- This is a consolidated reference under section 66(1) of the Indian Income-tax Act, 1922. It arises out of the Income-tax Appellate Tribunals orders disposing of the appeals preferred by two assessees. The two questions that have been framed for our opinion are :

"(1) Whether, in the facts and circumstances of this case, the sums of Rs. 1,64,352 and Rs. 3,91,381 received by the assessees, M/s. Shrikrishan Chandmal and Nandlal Bhandari & Sons (P.) Ltd., respectively, out of the sum of Rs. 6,40,000 distributed by Nandlal Bhandari Mills Ltd., amongst its shareholders is dividend and taxable as such in the hands of the respective assessees under the provisions of the Indian Income-tax Act, 1922 ?

(ii) Whether, in the facts and circumstances of this case, the Appellate Assistant Commissioner could enhance the assessment, as made by the Income-tax Officer on the assessee company, either at the instance of the Income-tax Officer or suo motu under section 31(3) (a) of the Indian Income-tax Act ?"

The material facts are that the assessees, one a private limited company doing business under the name and style of M/s. Nandlal Bhandari & Sons and the other, a Hindu undivided family doing business under the name of M/s. Shrikrishan Chandmal, Indore, are shareholders of Nandlal Bhandari Mills Ltd., Indore. In 1929 this company purchased a textile mill situated at Kalyan, in Maharashtra State, for Rs. 7,00,000. The machinery, stores and other material of the purchased mill were removed from Kalyan to Indore for the expansion of the Nandlal Bhandari Mills Ltd. The cost of this machinery, material, etc., was determined at Rs. 6,40,000 and debited in the account books of the Nandlal Bhandari Mills Ltd., Indore. The balance of Rs. 60,000 was treated as cost of land and building at Kalyan. On 31st March, 1949, the Government acquired the land building at Kalyan from Nandlal Bhandari Mills Ltd., paying Rs. 7,00,000 as compensation. The excess of Rs. 6,40,000 over the valuation of Rs. 60,000 of the land and building was first transferred to the capital reserve account of the mills. Then on 30th August, 1951, the directors of the mills resolved to distribute the amount of Rs. 6,40,000 out of the compensation amount received from the Government to the shareholders as dividend at the rate of Rs. 64 per share. The assessee family, M/s. Shrikrishan Chandmal, received a sum of Rs. 1,64,352 in respect of the shares held by it. The other assessee received a sum of Rs. 3,91,381 in respect of its shares.

In the assessment proceedings for the assessment year 1952-53, these receipts were disclosed by the two assessees, but they claimed that the amounts received by them in the aforesaid distribution were not dividends within the meaning of the term "dividend" given in section 2(6A) at it stood at the relevant time and that, therefore, they were not liable to pay any tax on those amounts. The Income-tax Officer first accepted the claim of the assessee company, M/s. Nandlal Bhandari & Sons, in regard to the exemption. He held that under the second proviso to clause (6a) of section 2 capital gains arising after 31st March, 1948, had been excluded from the definition of "accumulated profits" and that, therefore, the amount received by the assessee company could not be regarded as dividend under sub-clause (a) of section 2(6a). The claim was, however, disallowed in the case of the other assessee, namely, M/s. Shrikrishan Chandmal. This time the Income-tax Officer held that as the "sale" of land and building by M/s. Nandlal Bhandari Mills Ltd. to the Government was not voluntary but compulsory, the profit of Rs. 6.40,000 earned by the mills was in the nature of capital profit and not capital gain and consequently the distribution made by the mills to its shareholders was dividend. The Income-tax Officer had disallowed the other claims made by the assessee, M/s. Nandlal Bhandari & Sons. Both the assessees, therefore, appealed to the Appellate Assistant Commissioner. While these appeals were pending, the Income-tax Officer addressed a communication to the Appellate Assistant commissioner saying that the sum of Rs. 3,91,381 received by the assessee, M/s. Nandlal Bhandari & Sons, was dividend and properly chargeable to tax and that he had committed an error in not assessing it. The Appellate Assistant Commissioner, therefore, issued a notice to the said assessee to show cause why the assessment should not be enhanced and the dividend amount received by it should not be taxed. The Appellate Assistant Commissioner took the view that the amounts received by the two assessees were dividends and were taxable. The assessees then appealed to the Tribunal against the orders of the Appellate Assistant Commissioner. The Tribunal held that what the two assessees received was only a distribution of a capital asset and not anything out of the profits of M/s. Nandlal Bhandari Mills Ltd. and what was sought to be taxed was the distribution made by the said mills out of the "capital appreciation of an asset" and that this capital appreciation being in 1949 could not be regarded as accumulated profits under the second proviso to section 2(6A). Accordingly, the exemption claimed by the two assessees was allowed by the Tribunal.

The provision of the Act that requires consideration in answering the first question is section 2(6A) giving the definition of "dividend". That provision, as it stood on the relevant date and omitting what is not material, was in these terms :

"2. (6A) dividend includes -

(a) any distribution by a company of accumulated profits, whether capitalized or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company :...

Provided further that the expression accumulated profits, wherever it occurs in this clause, shall not include capital gains arising before the 1st of April, 1946, or after the 31st day of March, 1948."

The contention of the learned Advocate-General appearing for the department was that the definition of "dividend" in section 2(6A) was an inclusive and not an exhaustive definition and that even if the distribution of Rs. 6.40,000 to the shareholders could not be regarded as dividend within the extended meaning of that expression in section 2(6A), it was still a dividend within the ordinary meaning of the term and was taxable as income in the hands of the two assessees. The argument was that the land and building at Kalyan owned by M/s. Nandlal Bhandari Mills Ltd. were capital assets valued at Rs. 60,000; that the amount of Rs. 6,40,000 which the said mills got over the valuation of Rs. 60,000 when the property was acquired by the Government was from the appreciation in value of a capital asset; that it was a profit realised on the sale of the land and building and did not cease to be so merely because it was not a revenue receipt but a capital gain; that the amount of Rs. 6,40,000, though transferred to the capital reserve account of the mills, did not go towards increasing the capital and did not constitute the capital of the mills; that thus if what the directors of the mills did was to give to the shareholders a part of the assets of the company which did not constitute the capital of the company, then what the shareholders received was income in the nature of dividend; and that, in fact, under the resolution passed by the directors of the mills on 30th August, 1951, the amount of Rs. 6,40,000 was distributed amongst the shareholders as dividend at the rate of Rs. 64 per share. Learned Advocate-General proceeded to say that even under the definition given in section 2(6A) the amount received by the assessees was dividend; that the amount of Rs. 6,40,000 obtained by the mills on account of the enhanced value of the land and building at Kalyan and distributed amongst the shareholders was "profit" and in the distribution of it to the shareholders there was a release by the mills of a part of its assets and thus it was dividend within the meaning of sub-clause (a) of section 2(6a); and that the second proviso to section 2(6A) had no applicability because the property was not voluntarily sold by the mills but was compulsorily acquired by the Government and, consequently, the amount of Rs. 6,40,000 obtained by the mills could not be regarded as capital gains. In support of his contention the learned Advocate-General relied on Kantilal Manilal v. Commissioner of Income-tax, which was affirmed by the Supreme court in Kantilal Manilal v. commissioner of Income-tax and Calcutta Electric Supply Corpn. Ltd. v. Commissioner of Income-tax.

In reply, Shri Chitale, learned counsel for the assessees, submitted that the definition of "dividend" given in section 2(6A) was inclusive of various items and also exclusive of certain others; that if the amount received by the assessees was excluded from the definition under the proviso, then there was no room for the contention that, even if the amount was not dividend under section 2(6A), it would still be dividend within the natural import of the word "dividend"; that, even if the acquisition of the land and building by the Government could not be regarded as a voluntary sale of the property by the mills, yet it constituted a transfer of the property and, therefore, the extra amount of Rs. 6,40,000 obtained by the mills was capital gains; and that as this gain was after the 31st March, 1948, it could not under the proviso read with sub-clause (a) of section 2(6a) be regarded as "dividend".

Under section 2(6C) "income" is defined as including "dividends". Therefore, the point raised for decision by the first question is as to the meaning of the word "dividend" and the construction and content of section 2(6a) (a). The ordinary meaning of "dividend" as stated by the Supreme Court in Kantilal Manilal v. Commissioner of Income-tax is "a distributive share of the profits or income of a company given to its shareholders". The definition of "dividend" in the interpretation of clause (6a) of section 2 is not exhaustive. It is inclusive of some categories of distribution which may not fall under the natural connotation of the term "dividend" and exclusive of some other items of distribution. The normal dividend is paid out of current profits that is to say, out of the profits of the year for which the dividend is declared. But company, instead of distributing the current profits, may accumulate them. It may even appropriate the accumulated profits to capital; and when this is done the profits cease to be "accumulated profits". Section 2(6A) selects certain categories of distribution or payment out of accumulated profits of the company and brings them expressly under the description of "dividends". The effect of sub-clause (a) is to extend the meaning of the expression "dividend" so as to treat accumulated profits, whether appropriated to capital or not, as dividend if their distribution entails the release by the company to its shareholders of all or any part of the assets of the company.

Now, the Act does not define "profits" but the ordinary meaning of the term is "advantage or gain in money or in moneys worth". If by the sale of a capital asset a company realises an amount higher than the valuation put by it, the excess amount would be profit in the hands of the company. The mere fact that the profit follows from some capital asset does not prevent it from being profit. It would of course be capital gain and not a revenue receipt if the company does not carry on the business of selling or purchasing the property constituting the capital asset sold. The second proviso excludes capital gain arising before 1st April, 1946, or after 31st March, 1948, from the scope of the expression "accumulated profits". That being so, any distribution to the shareholders out of the profits realised by a company on the sale of a capital asset if it constitutes capital gains arising before or after the dates specified in the second proviso cannot be regarded as dividend under sub-clause (a) read with the said proviso. If a distribution out of such capital gain cannot be regarded as dividend within the extended definition given by sub-clause (a) of section 2(6a), it cannot be caught as dividend under the ordinary meaning of that expression. This becomes clear from the fact that the ordinary meaning of "dividend" and section 2(6A) defining "dividend" by inclusion and exclusion are in no way mutually exclusive. It cannot be argued with any degree of force that if any distribution is dividend under the ordinary meaning of the term it is unnecessary to look at section 2(6A). The Supreme Court has emphasized this position in Kantilal Manilal v. Commissioner of Income-tax. In that case the Tribunal submitted to the Bombay High Court the question -"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 ?" The High Court reframed the question thus :

"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 ?"

The High Court answered the question in the affirmative. When the matter went up before the Supreme Court, it was contended on behalf of the assessees that the High Court was not justified in reforming the question, in enlarging the scope of the question submitted by the Tribunal and in answering it in the light of its ordinary meaning. The Supreme Court found the contention unsubstantial and observed :

"Dividend is defined in section 2(6A) as inclusive of various items and exclusive of certain others which it is not necessary to set out for the purpose of this appeal. Dividend in its ordinary meaning is a distributive share of the profits or income of a company given to its shareholders. When the legislature by section 2(6A) sought to define the expression dividend it added to the normal meaning of the expression several other categories of receipts which may not otherwise be included therein. By the definition in section 2(6A), dividend means dividend as normally understood and includes in its connotation several other receipts set out in the definition. The Tribunal had referred the question whether the distribution of the right to apply for the Bank of India shares amounted to distribution of dividend within the meaning of section 2(6A) and, in answering that question, the High Court had to take into account both the normal and the extended meaning of that expression."

The fact that the ordinary meaning of the term "dividend" and section 2(6A) cannot be considered as distinct and mutually exclusive has an important bearing on the operation of what is excluded under section 2(6A) from the definition of "dividend". If it be assumed that the distribution of the kind described, say in sub-clause (a) of section 2(6a), is dividend even under the ordinary meaning of the term and that sub-clause (a) is really otiose and one inserted out of abundant caution, then the second proviso excluding certain capital gains from accumulated profits would have the effect of excluding from the ordinary meaning of "dividend" the distribution contemplated by that sub-clause. If, on the other hand, the ordinary meaning of the word "dividend" does not cover the distribution mentioned in sub-clause (a), then what is excluded by the second proviso from the artificial category of "dividend" mentioned in sub-clause (a) cannot clearly fall under the ordinary meaning. The proviso excludes certain capital gains from the extended definition of "dividend" given by sub-clause (a) of clause (6a) of section 2. It does not sweep into the ordinary meaning of the term "dividend" that which does not fall under its ordinary connotation.

Turning now to the facts of the case, it is clear that the excess of Rs. 6,40,000 over the valuation of Rs. 60,000, which Messrs. Nandlal Bhandari Mills Ltd. obtained for the acquisition of the land and building at Kalyan by the Government in 1949 was profit. It was not distributed to the shareholders in 1949, but accumulated and transferred to the capital reserve account of the mills and then distributed to the shareholders in 1951. The distribution undoubtedly entailed the release by the company to its shareholders of a part of the assets of the company. The distribution thus fell within the terms of sub-clause (a). But it cannot be regarded as dividend as the profit which the mills made on account of the sale of land and building at Kalyan was a capital gain arising after the 31st March, 1948, and, therefore, excluded from the expression "accumulated profits" for the purpose of clause (6A) and thus from the category of "dividend" mentioned in sub-clause (a). Learned Advocate-General contended, on the authority of Calcutta Electric Supply Corporation v. Commissioner of Income-tax, that the profit of Rs. 6,40,000 was not capital gain as the sale of land and building by the mills to the Government was not a voluntary sale. There is no force in this contention. "Capital gains" include profits or gains arising from a sale, exchange, relinquishment or transfer of a capital asset. A compulsory acquisition by the Government of some property may not constitute a sale; but it would be a "transfer" and the profit obtained by the transferor on such transfer would be capital gains. In Calcutta Electric Supply Corporation v. Commissioner of Income-tax, the Calcutta High Court held that the compulsory acquisition of an electricity generating plant of an assessee did not constitute a sale within the meaning of section 10(2) (vii) of the Act. The question whether it was a capital gain arising from the transfer of a capital asset did not arise for consideration in that case.

It was then said by the learned Advocate-General that the distribution by the mills to the shareholders was in fact in the form of dividend. In our opinion nothing turns on the circumstance that in the resolution passed by the directors the distribution of Rs. 6,40,000 to the shareholders was described as "dividend at Rs. 64 per share".

What is material is the real and true nature of the distribution and not its form. The distribution is clearly exclude from the definition given in section 2(6a) (a) read with the second proviso. If, as we think, the distribution of Rs. 6,40,000 is expressly excluded from the extended definition of "dividend" given in section 2(6a) (a), then, as we have pointer out earlier it cannot be regarded as dividend even within the ordinary definition of that word. The first question must, therefore, be answered in the negative.

It is not necessary to decide the issue raised by the second question. Shri Chitale, learned counsel appearing for the assessees, did not contest the question and accepted for the purposes of this reference that the Appellate Assistant Commissioner could enhance the assessment sub motto or at the instance of the Income-tax Officer under section 31(3) (a) of the Act.

For the foregoing reasons, our answer to the first question is that the sums of Rs. 1,64,352 and Rs. 3,91,381 received by the assessees, Messrs. Shrikrishan Chandmal and Nandlal Bhandari and Sons Private Ltd., respectively, are not dividend and are not taxable as such in the hands of the two assessees. The second question does not arise. There will be no order as to costs.

Order accordingly.