COMMISSIONER OF INCOME-TAX, WEST BENGAL vs. CENTRAL INDIA INDUSTRIES LTD.

CIVIL APPEAL No. 2347/1968Supreme Court[1972] 1 S.C.R. 61907 September 1971Bench: 2 JudgesAuthor: K.S. HEGDE, A.N. GROVER B8 pages
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What were the facts?

The assessee company, Central India Industries Ltd., received a dividend from its parent company, Pilani Investment Corporation Ltd., for the assessment year 1959-60. The dividend, amounting to Rs. 1,83,228.40, was paid partly in cash and partly in share scrips of two other companies. The Income-tax Officer valued these scrips at their market value on the date of entitlement, adding Rs. 61,500 to the assessee's assessable income. The Appellate Assistant Commissioner upheld this. The Tribunal, however, allowed the assessee's appeal, finding the distribution of scrips not to be a dividend, that the scrips were valued at face value by the parent company, and that no profit arose as the shares were not sold. The High Court agreed with the Tribunal's first two grounds and additionally relied on Section 18(5) of the Act concerning tax refunds. The Revenue appealed to the Supreme Court by special leave.

What did the Supreme Court hold?

The Supreme Court held that: (i) Dividend distribution is not restricted to cash; it can be in the form of property or rights with monetary value. The legality of the distribution is irrelevant for taxability so long as a resolution was passed. Section 16(2) deems dividend as income in the previous year of payment. (ii) The face value of shares is not necessarily their real value. A shareholder receives the market value of shares as of the entitlement date. The valuation by the distributing company does not bind the revenue, as this could facilitate tax evasion. The assessee receives the real value, which is the cash plus the market value of the shares. (iii) The fact that the assessee retained the shares is irrelevant; income does not cease to be income by retention. The Tribunal erred in valuing the shares at face value because they were retained. (iv) The Tribunal and High Court erred in holding that the revenue could not value the shares differently in the assessee's hands if they were valued differently in the parent company's assessment. No vested right arises from an erroneous order. The assessee cannot insist that an error should be carried forward. (v) While an erroneous valuation in the parent company's assessment might affect the assessee's refund under Section 18(5), it cannot alter the levy on the assessee. The assessment provisions are independent of refund provisions, though refunds may depend on assessment. The assessee's argument for a uniform valuation scheme based on refund entitlement was rejected as lacking statutory basis. The appeal was allowed, and the High Court's answer was discharged and answered in favour of the Department.

What were the issues?

1. Whether the distribution of share scrips by the parent company to the assessee company constituted a distribution of dividend for the purpose of income-tax assessment under the Income-tax Act, 1922? (Question of law) 2. Whether the share scrips received by the assessee company as dividend should be valued at their face value or market value on the date of entitlement? 3. Whether the valuation of the shares in the hands of the parent company for its assessment precludes the revenue from valuing them differently in the hands of the assessee company? Assessee's contentions: The assessee argued that the scheme of the Act requires a uniform method of assessment for both the dividend-declaring company and the shareholder. They relied on Sections 12(1-A), 16(2), 18(5), 20, and 35(9) to argue that any discrepancy in valuation would affect the refund entitlement under Section 18(5). Revenue's contentions: The revenue contended that the market value of the shares on the date of entitlement should be considered as the dividend income, regardless of the face value or the valuation in the parent company's assessment. They argued that the assessee receives the real value of the shares, not just their face value, and that tax evasion would be facilitated if undervaluation were permitted.

Which sections of the Income-tax Act were involved?

Section 16(2),Section 18(5),Section 12(1-A),Section 20,Section 35(9),Section 66(1),Section 66-A(2)

AI-generated summary — verify with the full judgment below

A B c D E F G H 619 COMMISSIONER OF INCOME-TAX, WEST BENGAL v. CENTRAL INDIA INDUSTRIES LTD.

September 7. 1971 [!(. S. HEGDE AND A. N. GROVER, JJ.] /nco111e-tax Act 1922, s. 16(2)-Parent co111pany distributing dividend to assessee con1pany partly in cash and partly in scrips-In coniputing inco111e of assessee co111pany fron1 dividend said scrips whether to be valu- ed at fuce vaflle or niarkei value-Considerations.

The assessee company was holding certain shares in an investment company which was its parent company.

The an1ount of dividend receiv- able by the asscsscc company was paid to it partly in cash and partly in share scrips of hvo other companies. The relevant assessment year was 1959-60. For the purpose of assessment under the Income-tax Act, 1922 the Income-tax Officer valued those shares as per their market value on the date on which those shares became the assets of the assessee com- pany.

He therefore added to the amount of dividend purported to have bce.n declared a sum of Rs. 61,500/- in computing the assessable income of the asscssee company. The Appellant Assistant Commissioner upheld the order of the Income-tax Offi:.-:cr and rejected

The order continues below.

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