KANTILAL MANILAL AND ORS. vs. THE COMMISSIONER OF INCOME-TAX, BOMBAY

CIVIL APPEAL No. 364/1957Supreme Court[1961] 2 S.C.R. 58422 November 1960Bench: 3 JudgesAuthor: J.L. KAPUR, M. HIDAYATULLAH, J.C. SHAH6 pages
AI SummaryDismissed

What were the facts?

The appellants were shareholders of Navjivan Mills Ltd. (the Mills). The Bank of India offered new shares to its existing shareholders, including the Mills, at a price including a premium that was approximately half the market value. The Mills purchased a small number of these shares and distributed its right to acquire the remaining shares to its own shareholders in proportion to their holdings. The Income Tax Officer reopened the assessment of the appellants under Section 34(1)(a) of the Indian Income Tax Act, 1922, on the grounds that the distribution of the right to acquire Bank of India shares constituted a dividend. Appeals to the Appellate Assistant Commissioner and the Appellate Tribunal were unsuccessful. The High Court, at the instance of the appellants, framed a question of law.

What did the Supreme Court hold?

The Supreme Court held that the High Court was correct in its view. The distribution of the right to obtain Bank of India shares at half the market value to the shareholders of the Mills amounted to a distribution of 'dividend' which was liable to be taxed. The Court reasoned that 'dividend' as defined in Section 2(6A) is inclusive and not exhaustive. Even if the distribution did not strictly fall within the extended definition, it still qualified as a dividend in its ordinary meaning, representing a distributive share of profits or income. The Mills had the option to accept, decline, or surrender the right to its nominees. By distributing this right, which had a market value of Rs. 100 per share (the difference between the Rs. 100 payable and the market quotation of over Rs. 200), the Mills effectively transferred a benefit of monetary value to its shareholders. This was akin to distributing dividend, even if not in cash, and the form of the resolution did not alter the true character of the transaction. The appeal was dismissed.

What were the issues?

1. Whether, on the facts and circumstances of the case, the distribution of the right to apply for the shares of the Bank of India by Navjivan Mills Ltd. in favour of the assessees amounted to a distribution of "dividend" within the meaning of Section 2(6A) of the Indian Income Tax Act, 1922? (Question of law) Assessee's contention: The High Court erred in enlarging the scope of the question framed by the Tribunal, which specifically referred to Section 2(6A), and in answering it based on the ordinary meaning of 'dividend'. Revenue's contention: Not recorded in the judgment.

Which sections of the Income-tax Act were involved?

Section 34(1)(a),Section 2(6A),Section 66(1),Section 12

AI-generated summary — verify with the full judgment below

584 SUPREME COURT REPORTS (1961] '960

therefore allow the petition, and declare that the n. Hingir- Orissa Mining Areas Development Fund Act, 1952, is Rampu• coal co., beyond the constitutional competence of the Orissa. Lid. & Othm Legislature to pass it. The whole Act must be struck v. down because there will be very little left in the Act Th• Stat• 01 ifs. 4 falls as it must. The legislature would never Orissa ©- Otlurs have passed the Act without s.

4.

Wanchoo J. BY COURT. In accordance with the majority Judg- ment of the Court, the Writ Petition is dismissed with costs. r960 November aa. KANTILAL MANILAL AND ORS. v. THE COMMISSIONER OF INCOME-TAX, BOMBAY (J. L. KAPUR, M. HIDAYATULLAH and J. c. SH;\H, JJ.) '• Income-tax-Distribution of new shares at half the market value-If amounts to distribution of dividend-Assessment-Re- opening of-The Indian Income-tax Act, r9a2 (II of r9zz), ss. a(6A) (a), 66(r). The appellants were shareholders of a company known as Navjivan Mills ltd. which held a large number of shares of the Bank of India. The Bank with the object of increasing their share capital offered some more shares to the Mills for a price including

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