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Commissioner Of Income Tax, Calcutta v. Nalin Behari Lal Singha, Etc. .
Factual and Procedural Background
The dispute concerns assessment to income tax for the Assessment Year 1949-50. The respondents—shareholders of Ukhra Estate Zamindaries Ltd.—received a distribution declared by the company. They contended that the sum was exempt because it was paid out of capital gains that arose on or after 1 April 1948 and therefore did not constitute “accumulated profits” under Section 2(6-A) of the Indian Income-tax Act, 1922.
The Income Tax Officer disagreed and taxed the amount. On appeal, the Appellate Assistant Commissioner accepted the shareholders’ position for ₹1,12,500 of the ₹2,24,000 distributed. The Income-tax Appellate Tribunal reversed that decision, reasoning that the statutory definition of “dividend” was not exhaustive and that distributions which were dividends “in ordinary parlance” remained chargeable.
The Tribunal referred the following question to the Calcutta High Court under Section 66(1) of the Act: “Whether on the facts and in the circumstances of the case the amount of ₹28,125 was rightly included as dividend in the total income of the assessee for Assessment Year 1949-50?” The High Court answered in the negative. The Commissioner of Income Tax obtained a certificate and appealed to the Supreme Court.
Legal Issues Presented
- Whether a distribution made out of capital gains arising after 31 March 1948 can be treated as “dividend” chargeable to tax under the Indian Income-tax Act, 1922.
- Whether the inclusive definition of “dividend” in Section 2(6-A) is confined to “deemed dividends” or also embraces dividends in their ordinary commercial sense even where the Act expressly excludes certain capital gains.
Arguments of the Parties
Commissioner of Income Tax (Appellant)
- The statutory definition of “dividend” is not exhaustive; any amount that is dividend in ordinary parlance is taxable under the general charging section.
- The proviso excluding certain capital gains applies only to deemed dividends and does not affect taxability when the distribution is otherwise a dividend in the general sense.
Shareholders / Assessees (Respondents)
- Capital gains arising after 31 March 1948 are expressly excluded from “accumulated profits” by the second proviso to Section 2(6-A); therefore, the distributed amount cannot be taxed as dividend.
- Accepting the Tribunal’s view would nullify the statutory exclusion and defeat legislative intent.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The Supreme Court began by noting that “dividend” in ordinary usage denotes a distribution to shareholders proportionate to share-holding, detached from the character of the profits out of which it is paid. However, the governing statute modifies that ordinary meaning. Section 2(6-A) expressly states that “accumulated profits” shall not include capital gains arising after 31 March 1948. The Court held:
- The inclusive definition in Section 2(6-A) does not permit taxing what the Legislature has expressly carved out. Capital gains in the excepted period are excluded from “accumulated profits,” so a shareholder’s proportionate share of such gains cannot be treated as dividend for tax purposes.
- The Tribunal’s view—that the definition covers only deemed dividends and leaves ordinary dividends untouched—would “nullify an express provision of the statute” by re-introducing excluded capital gains through the back door.
- Because the statutory language is clear, no strained construction is warranted; the exclusion must be given full effect.
- The Revenue’s new argument that the amount might be taxable as non-dividend income was rejected, as it had not been raised before the Tribunal or the High Court.
Holding and Implications
The appeals were dismissed with costs.
Consequently, the shareholders’ proportionate share of capital gains realised by the company after 31 March 1948 is not taxable as dividend under Section 12 of the Indian Income-tax Act, 1922. The decision affirms the statutory exclusion without creating additional precedent beyond reiterating that explicit legislative carve-outs must be respected.
J.C Shah, Acting, C.J— In a proceeding for assessment to Income Tax for the year 1949-50 the respondents in these appeals claimed that the dividend distributed by the Ukhra Estate Zamindaries Ltd., was exempt from tax, because the fund out of which the dividend was distributed did not form part of the “accumulated profits” of the company. The Income Tax Officer rejected the contention and brought the dividend to tax in the hands of the respondents. The Appellate Assistant Commissioner held that Rs 1,12,500 out of a total amount of Rs 2,24,000 distributed by the company, represented capital gains arising to the company on or after April 1, 1948 and not being dividend within the meaning of Section 2(6-A) of the Income Tax Act, 1922.
“The share distributed to the shareholders out of that amount was exempt from Income Tax. The order of the Appellate Assistant Commissioner was reversed in appeal by the Tribunal. In the view of the Tribunal the definition of dividend in Section 2(6-A) in force in the year of assessment was not exhaustive, and if the amount distributed was ‘dividend in ordinary parlance it became chargeable under the general charging section’, and that clause 2(6-A) was concerned with deemed dividends, and exclusion of certain capital gains by the proviso had no bearing on the issue raised by the revenue”.
2. The following question referred by the Tribunal to the High Court of Calcutta under Section 66(1) of the Indian Income Tax Act:
“Whether on the facts and in the circumstances of the case the amount of Rs 28,125 was rightly included as dividend in the total income of the assessee for Assessment Year 1949-50?”
was answered in the negative. The Commissioner has appealed to this Court with certificates granted by the High Court.
3. “Dividend” in its ordinary connotation means the sum paid to or received by a shareholder proportionate to his share holding in a company out of the total sum distributed. The relevant part of the definition contained in Section 2(6-A) of the Income Tax Act, 1922, in the year of assessment 1949-50 was as follows:
“‘Dividend’ includes—
(a) any distribution by a company of accumulated profits whether capitalised 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;
* * *
Explanation.—The words ‘accumulated profits’ wherever they occur in the clause, shall not include ‘capital profit’:
Provided further that the expression ‘accumulated profits’, wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948.”
Dividend distributed by a company being a share of its profits declared as distributable among the shareholders, is not impressed with the character of the profits from which it reaches the hands of the shareholder. It would be therefore difficult to hold that the mere fact that a distribution has been made out of the capital gains, it has the attributes of capital gains in the hands of the shareholders. But that does not assist the case of the Revenue, for the Legislature has expressly excluded from the content of dividend, capital gains arising after March 31, 1948.
4. The proviso to the Explanation clearly enacted that capital gains arising after March 31, 1948, are not liable to be included within the expression “dividend”. The definition is, it is true, an inclusive definition and a receipt by a shareholder which does not fall within the definition may possibly be regarded as dividend within the meaning of the Act unless the context negatives that view. But it is difficult on that account to hold that capital gains excluded from the definition of dividend by express enactment still fall within the charge of tax. According to the definition in Section 2(6-A) of the Income Tax Act only the proportionate share of the member out of the accumulated profits (excluding capital gains arising in the excepted period) distributed by the company, alone will be deemed the taxable component.
5. There is no warrant for the view expressed by the Tribunal that the definition of “dividend” only includes deemed dividend. To hold that the capital gains within the excepted period are not part of the accumulated profits for the purpose of the definition under Section 2(6-A) and a distributive share thereof does not on that account fall within the definition of “dividend” and therefore of income chargeable to tax and still to regard them as a part of accumulated profits for the purpose of dividend in the popular connotation and to bring the share to tax in the hands of the shareholders is to nullify an express provision of the statute. We do not see any reason why such a strained construction should be adopted.
6. We agree with the High Court that the proportionate share of the capital gains out of which the dividend was distributed to the shareholders of the company must be deemed exempt from liability to pay tax under Section 12 as dividend income liable to tax.
7. Counsel for the Revenue sought to argue that share of dividend which is not chargeable to tax by virtue of the exemption clause is still liable to tax as income other than dividend. But no such contention was raised before the Tribunal or the High Court and no question was raised in that behalf. We will not be justified in entering upon the question which was not raised or argued before the Tribunal and before the High Court.
The appeals fail and are dismissed with costs. One hearing fee.
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