Kantilal Manilal And Ors vs The Commissioner Of Income-Tax, Bombay on 22 November, 1960

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 22 November 1960

Coram: J.C. Shah, J.L. Kapur, M. Hidayatullah

In the case titled Kantilal Manilal and others versus the Commissioner of Income‑Tax, Bombay, decided on 22 November 1960, the Supreme Court of India recorded that the managing agents were entitled to inform shareholders that they could, if they wished, exercise the right to acquire shares. Accordingly, Navjivan Mills Ltd. exercised its right to take over only sixty‑six shares out of the total shares that had been offered, and it resolved that the remaining right to one thousand six hundred shares should be allocated among its eight hundred shareholders. The seven appellants, who together held five hundred seventy shares of the Mills, consequently became entitled to one thousand one hundred forty shares of the Bank of India. The appellants accepted this allotment and later transferred the allotted shares to a private company named Jesinghbai Investment Co. Ltd. Subsequently, the assessment of income of these seven appellants, together with that of other shareholders of the Mills, was reopened by the Income Tax Officer under section 34(1)(a) of the Indian Income‑Tax Act on the ground that the distribution by the Mills of the Bank of India shares constituted a “dividend”. The officer further held that the value of the right released in favour of the shareholders, although taxable under section 12 of the Act, had escaped tax. The reassessment order against the seven appellants was affirmed on appeal by the Appellate Assistant Commissioner and again by the Appellate Tribunal. Acting on the appellants’ petition, the Tribunal referred the matter to the Bombay High Court under section 66(1) of the Income‑Tax Act, framing 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, however, restated the question more generally as whether the distribution amounted to a dividend, and answered affirmatively. In its reasoning, the High Court observed that the definition of “dividend” in section 2(6A) was intended to be inclusive rather than exhaustive; therefore, even if the distribution of the right to the Bank of India shares could not be classified as a dividend under the extended definition, it nonetheless qualified as a dividend in its ordinary sense and was thus taxable in the hands of the appellants. Counsel for the appellants argued that the High Court’s decision was unwarranted because the original question explicitly concerned whether the distribution constituted a dividend as defined in section 2(6A), and that the Court had improperly broadened the scope of the question and relied on the ordinary meaning of the term instead.

The Court observed that the High Court had broadened the issue and answered it according to the ordinary meaning of “dividend,” and that the contention advanced against this approach lacked any substance. It reiterated that “dividend” is defined in section 2(6A) as an inclusive term, enumerating various items and excluding certain others, though the precise exclusions were not required for the present appeal. In its ordinary sense, “dividend” denotes a distributive share of a company’s profits or income paid to its shareholders. When the Legislature enacted section 2(6A), it supplemented the usual meaning of the word with several additional categories of receipts that might otherwise be omitted. Consequently, under the definition, “dividend” embraces the normal concept of a profit share and also incorporates the other receipts listed in the provision. The Tribunal had referred the question of whether the distribution of the right to apply for Bank of India shares constituted a dividend within the meaning of section 2(6A). In answering that question, the High Court was required to consider both the ordinary and the extended meanings of the term. The Tribunal’s framing contained no indication that the High Court was confined to advise solely on the extended definition. The Mills had asked the Bank of India to allot shares to its nominees, and that request effectively transferred the right to the shares. By its resolution, the Mills transferred a right valued at Rs 200 for each share held by its shareholders. This transfer was clearly not a distribution of the Mills’ capital. The Mills could have sold the right in the open market and then distributed the proceeds to the shareholders; such a distribution would unquestionably have been a dividend. Even though the Mills chose to transfer the right directly rather than selling it first, the benefit received by the shareholders remained a dividend. A dividend need not be paid in cash; it may be distributed by delivering property or a right that possesses monetary value. Although the resolution did not explicitly state that it was distributing a dividend, nor was it framed as a dividend‑distribution resolution, the substance of the resolution could not be altered by its form. Accordingly, the Court agreed with the High Court that the distribution of the right to apply for and obtain two Bank of India shares at half their market value for each share held by the Mills’ shareholders constituted a dividend.

The Court observed that the scheme under consideration was, in substance, a distribution of dividend to the shareholders of the milling enterprise. Because the Court accepted that characterization, the petitioner's challenge to the earlier judgment could not be sustained at all. Accordingly, the Court concluded that the appeal had failed on its principal ground and could not be allowed. The Court therefore ordered that the appeal be dismissed in its entirety, leaving no further relief or remedy whatsoever. In addition, the Court directed that the costs of the proceedings be awarded against the appellant in full. The order specifically stated that the appellant was required to bear the costs incurred by the respondent promptly. By delivering this judgment, the Court affirmed the decision of the lower tribunal that the right to obtain two shares at reduced price constituted a dividend distribution. No further relief was granted to the appellant, and the matter was concluded with the dismissal of the appeal. The Court emphasized that the form of the resolution did not alter the substantive character of the transaction, which remained a dividend. It further noted that a dividend may be distributed not only in cash but also by granting a property or right having monetary value. Since the right to obtain the two shares possessed monetary value, its allocation to the shareholders was treated as a dividend under the applicable tax provisions. The appellant had argued that the transaction was a mere transfer of a right, which he claimed was exempt. The appellant further contended that because it was a transfer of a right, it should not be liable to dividend tax, but the Court rejected that contention. By rejecting the appellant’s contention, the Court left intact the earlier finding that the transaction attracted tax as a dividend. Consequently, the Court found that there was no basis to set aside the assessment made by the tax authority. The dismissal of the appeal therefore affirmed the tax liability that had been imposed on the appellant, thereby confirming the assessment.