re-frame the address which is ably perused as follows: 

In the conclusion, in the event that the genuine nature of the exchange which we must consider is the receipt by the shareholder of the dividend within the sense of his accepting a portion of the benefits of the company, at that point, he is obligated to charge on that salary as profit, regardless the disappointment of the company to comply with the essential procedure.

The disappointment of the company to comply with the method may involve genuine results as distant as the company is concerned. It may render the executives obligated to misfeasance procedures; it may indeed render the shareholder at risk to discount the pay that he has gotten. But those are contemplations with which we are not concerned. The as it addressed that we need to consider is that when within the year of account a shareholder receives a part of the profits or income of the company of which he may be a shareholder which receipt isn’t inferable to the capital of the company within the sense that the capital is expanded, at that point is or is not the shareholder at risk to pay the charge in that year on that pay “as a dividend”.

The appeal got dismissed.

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