TMI Blog1992 (12) TMI 93X X X X Extracts X X X X X X X X Extracts X X X X ..... anies Act, 1913, on July 20. 1949, with its registered office at Madras and its factory at Ketti, Nilgiris. The company makes and markets needles for various uses, fishhooks, and related products. At the time of its incorporation. NIIL was a wholly-owned subsidiary of Needle Industries (India) Ltd., Studley, England ('NI-Studley' for short). To be specific, of the 6756 equity shares of Rs. 100 each, 6750 shares were held by NI-Studley, the remaining 6 shares being held by one Devagnanam. The said Devagnanam became a Director of NIIL in 1956 and Managing Director in 1961. All along, it was he who was looking after the affairs of NIIL. 4. In 1961, NI-Studley entered into an agreement with Newey Bros. Ltd., Birmingham, England ('Newey' for short) wherein Newey agreed to participate in the equity capital of NIIL to the extent of Rs. 4,33,400, by taking up 4,334 equity shares of Rs. 100 each, with the result the issued and paid up capital stood augmented to Rs. 11,09,000. In 1963, 2450 additional shares were issued all of which were taken up by NI-Studley. Thus, the 1963 profile of shareholding was as follows : NI-Studley 9,200 shares. 67.96 per cent. Newey 4,334 shares. 32.01 per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... become closer to Newey which had entrusted its far-east interests to his care and control. Since Newey was also in the same line of business as Coats, there developed, not unnaturally, competing interest in general and with regard to the affairs of NIIL in particular. 8. The Foreign Exchange Regulation Act, 1973 (FERA) came into force on January 1, 1974. The said Act contained a new section, namely, section 29 dealing with restrictions on establishment of base of business in India. It is unnecessary to notice in detail the elaborate provisions of this section. Suffice it to note that the said section prohibits non-residents, non-citizens and non-banking companies, not incorporated under any Indian law or in which the non-resident interest is more than 40 per cent, from carrying on any activity in India of a trading, commercial or industrial nature, except with the general or special permission of the Reserve Bank of India ('RBI' for short). The section also provides that, if such a person or company is engaged in any such activity at the commencement of the FERA, he or it has to apply to the RBI for permission to carry on that activity, within six months of the commencement of FE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0-21. 1976 meeting between the Indian shareholders and the U.K. shareholders (which was called to take a decision of the mode and mechanics of foreign holding) ending in a stalemate. To cut a long story short, the Board of Directors of NIIL met on April 6, 1977 to consider Indianisation. The Board resolved that the issued capital of NIIL be increased to Rs. 48 lakhs by an issue of 16,000 equity shares of Rs. 100 each, to be offered as right shares to the existing shareholders in proportion to the shares held by them. The offer was to be made by a notice and the offer was to be accepted within 16 days from the date on which it was made, failing which it was to be deemed to have been declined by the concerned shareholder. Accordingly, letters of offer dated April 14, 1977 were prepared. The letter of offer meant for the foreign shareholders, together with Devagnanam's letter dated April 12, was posted on April 27, 1977 and received by one Mr. Raeburn, the Chairman of Newey, on 2-5-1977. According to the terms of the letter of offer, the time limit to accept the right shares offered expired on 30-4-1977. In other words, the letter of offer itself was received by the foreign sharehol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Holding Company, filed a Company Petition in the Madras High Court under sections 397 and 398 of the Indian Companies Act, 1956. The sum and substance of the petition was that the Indian Directors had abused their fiduciary position and had acted mala fide by deciding to issue right shares at par and by allotting the shares exclusively to the Indian shareholders. The fair value of the shares of NIIL was about Rs. 204 per share. By allotting the right shares exclusively to the Indian shareholders at par, the Indian Directors gained an illegal advantage for themselves. 16. The Learned Acting Chief Justice who tried the Company Petition found defects and infirmities in the meeting of the Board of Directors held on May 2, 1977, and concluded that appropriate relief should be granted to the Holding Company under section 398 of the Companies Act. The learned Judge was of the view that the average market value of the right shares was about Rs. 190 per share on the crucial date and that since the right shares were issued at par, the Holding Company was unjustly deprived of a sum of Rs. 8,54,550 at the rate of Rs. 90 per share on the 9,495 right shares which it was offered. Exercisin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovide for election of Directors by proportional representations ; and (f) Devagnanam was asked to pay to the Holding Company the costs of appeal and cross-objections quantified at Rs. 25,000. He was also asked personally to reimburse the expenses incurred by NIIL in the appeal and cross-objections. 18. Thereupon, NIIL and some of the Indian shareholders, including Devagnanam, appealed to the Supreme Court. On a detailed consideration of the matter, the Supreme Court held that the Holding Company had failed to make out a case of oppression. Even so, it held that the Indian shareholders had unjustly and unjustifiably enriched themselves at the cost of the Holding Company by the simple expedient of issuing the right shares at par, when the value of those shares was much above par ; and that they should be asked to pay the difference " in order to nullify their unjust and unjustifiable enrichment at the cost of the Holding Company ". As to the quantum, the Supreme Court, agreeing with the learned trial Judge, held that it would be just and reasonable to take the average market value of the right shares on the crucial date at Rs. 190 per share. On this basis, the Supreme Court held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under : "The interim Board of Directors shall forthwith hand over charge to the Board which was superseded, but with Shri M.M. Sabharwal as Director and Chairman of the Board of Directors. After taking the charge from the interim Board, the Board of Directors will take expeditious steps for convening an Annual General Meeting for the year 1976-77 and the years thereafter for the purpose of passing the accounts, declaring dividends electing all Directors and for dealing with other necessary or incidental matters." 20. Thereupon, NIIL declared dividends the details of which are given below : Year of Account Dividend Date of declaration C.Y. 1977 36 per cent* 29-6-1981 (29th AGM) C.Y. 1978 20 per cent 29-6-1981 (30th AGM) C.Y. 1979 19 per cent 14-9-1981 ( 31st AGM) C.Y. 1980 12 per cent 27-11-1981 (32nd AGM) *Note : The Board of Directors had recommended that the interim dividend of 24 per cent, subject to tax, already paid on the total share capital of Rs. 48 lakhs be treated as final and that no further dividend be paid for the year 1977. The Honble Supreme Court of India had, however, directed that the interim dividend received by the Indian shareholders on the 16, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer. On the former issue, reading the Supreme Court judgment as meaning that the amount ordered to be paid by the Supreme Court represented the price which was payable by the Indian shareholders, the Assessing Officer held that the outlay was on capital account and hence not revenue deductible. As for the latter issue, going on the basis of the dates on which the annual General Meetings were held, the Assessing Officer held that all the meetings in question having been held during the relevant previous year, the dividends declared by NIIL for the years 1977 to 1980 (both inclusive) must be aggregated and brought to tax in the assessment for the assessment year 1982-83. 25. The CIT(A) declined to interfere in the matter. 26. It is in these circumstances that the assessees are now before us. 27. Shri G. Vaidyanathan, the learned counsel for the assessee, took us through the facts and circumstances of the case and particularly the relevant portions of the Supreme Court judgment, and contended that the lower authorities were not justified in deciding both the aforesaid issues against the assessees. The first limb of Shri Vaidyanathan's argument was that the lower authorities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could not properly be regarded as premium in the accepted sense of the term, there is no question of treating the amounts paid by the assessees to the foreign shareholders as an outlay on capital account. 29. The third limb of Shri Vaidyanathan's argument was that, properly viewed, the sums in question were compensation simpliciter. Elaborating this aspect of the matter, he contended that the amount awarded by the Supreme Court to the foreign shareholders went to " fill in " the loss suffered by them by reason of, what according to the Supreme Court was, unjust and unjustifiable enrichment on the part of the Indian shareholders. The sum in question was thus nothing but compensation. In this regard, Shri Vaidyanathan referred to and relied upon the following extract from the Supreme Court case of State of Gujarat v. Shantilal Mangaldas AIR 1969 SC 634 : " In ordinary parlance the expression 'Compensation' means anything given to make things equivalent a thing given to or to make amends for loss, recompense, remuneration or pay : ..." 30. The fourth limb of Shri Vaidyanathan's argument was that the compensation in question related not to capital field but to revenue field. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question so as to ensure prompt payment by the shareholders of the award amount to the foreign shareholders. Even so, drawing our attention to the net wealth position of the assessees before us, Shri Vaidyanathan contended that they did not have any other assets that could be attached. Consequently, the fact that no specific charge was created on the right shares in question did not materially alter the position. In this connection, we wondered whether the assessees could not have made some other arrangement for paying the award amount in question, such as borrowing money from others and the like. Shri Vaidyanathan's response was that they could not have done so. 32. The next limb of Shri Vaidyanathan's argument was that if regard be had to the totality of the circumstances leading to the filing of the Oppression Petition. it will be readily seen that the amount awarded by the Supreme Court to the foreign shareholders was meant to compensate the foreign shareholders for the loss of dividends suffered by them. According to him, the unjust and unjustifiable enrichment by the Indian shareholders adverted to by the Supreme Court could only refer to the right to dividends on the rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eone other than the transferor, both the payments foming part of a package deal. Shri Vaidyanathan fairly stated that he was taking the line that, in the case before us, the award amount did not form part of the price of the right shares in question. 35. Turning next to the question whether the aggregate of the dividends declared by NIIL during the previous year relevant to the assessment year 1982-83 should be brought to charge in the assessment for that year, Shri Vaidyanathan contended that the assessees were clearly entitled to have the dividend income spread over and assessed in the respective assessment years. Shri Vaidyanathan said that the issue which is now before us has not come up for consideration in any of the earlier reported cases. Even the latest edition of the Commentary of Kanga Palkhivala has cited only one case, namely, Vernon Milward Bason v. CIT 2 ITC 523 (Cal.) which could be said to come as closely as possible to the issue before us. Even here, the said case dealt with a different aspect of the matter. Nor does the latest Commentary of Sampath Iyengar cite any subsequent reported case directly on the issue before us. 36. Shri Vaidyanathan referred to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier, is revenue deductible, should also be spread over and deducted from the dividend of the respective assessment years. 37. In view of the foregoing. therefore, contended Shri Vaidyanathan, the assessees are entitled to succeed on both the issues before us. 38. On his part Shri P.A. Iyengar, the learned Departmental Representative, strongly supported the impugned orders of the lower authorities. On the question whether the award money paid by the Indian shareholders to the foreign shareholders was revenue deductible. Shri Iyengar drew our attention to pages 205 et seq of the Supreme Court judgment and contended that the said amount was part of the price which the Indian shareholders had to pay for the right shares allotted to them. In any event contended Shri Iyengar, as has been pointed out by the Supreme Court in the case of CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140, the expression " for the purpose of making or earning such income " occurring in section 57(iii) has a much narrower connotation than the expression " for the purposes of the business " occurring in section 37(1) of the Act. In the case before us, the assessees received the dividend because the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by them. 43. We have looked into the facts of the case. We have heard the rival contentions. 44. We may first deal with the issue whether the award amount paid by the Indian shareholders is part of the price which they have paid for acquiring the right shares in question. " What is the true nature of the award amount ? " The answer to this question holds the key to the issue before us. 45. To recapitulate, the assessees' case is that the award amount was essentially in the nature of compensation paid by the Indian shareholders to the foreign shareholders to recompense the latter for the loss of dividend on the right shares caused to them by the mode and mechanics followed by the Indian shareholders to allot right shares to themselves. It is also the as assessees' case that the award amount represented three years dividends calculated at 30 per cent. The award amount was also paid by the Indian shareholders out of the dividends received by them. The cumulative effect of these facts, according to the assessees, is that the sum in question is a proper deduction from the dividend income. 46. Let us approach the matter first on first principles. It is well-settled that a bundl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right to receive dividend was jeopardised, is to oversimplify the issue. 50. We are not impressed by Shri Vaidyanathan's argument that simply because the amount awarded by the Supreme Court equals three years' dividend calculated at the rate of 30 per cent year, the award amount must be equated to dividend. It was just a happenstance that on the basis of the figures available before it, the Supreme Court came to fix the 'fair premium' at Rs. 90 per share. Needless to add the happenstance-based argument would not have been available to the assessees had the Supreme Court determined the 'fair premium' at, say, Rs. 77 per share. We, therefore, reject this argument. 51. Similarly, the fact that the Indian shareholders paid the award amount out of the dividends received by them from NIIL is neither here nor there. Even if the company had not declared dividend. they would have been forced to pay the award amount by raising adequate funds by some means or other. 52. Thus, on the basis of first principles, we have arrived at the conclusion that the amount awarded by the Supreme Court was a recompense for the totality of the rights of the foreign shareholders which was jeopardised by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justice in so far as we may." Accordingly, the Supreme Court, agreeing with the learned trial court, went on to hold that it would be just and reasonable to take the market value of the right shares on the crucial date at Rs. 190 per share, being the mean of the value of the shares as assessed by the Secretary of NIIL (Rs. 175) and the value of the said shares as assessed by Price Waterhouse, Peat Co., Calcutta. It was thus that the 'fair premium' came to be fixed at Rs. 90 per share. It will be clear from the foregoing that the focus of the Supreme Court was not restricted to dividends. Its focus was on the totality of the circumstances of the case, something much more than mere dividends. 54. What then is the exact nature of the award amount in question? As we see it, it is nothing but additional price paid by the assessees to acquire the right shares in question. The Supreme Court held that a case of Oppression was not made. Even so, taking the totality of the circumstances into account, the Supreme Court felt that substantial justice needed to be done between the parties, so as to place them, as nearly as it was possible, in the same position in which they would have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... represented by the monetary consideration that the promisee pays directly to the promisor, and the second count being represented by the monetary consideration that the promisee pays, under the terms of contract, to a third party. This situation is examplified by a case in which 'A' buys a house property from 'B' by paying (i) the stipulated monetary consideration to 'B', and (ii) the stipulated monetary consideration to 'C' who is the tenant of the property. In such a situation, from the point of view of the purchaser of the property, the cost to him of the property will be the sum total of the monetary consideration paid by him to 'B' and 'C'. In the case before us, in the context of the acquisition of the right shares, the Indian shareholders have suffered detriment on two counts. First, they had paid NIIL a sum of Rs. 100 each per share. They had also paid, on the directions of the Supreme Court, a further sum of Rs. 90 per share to the foreign shareholders. Thus, in monetary , the Indian shareholders suffered a detriment represented by the sum total of the two sums ; that is to say, Rs. 100 + Rs. 90 = Rs. 190. It should, therefore, follow that the Indian shareholders had acqui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the General Meeting called on December 30, 1934 was adjourned to March 31, 1935 and was held on that date. On a complaint filed by the Assistant Registrar of Joint Stock Companies. Madurai, the company was convicted on the ground that it failed to hold a General Meeting in 1935, thereby violating the provisions of section 76(1) of the Indian Companies Act, 1913. The assessee's case was that the General Meeting held on March 31, 1935 should be regarded as the meeting which it was obligated to hold in 1935. The High Court negatived the assessee's contention and pointed out that the meeting held on March 31, 1935 was not a different meeting from the one which began on December 30, 1934, it was the same meeting. The company did not hold a separate and distinct meeting in 1935, as required by section 76. Consequently, the conviction of the company was correct. The facts of the case before us, however, are different. Here, it is a matter of record that no meetings were held within the time allowed by and under section 166 of the Companies Act, 1956 to consider the Annual Report of NIIL for the years 1978, 1979 and 1980. The relevant Annual General Meetings were in fact held only on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operative during the interregnum between the due date of holding the meeting and the date on which the delayed meeting was actually held. But we know of no justification, in authority or law, for the proposition that the proceedings of the delayed meetings will relate back to the dates on which the meetings could have been held (and within the time allowed under section 166 of the Companies Act, 1956) had not the litigation interfered with the functioning of the Board of Directors of the company. 62. Under the scheme of the Act, it is will-settled, the income of the assessee could be brought to charge either on accrual basis or on receipt basis. Conceptually speaking, receipt of income cannot precede the accrual of income. The receipt of income will normally come after the accrual of income. In some cases, both accrual and receipt of income may be simultaneous. In the case before us, we are dealing with dividend. It is well-settled that the liability of a company to pay any amount by way of dividend arises only when the shareholders accept the recommendations of the Board of Directors and dividend is declared at the Annual General Meeting of the company. It is open to the Di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t will be only fair to hope that the Income-tax authorities concerned will look into the matter sympathetically and redress the unintended hardship which the assessees before us had been subjected to. In expressing this hope, we are merely following the Madras case of Seth Lunidaram Tikamdas v. CIT [1980] 121 ITR 824. 64. In the result, all the appeals are dismissed Member(s) : T. N. C. RANGARAJAN., S. KANNAN. ORDER Per Shri S. Kannan, Accountant Member --- Centered as they are on certain common issues, these appeals by the assessees were heard together and are disposed of by a common order for the sake of convenience. 2. Though the controversy before us has naturally arisen under the Income-tax Act, 1961, yet its genesis is to be found in an Oppression Petition filed before the Court of law under section 397 of the Companies Art, 1956. Not unnaturally, therefore, an understanding of the circumstances leading to the filing of the Oppression Petition will facilitate the resolution of the controversy before us. It is, therefore, necessary, at the outset. to notice the circumstances leading to the filing of the Oppression Petition. 3. At the relevant point of tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny way by the foreign companies' establishing economic hegemony in the country. Towards this end in view, the Parliament passed, inter alia, the Foreign Exchange Regulation Act, 1947. Since NIIL was incorporated after the independence, even at the time of its incorporation, it was obligated to Indianise its share capital. Accordingly, further shares were issued in 1968, 1969 and 1971, all at par. There was also an issue of Bonus shares in 1971. The 1971 profile of shareholding of NIIL was as follows : Holding Company 59.34 per cent. Indian shareholders 40.66 per cent. It may here be mentioned that a major portion of the Indian holding amounting to 40.66 per cent was held by Devagnanam group. 6. In or about 1972, Coats Paton Limited, Glasgow. U.K. ('Coats for short) became almost the 100 per cent owner of NI-Studley. Since, as pointed out earlier, NI-Studley was having a 50 per cent shareholding in the Holding Company to which the shares of NIIL held both by NI-Studley and Newey had earlier been transferred, Coats acquired, indirectly, a say in the affairs of NIIL. 7. The gaining of a foothold by Coats in NIIL signalled the development of not a little friction between De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lding Licence under section 29(4)(a) of FERA, on September 18, 1974. During the period with which we are concerned, it would appear that the said application was pending before the RBI, perhaps in view of the fact that the issue of the Holding Licence was conditional on the reduction of the non-resident interest in NIIL to 40 per cent. 11. The coming into force of the FERA and particularly the deadline fixed by the RBI saw a flurry of activity in the NIIL for diluting the foreign holding. Various alternatives, such as going in for public subscription, private placement of shares and the like, were considered. For a fact, Devagnanam even considered selling of the block of shares belonging to his group to one Mr. Khaitan at a substantial price, part of which was allegedly payable outside India. Given the cold war that had developed between him and the Coats, Devagnanam was determined not to allow " Coats dominate Ketti ". On its part. Coats took a decidedly anti-devagnanam stand and refused to countenance the very idea of any block of shares being transferred to Khaitan. Coats made a counter proposal and that was that Devagnanam and his group sell their block of shares to Madura Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Directors was held on May 2, 1977 as scheduled and the whole of the new issue of 16,000 right shares was allotted to the Indian shareholders (including the members of Manoharan Group, with which we are not here concerned). Out of the said 16,000 right shares, the members of Devagnanam Group were allotted 11,734 shares. A dividend of 30 per cent subject to tax, was also recommended by the Board and it was resolved that the Annual General Meeting of NIIL be held on June 4, 1977. On the same date, Devagnanam wrote a letter to Raeburn intimating him that the Indianisation process was complete and that the company had come under the control of the Indian shareholders. 14. Stung to the quick by being presented with a fait accompli, Raeburn, through a series of telex messages and letters, told Devagnanam what he (Raeburn) thought about the entire affair. In particular, Raeburn stated that the right issue at par, which was considerably less than the fair value of the shares, was most unfair to the foreign shareholders who could not take up the right issue. On his part, Devagnanam tried to convince the foreign shareholders that given the FERA imperative and the pressure. of the deadline ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Directors of NIIL could not be remedied by the award of compensation and, therefore, the action of the Board of Directors in issuing the right shares had to be quashed. Finally, by its order dated October 26, 1978, the Division Bench granted the following reliefs : (a) Devagnanam was removed forthwith both as the Managing Director and Director of NIIL and was asked to vacate the bungalow occupied by him, by November 1, 1978. He was paid one year's remuneration as compensation for the termination of his appointment as the Managing Director. (b) The Board of Directors was superseded and an interim Board consisting of nine directors proposed by the Holding Company was constituted, with Shri M.M. Sabharwal as an independent Chairman. (c) Harry Bridges, an executive of COATS, was appointed as the Managing Director for a period of four months. (d) The rights issue made on 6th April, 1977 and the allotment of shares made on 2nd May, 1977 at the Board Meetings were set aside and the Interim Board was directed to make a fresh issue of shares at a premium to the existing shareholders, including the Holding Company which was to have a right of renunciation. The new Board was directed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of one year commencing from January 1, 1977, the Company's year being the Calendar year. The interim dividend or any further dividend received by the Indian shareholders on the 16,000 right shares for the year ending December 31, 1977 shall be repaid by them to NIIL, which shall distribute the same as if the issue and allotment of right shares was not made until after December 31, 1977. This direction will not be deemed to affect or ever to have affected the exercise of any other rights by the Indian shareholders in respect of the 16,000 right shares allotted to them. Finally, in order to ensure the smooth functioning of NIIL and with a view to ensuring that our directions are complied with expeditiously, we direct that Shri M. M. Sabharwal who was appointed as a Director and Chairman of the Board of Directors under the orders of this Court dated November 6, 1978 will continue to function as such until December 31, 1982." While granting Special Leave, the Supreme Court, by their interim order dated 6-11-1978, directed, inter alia, that there would be an interim Board of Directors headed by one M. M. Sabharwal. ex-Managing Director of Dunlop India Pvt. Ltd. With the handing down ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wo-fold claim was set up on behalf of the assessees. The first claim was that the amounts paid by the assessees to the foreign shareholders in accordance with the directions of the Supreme Court must be deducted from the income as and by way of dividends received by the assessees. Ibis claim was made on the footing that the amounts paid by them to the foreign shareholders represented, to quote the assessees, " amount paid to foreign shareholders towards dividend due to them as per Supreme Court order ". The second claim was that even though NIIL had declared dividends for the years 1977 to 1980 (both inclusive) on various dates falling in the year of account relating to the assessment year 1982-83, yet, the said dividends should not be aggregated for purposes of bringing the sums to charge in the assessment for the said assessment year. In this regard, the assessee's case was that even though the dividends were, not declared during the previous years relevant to the earlier assessment years and were declared and paid only during the precious year (ending on 31-3-1982) relevant to the assessment year 1982-83, yet, " in view of the litigous vicissitudes through which the company foun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uiring the right shares. Thirdly, according to Shri Vaidyanathan, the case before us is one of judgment or decree debt inasmuch as, the foreign shareholders' claim having merged in the decree of the Supreme Court, the claim assumes the character of judgment debt --- See the Supreme Court case of All India Reporter (4 ITR 444) (sic). And, as has been held by the Madras High Court in the case of CIT v. Abdul Cader Motor Service [1980] 122 ITR 812, the satisfaction of a decree debt cannot be taken as payment of a sale price. 28. The second limb of Shri Vaidyanathan's argument was that the sum awarded by the Supreme Court was not premium properly so-called, either. True, on page 201 of the judgment, the Supreme Court was talking of " fair premium of the shares ". But the " fair premium of the shares " referred to by the Supreme Court cannot be equated with the premium at which shares are issued for subscription by companies. In the context in which it occurs, the term " fair premium " only means damages for the unjust and unjustifiable enrichment by the Indian shareholders at the cost of the foreign shareholders. Secondly, when shares are issued at a premium, it is common knowledge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferred to and relied upon the Calcutta case of CIT v. De Luxe Film Distributors Ltd. [1978] 114 ITR 434. According to Shri Vaidyanathan, the matter could be looked at from another angle. The right shares allotted to the Indian shareholders is an income-earning apparatus. The compensation paid by the Indian shareholders to the foreign shareholders could well be regarded as monies spent for the specific purpose of preventing an attack on and thereby preserving the income-earning asset, in which event also the outlay properly relates to revenue field. Elucidating this point further, Shri Vaidyanathan contended that had the Indian shareholders failed to pay the compensation amount to the foreign shareholders, there was a real threat of the right shares being attached in execution of the judgment decree in question. The amount paid by the Indian shareholders to the foreign shareholders could, in such circumstances, relate only to the revenue field. In this regard, he referred to and relied upon the following cases : (i) CIT v . H.H. Maharani Shri Vijaykuverba Saheb of Morvi [1975] 100 ITR 67 (Bom.) (ii) CIT v. Delhi Safe Deposit Co. Ltd. [1982] 133 ITR 756 (SC) (iii) CIT v. O.P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, naturally follow that the amounts paid by the Indian shareholders were payable from and out of the dividends received by them from NIIL. Further, the award amount was actually paid by the Indian shareholders from and out of the dividends declared and paid to them by NIIL. In view of the foregoing, therefore, contended Shri Vaidyanathan, the sums paid by the assessees were a proper deduction from the dividend income of the assessees before us. 33. Concluding his arguments on the nature of the sums paid by the Indian shareholders to the foreign shareholders, Shri Vaidyanathan finally contended that though the language of section 37(1) is a little wider than that of section 57(iii), it does not mean that section 57(iii) must be given a narrow and constricted meaning. In other words, the sums in question were a proper deduction from the dividend income of the assessees. In this regard, he referred to and relied on the Supreme Court case of CIT v. Rajendra Prasad Moody [1978] 115 ITR 519. 34. On the issue whether the award money could be regarded as price of the right shares allotted to the Indian shareholders, the Bench wanted to know whether the consideration for a thing a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors was superseded by the orders of the Madras High Court, the Board of Directors would certainly have recommended, in time, dividends for the years 1977, 1978 and 1979 ; Annual General Meetings would have been held within the time allowed under section 166 of the Companies Act ; and the dividends declared in those meetings. In that event, the question of bringing to charge in the hands of the assessees the dividend income of more than one year would not have arisen. In this regard, Shri Vaidyanathan highlighted the fact that the mandate of section 166 of the Companies Act was that an Annual General Meeting be held each year within the stipulated time. This mandate could not be followed or complied with by NIIL due to circumstances beyond its control - to wit the supersession by the High Court of the Board of Directors. Hence it is only fair that dividend income is brought to charge in the respective assessment years and not aggregated and brought to charge in the assessment for the assessment year 1982-83. In other words, having regard to the special facts and circumstances of the case, the dividends declared during the previous year relevant to the assessment year 1982-83 must re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the impugned orders of the lower authorities do not invite any interference. 41. In his reply, Shri Vaidyanathan pointed out that the case referred to as Vernon Milward Bason went on the basis of different set of facts. There, a lump sum amount was paid as and by way of dividend and not an aggregate of distinct and separate amounts relating to different years. This case cannot, therefore, avail the Department. 42. As for the Supreme Court case of Malayalam Plantations Ltd., referred to and relied upon by the learned Departmental Representative, Shri Vaidyanathan contended that the decision therein is not applicable to the case before us. Further, as has been pointed out by the Supreme Court in the case of Rajendra Prasad Moody the fact that the language of section 37(1) is a little wider than that of section 57(iii), it does not mean that the latter section must be given a narrow and constricted meaning. In the case before us, the assessees did not have any other assets worth the name other than the shares in question. Non-compliance with the Supreme Court order would have entailed the shares in question being attached and brought to sale. By paying the award money from out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olders their valuable right to participate in the meetings and to vote on the proposal. Had they been given adequate notice of the meetings, and had they attended the meetings, given the fact that they were the majority shareholders, they could certainly have resisted the proposal to issue the right shares at par, and what was more, they could have decided on what should be the proper premium at which to issue the right shares. 48. True, the very process of dilution of foreign holding to 40 per cent through issue of right shares meant that the foreign shareholders would not have been allotted any right shares. But that circumstance, as we see it, is not material. What is material is that had they succeeded in getting the right shares issued at a premium. the premium collected would have been credited to share premium account which would. in course of time, come back to them as bonus shares. (The issue of bonus shares would not have entailed any change in the percentage of foreign holding). Or again, in the event of liquidation of NIIL, the money credited to the share premium account would have, other things being equal increased the size of the moiety that would have been allotte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2nd May, 1977 were held in accordance with law ". In this regard, the Supreme Court took note of the willingness of the Indian shareholders to pay a premium on the excess holding of the right shares to be issued. In particular, it took note of the fact that Devagnanam and his group were always ready and willing to buy the excess shares of the Holding Company at a fair price, as was clear from the related correspondence. For a fact, in the affidavit dated May 25, 1977, Devagnanam had stated categorically that the Indian shareholders were always ready and willing to purchase one-third of the holdings of the non-resident shareholders at a price to be fixed in accordance with the Articles of Association by the Reserve Bank of India. It was, therefore, that the Supreme Court observed : " Having had the benefit of that stance, they must now make it good. Besides, it is only meet and just that the Indian shareholders. who took the right shares at par when the value of those shares was much above par should be asked to pay the difference in order to nullify their unjust and unjustifiable enrichment at the cost of the Holding Company. We must make it clear that we are not asking the India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the foreign shareholders at the rate of Rs. 90 per share on the 9,495 right shares which were offered to the Holding Company. Reading the judgment of the Supreme Court as a whole, we have no hesitation in coming to the conclusion that the award amount was the additional price which the Indian shareholders had to pay to acquire the right shares allotted to them. True, the additional price was not paid to NIIL as and by way of premium, properly so called, but to the foreign shareholders. Even so, from the point of view of the Indian shareholders, it was very much a price (both literally and metaphorically) which they had to pay for acquiring the right shares in question. 55. A related aspect of the matter is noteworthy. It is well-settled that the consideration for a thing acquired will encompass, in certain cases, not only the amount paid by the transferee to the transferor but also the amount paid by the transferee to someone other than the transferor, both the payments forming part of a package deal. The said proposition flows logically and directly from the rule that, under the Law of Contracts, consideration is the very life-breath of simple contracts and that detriment to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd under section 166 of the Companies Act, 1956, by reason of the Board of Directors having been superseded by the orders of the Madras High Court. It was only after the Supreme Court delivered its judgment on May 7, 1981 that the said Annual General Meetings were held respectively on 29-6-1981, 14-9-1981 and 27-11-1981 --- all the dates falling in the previous year ending on 3l-3-1982 relevant to the assessment year 1982-83 now before us. And it was in the said Annual General Meetings that the dividends relating to the Calendar Years 1978, 1979 and 1980 were declared. The assessee's case is that it was due to the intervention of the Madras High Court that the said Annual General Meetings could not be held in time and that consequently, the dividends declared must be spread over the relevant assessment years. In this regard, the assessee's case is that the decision of the Calcutta High Court in the case of Vernon Milward Bason is not applicable. It is also the assessee's case that the ruling in the Madras case of Sree Meenakshi Mills Co. Ltd. would avail the assessee. 60. We have carefully perused the aforesaid two reported cases. We agree with the assessee's counsel that the Cal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le case. In the case before us, even the notice relating to the holding of the Annual General Meetings was issued only in June/August, 1981, that is to say, during the previous year relevant to the assessment year 1982-83 which is now before us. It is, therefore, difficult to accept the contention of the counsel for the assessee that the dividends declared in the delayed meetings held during the previous year relevant to the assessment year 1982-83 must be related back to the earlier previous years on the footing that the delayed Annual General Meetings themselves related to those years. True, the Annual General Meetings in question could not be held within the time allowed under section 166 of the Companies Act, 1956, owing to circumstances beyond the control of the Board of Directors and even of the shareholders. All that would follow from the said situation is that NIIL could successfully set up a case that because it was prevented by reasonable cause from holding the Annual General Meetings in time. It could not be visited with penalty for the failure to hold the Annual General Meetings in time. If any authority is needed for this proposition, it is to be found in the Kerala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the dividend ". It should, therefore, follow that the assessees before us can properly be said to have acquired a right to receive dividends only on the aforesaid three dates on which the three Annual General Meetings were held. There is no question of holding that somehow the right of the assessees to receive the said dividends gets related back to earlier assessment years. We, therefore, hold that the lower authorities were in law justified in bringing to charge, in the assessment for the assessment year 1982-83, the aggregate of the dividends declared during the relevant previous year ending on 31-3-1982. 63. But, as we see it, the matter should not be permitted to rest there. In the case before us, had the respective Annual General Meetings been held in time, the dividends in question would have been brought to tax only in the related assessment years. And it is a matter of record that the normal course of holding Annual General Meetings and declaring dividends in those meetings, was rendered impossible owing to the intervention of the Madras High Court. The result is that the application of the normal rule of accrual has resulted in an unintended hardship. in that all t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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