1965 (1) TMI 1 - HC - Income Tax

Amount received as dividend - assessee first credited this sum to the profit and loss appropriation account and thereafter transferred the same to a reserve fund - Whether the sum of Rs. 43, 925 received by the assessee represented business income arising under s. 10 from an adventure in the nature of trade or it was a dividend within the meaning of s. 12

Summary

Issues Involved:
1. Taxability of the sum of Rs. 43,925 received by the assessee.
2. Classification of the sum as business income under section 10 or as dividend under section 12 of the Income-tax Act.
3. Determination of whether the assessee purchased arrears of dividend.
4. Assessment of the sum as either dividend or profit.

Detailed Analysis:

1. Taxability of the sum of Rs. 43,925 received by the assessee:

The primary issue was whether the sum of Rs. 43,925 received by the assessee represented business income or dividend. The assessee contended that the amount was not income at all and could not be taxed. The Income-tax Officer, however, considered it as business income since the shares were part of the assessee's stock-in-trade and any accrual on the stock was deemed business income. The Tribunal upheld this view, stating that the receipt formed an integral part of the assessee's income from the business.

2. Classification of the sum as business income under section 10 or as dividend under section 12 of the Income-tax Act:

The Tribunal classified the sum as business income, but the court found this classification problematic. It was noted that dividends declared by Kedarnath Jute Manufacturing Co. Ltd. between 1936 and 1945 were the property of the registered shareholders at the time, and the assessee, as a purchaser, had no legal right to these dividends. The court emphasized that the dividends received were due to a contractual arrangement between the vendor and the purchaser, not because of the shares themselves. Therefore, the dividends could not be considered as the assessee's income from the shares.

3. Determination of whether the assessee purchased arrears of dividend:

The court observed that the purchase of shares included arrear dividends, as evidenced by the letter from the share-broker. The Appellate Assistant Commissioner noted that the assessee was aware of the unclaimed dividends and purchased the shares to claim these dividends. This indicated a plan and design characteristic of an adventure in the nature of trade. However, the court clarified that the arrear dividends were not claimable by the purchaser by virtue of his right as such purchaser and could not become his income from the shares.

4. Assessment of the sum as either dividend or profit:

The court concluded that the arrear dividends were income of the registered shareholders (vendors) and not the purchaser (assessee). The transaction was likened to a house sale where a hidden sum of money was included in the sale price. The sum of Rs. 43,925 was essentially a return of part of the purchase price and not income. The court dismissed the revenue's argument that the sum should be taxed as income from an adventure in the nature of trade, stating that the receipt did not constitute income from such an adventure.

Conclusion:

The court held that the sum of Rs. 43,925 was not income in the hands of the assessee and could not be taxed. The assessee's contention was upheld, and the question was answered in favor of the assessee. The judgment emphasized the importance of the real nature of the receipt over its treatment in the books of account for income-tax purposes.