High Court Of Bombay
Mafatlal Gagalbhai & Co. (P) Ltd. vs. CIT
Asst. Year 1969-70
T.D. Sugla & B.N. Srikrishna, JJ.
IT Ref. No. 246 of 1977
27th March, 1991
Dilip Dwarkadas with Prakash D. Shah & Mrs.F. Sampat i/b M.K. Amvalal & Co., for the Assessee : Dr. V. Balasubramanian with J.P. Devdhar & K.C. Sidhwa, for the Revenue
T. D. SUGLA ,J.:
In this reference relating to the assessee’s asst. yr. 1969-70, the Tribunal has referred to this Court at the instance of the assessee the following question of law for opinion under section 256(1) of the IT Act, 1961:
“Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in holding that the sum of Rs. 2,14,250 declared as dividend by erstwhile Gagalbhai Jute Mills Pvt. Ltd. on September 2, 1968, was liable to be taxed as income in the hands of the assessee-company ?”
2. The assessee is a company. The relevant previous year is the financial year ending on March 31, 1969. On September 2, 1968, M/s Gagalbhai Jute Mills Pvt. Ltd. (for short “the jute company”) declared dividend. The assessee- company, being that company’s major shareholder, received Rs. 2,14,250 as dividend. However, even before this date, negotiations were going on between the assessee-company and the jute company for amalgamation. Eventually, on September 16, 1968, both the assessee-company and the jute company presented applications in this Court for approval and sanction of the scheme of amalgamation of the jute company with the assessee- company.
On September 20, 1968, the Court directed both parties to convene a meeting of their shareholders and obtain their approval with the requisite majority. Both the assessee and the jute company held separate meetings of their shareholders on November 4, 1968, and obtained from them the necessary approval. A final petition for the amalgamation was filed by both thereafter and, on January 6, 1969, the Court passed its order sanctioning the amalgamation as proposed and agreed to by the parties. Under the orders of this Court, the amalgamation was to take effect from April 1, 1968. As regards the period from April 1, 1968, till the date of the sanction of the Court for amalgamation or until the amalgamation was complete, the jute company was deemed to have carried on business in trust for the assessee-company.
3. There is no dispute that the profit and loss account and the balance- sheet of the assesseecompany for the financial year 1968-69 reflects the sales, profits, assets and liabilities, etc., of both the companies as on March 31, 1969, on which date the amalgamation was certainly complete, if not earlier. However, in the return filed for the year, the assessee disclosed the amount of Rs. 2,14,250 as its dividend income even though, w.e.f April 1, 1968, it had ceased to be a shareholder of the jute company in view of the order of amalgamation. The assessment was made accordingly. The objection to the inclusion of the aforesaid dividend income was raised before the AAC by way of an additional ground. However, the AAC rejected the objection on merits observing that the dividend was received before the sanction order of the Court dated January 6, 1969.
4. The Tribunal has considered the rival contentions in great detail in paragraph 21 of its order. In particular, it referred to s. 8(a) of the IT Act, 1961, and the Supreme Court decision in the case of Kishinchand Chellaram vs. CIT (1962) 46 ITR 640 and held that dividend having been received by the assessee when it was a recorded shareholder, dividend was assessable as the assessee’s income and that the subsequent events were of not much consequence.
5. A copy of the amalgamation order with schedule I is annexed to the statement of the case as annexure “D”. The High Court had power and has sanctioned the impugned scheme of amalgamation under s. 394(1) of the Companies Act, 1956. Sub-s. (2) of s. 394 provides as under : “394. Provisions for facilitating reconstruction and amalgamation of companies.-. . . (2) Where an order under this section provides for the transfer of any property or liabilities, then, by virtue of the order, that property shall be transferred to and vest in, and those liabilities shall be transferred to and become the liabilities of, the transferee company ; and in the case of any property, if the order so directs, freed from any charge which is, by virtue of the compromise or arrangement, to cease to have effect.” Having regard to the above provision and the provision in the order of amalgamation that, from April 1, 1968, until the amalgamation is complete, the jute company would be deemed to carry on the management of the company in trust for the assessee-company, the position in law on and from April 1, 1968, is to be taken as if the jute company had become a non-existing company and the assessee-company had naturally ceased to be a shareholder of such a company after April 1, 1968, though factually,on September 2, 1968, the jute company was in existence and the assessee-company did receive from it the amount in dispute as dividend.
We have heard learned counsel on both sides at great length. In sum, the case of the assessee is that the legal effect of the order of amalgamation w.e.f. April 1, 1968, is that the jute company was not in existence as a separate legal entity from that day and that the assessee company was not, or rather could not be, a shareholder of such a non existent company thereafter and that the amount of Rs. 2,14,250 apparently received by the assessee as dividend from that company was, in fact, and in law, a receipt of its own money. To put it differently, it was a receipt by the left hand from the right hand and could not, thus, constitute an income assessable in its hands. The case of the Department, on the other hand, was that the jute company was in existence on September 2, 1968, when it declared and distributed dividend and that the assessee-company did receive the same as a shareholder and that no order of the Court could deprive the Department of its right to tax the income in the hands of the assessee-company. The Department, it was stated, acquired a vested right to tax the income on the day of declaration of the dividend. Dr. Balasubramanian stated that the Department was not a party to the amalgamation proceed- ings and that the Supreme Court decision in Kishinchand Chellaram vs. CIT(supra) was an authority for the proposition that once dividend was declared, it had to be taxed as such. Subsequent cancellation thereof for any reason whatsoever could not alter the legal position.
The profit and loss account and balance-sheet of the assessee-company for the financial year 1968-69 was taken on record with the consent of the parties. The directors’ report to the shareholders on the issue of amalgamation is: “Pursuant to the scheme of amalgamation approved by the members and sanctioned by the High Court of Bombay, vide order dated 6th January, 1969, Gagalbhai Jute Mills Private Ltd. has been amalgamated with the company w.e.f. 1st April, 1968. The statement of accounts, therefore, includes the assets and liabilities of the amalgamated company and the working of the year under review reflects the working of the company as well as the working of the said amalgamated company, and as such the previous year’s figures shown in the balance-sheet and the profit and loss account are not comparable.” Though the profit and loss account and balance-sheet of the jute company for the earlier financial year is not on record, it can be reasonably assumed that that company must have discharged its income-tax liability for that year and earlier years and declared dividend out of its profits and reserves. Dividends are undoubtedly assessable in the hands of the share- holder as laid down in s. 8(a) of the IT Act, 1961. What has happened in this case is that, as a result of order of this Court dated January 6, 1969, the assessee- company ceased to be a shareholder of the jute company w.e.f. April 1, 1968. The jute company, from that date, became a part and parcel of the assesseecompany. It is trite law that a company cannot hold shares of its ow company. As a natural corollary, it cannot receive dividend out of its own profits. Thus, a complicated situation has arisen in this case. Factually, the amount in dispute was received as dividend. Legally, it could not be so as that is the legal effect of the order of amalgamation. The question is what is the legal position in such a case.
For this purpose, we consider it desirable to refer to the following provisions which have some bearing on the question before us. The company Court, it may be stated, passed an order sanctioning the scheme of amalgamation under s. 394(1) on the application made under s. 391 of the Companies Act. While sanctioning the scheme, the Court has power to make provision for all or any of the six matters mentioned in sub-s. (1) of s. 394. Clause (vi) of sub-s. (1) of s. 394 refers to”(vi) such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out.”
9. For this purpose, it is necessary to bear in mind that there are six heads of income as provided in s. 14 of the IT Act. One such head is “Income from other sources”. That head of income is dealt with in s. 56 of the Act. Sub-s. 2(i) thereof refers to dividends. The expression “dividend” is defined in s. 2(22), but we are not concerned with that definition in this reference. Sec. 8(a), which is relevant in this regard reads : “8. For the purposes of inclusion in the total income of an assessee, (a) any dividend declared by a company or distributed or paid by it within the meaning of sub-cl. (a) or sub-cl. (b) or sub-cl. (c) or sub-cl. (d) or sub-cl. (e) of cl. (22) of s. 2 shall be deemed to be the income of the previous year in which it is so declared, distributed or paid, as the case may be. “
10. Evidently, dividend is made taxable as the income of the previous year in which it is declared. The dividend income, thus, accrues as income of the previous year in which it is declared as distinct from income of the day on which it is declared. If something happens during the previous year due to which the declaration of dividend is cancelled and the amount Rpaid as dividend is directed to be treated as loans or payment of a part of capital, it is possible to conceive that, at the end of the year, there will not be accrual of income by way of dividend despite a factual declaration. Similarly, if, by operation of law, the declaration of dividend becomes illegal, inoperative or invalid during the previous year itself, it is possible to conceive of a situation in which an assessee would be entitled to say that no income by way of dividend accrued to him during the previous year. What is important is that something factual or legal should have happened during the previous year in which the dividend is declared. We are not, for the present, considering a situation where something happened after the end of the previous year in which the dividend was declared and consequently became income of that previous year under s. 8(a) of the Act. In the present case, the High Court passed the sanction order for the amalgamation of the jute company with the assessee-company on January 6, 1969, w.e.f. April 1, 1968. Dividend was declared by the jute company on September 2, 1968. It had at this stage become the income of the assessee for the previous year 1968-69 (financial year). But, before the end of the year, on January 6, 1969, as a result of the sanction order, the jute company became a part of the assessee-company from the commencement of the previous year which meant that provision for the distribution of dividend in the hands of the jute company became a provision for dividend in the hands of the assessee company as on April 1, 1968. This also meant that the assessee ceased to be a shareholder of the jute company as on that day, as it is inconceivable that a company holds its own shares. Thus, the legal position was that neither could the jute company declare nor could the assessee-company receive dividend from the jute company after April 1, 1968. If, factually, any such thing happened as it did happen in this case, the legal effect of the order of sanction for amalgamation was that all that became impermissible and illegal. It is for this reason we are inclined to accept Shri Dwarkadas’ submission that the amount of Rs. 2,14,250 could not be taxed in the hands of the assessee as income by way of dividend received from the jute company. It was the assessee’s own money which it received and it could not certainly be of income nature.
11. The same view, it may be stated, was taken by our Court in the case of CIT vs. Swastik Rubber Products Ltd. (1983) 140 ITR 304(Bom) . In that case, sanction of the High Court for amalgamation w.e.f. July 1, 1971, was obtained on December 31, 1971. It was held (headnote) : “The ITO held that the date of amalgamation for the purpose of s. 170 was December 31, 1971. On appeal, the Tribunal took the view that the approval of the Controller of Capital Issues was a mere formality in view of the order of the High Court that the amalgamation was to be effective from July 1, 1971. Moreover, for the purposes of income-tax, what was crucial was the date on which the assets and liabilities vested in the assessee. Accordingly, the Tribunal held that the date of amalgamation was July 1, 1971. On a reference under s. 256(2) of the IT Act, 1961: Held, that cl. (15) of the scheme of amalgamation could not alter the legal effect of the order sanctioning the scheme of amalgamation passed by the High Court. Moreover, as per cl. (3) of the said scheme, w.e.f. July 1, 1971, the transferor was deemed to have been carrying on the business on account of the assessee. In view of these there was no reason to direct the Tribunal to refer the questions of law sought to be referred by the Department.”
The Gujarat High Court explained the effect of the scheme of amalgamation in the case of Jitendra R. Sukhadia vs. Alembic Chemical Works Co. Ltd. (1988) 64 Comp Cas 206, but that case does not have a direct bearing on the question before us. Dr. Balasubramanian for the Revenue has also relied on the Supreme Court decision in the case of Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363. We have carefully gone through that decision and do not find any relevance so far as the question in this reference is concerned. This takes us to the Supreme Court decision in the case of Kishinchand Chellaram vs. CIT (supra) which was strongly relied upon by the Tribunal as well as Dr. Balasubramanian. In that case, a company had declared dividend and the amounts payable to the shareholders as dividend had been credited or paid to the shareholders as dividends. After a few years, however, it was found that the company could not have declared and distributed any dividend in law. Accordingly, the company passed an extraordinary resolution declaring that dividends were inadvertently declared and should, therefore, be treated as loans. A question arose as to whether, in the year in which the dividend had been declared and distributed, they were assessable as income in the hands of the shareholders. Since the extraordinary resolution by which the dividends declared were directed to be treated as loans was passed long after the end of the previous year in that case., that case is distinguishable.
12 .We would like to make it clear that we are concerned in this case with a situation where the declaration of dividend as a matter of fact as well as the change in the legal position to the effect that it could not have been declared as dividend have happened during one and the same previous year. Sec. 8(a), which has been referred to above, in our judgment, clearly contemplates a situation where a dividend declared has become invalid during the course of the previous year itself.
13. Accordingly, we answer the question referred to us in the affirmative and in favour of the assessee.
There will be no order as to costs.
[Citation: 193 ITR 188]