COMMISSIONER OF INCOME-TAX (CENTRAL) CALCUTTA vs. INDIA DISCOUNT CO. LTD.

CIVIL APPEAL No. 2115/1968Supreme Court[1970] 1 S.C.R. 76707 August 1969Bench: 3 JudgesAuthor: J.C. SHAH, V. RAMASWAMI, A.N. GROVER A COMMISSIONER OF INCOME5 pages
AI SummaryDismissed

What were the facts?

The assessee, India Discount Co. Ltd., a dealer in shares and securities, purchased 11,900 shares of Kedarnath Jute Manufacturing Co. Ltd. on September 30, 1954, for Rs. 1,12,575. These shares had arrear dividends declared between 1936 and 1945. The shares were sold with these arrear dividends. The assessee received Rs. 43,925 as arrear dividends, which it credited to the profit and loss appropriation account and then transferred to a reserve fund. No adjustment was made to the share purchase account. The Income-tax Officer taxed this amount as business income. The Appellate Assistant Commissioner and the Appellate Tribunal upheld this decision. The High Court, however, held that the amount was not liable to tax. The Commissioner of Income-tax appealed this decision.

What did the Supreme Court hold?

The Supreme Court held that the consideration paid by the assessee was for both the shares and the arrear dividends. The contract to sell shares with arrear dividends implied that the purchase price included the value of the dividends to be realized. Since the dividends were declared long ago, there was no uncertainty about the exact amount receivable. The Court reasoned that the arrear dividends were not claimable by the assessee by virtue of its right as a purchaser of shares but because the vendor had contracted to pass them on. Therefore, they were the income of the vendors (registered holders) and could not become the income of the purchaser. The Court further stated that a receipt which in law cannot be regarded as income cannot become so merely because the assessee erroneously credited it to the profit and loss account. The High Court's decision that the amount was not liable to tax was upheld. The appeal by the Revenue was dismissed.

What were the issues?

1. Whether, in the facts and circumstances of the case, the assessee had purchased the arrears of dividend? (Mixed law and fact, turning on the interpretation of the sale agreement and the nature of the transaction). 2. If so, whether the said sum of Rs. 43,925/- could at all be assessed either as dividend under Section 12 or as profit under Section 10 of the Income-tax Act, 1922? (Mixed law and fact, concerning the taxability of the receipt). Assessee's contentions: The assessee argued that the arrear dividends pertained to previous years (1936-1945) and their receipt was merely a realization of capital, not income liable to tax. The High Court agreed with this contention. Revenue's contentions: The Revenue contended that the shares were purchased in the course of the assessee's share-dealing business, and the sum received formed an integral part of its business income, making it liable to tax under Section 10. The Income-tax Officer, Appellate Assistant Commissioner, and Appellate Tribunal supported this view.

Which sections of the Income-tax Act were involved?

Section 10,Section 12,Section 66A(2)

AI-generated summary — verify with the full judgment below

767 A COMMISSIONER OF INCOME-TAX (CENTRAL) B D E F G H CALCUTTA v. INDIA DISCOUNT CO. LTD.

August 7, 1969 [J. C. SHAH, ACTING C.J., V. RAMASWAMI AND A. N. GROVER, JJ.] Income-tax Act (11 of 1922), ss. 10 •nd 12-Shares sold with arrear dividends-Amount of arrear dividends received by purchaser-Whether taxable. · The assessee--e. dealer in shares and securities, purchased ceitain shares on which dividends relating to previous years were in arrears. The shares were sold with the arrear dividends.

The assessee received the amount of arrear dividends and he first credited this sum to the profit and Joss appropriation account end thereafter transferred the same to a reserve fund. No adjusttnent was made in the share purchase account on account of the receipt of the dividend. The value of the shares which represented the stock-in-trade of the assessee remained the same both in the opening and the closing $(.ocks.

The assessee claimed that the amount of arrear dividends received was not income liable to income-tax as it was merely a realisation of the .capital. The Income-tax Officer rejected the contention and brought it to tax. This decision was upheld in f

The order continues below.

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