Bharat Fire And General Insurance Co.... vs The Commissioner Of Income Tax, New...

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 613/ 1963

Decision Date: April 2, 1964

Coram: S.M. Sikri, J.C. Shah

In the matter titled Bharat Fire And General Insurance Co. versus The Commissioner Of Income Tax, New Delhi, the Supreme Court rendered its judgment on 2 April 1964. The opinion was authored by Justice S M Sikri, who sat with Justice J C Shah on the bench. The case arose as Civil Appeal No 613 of 1963, filed by special leave against the Punjab High Court’s decision dated 12 December 1960 in Income‑Tax Reference No 2 of 1958. The appellant, Bharat Fire And General Insurance Co., was a joint‑stock company with its registered office in Delhi, and it was referred to in the proceedings as the assessee. The company held eleven thousand nine hundred fifty ‘B’ Preference shares in another corporation, Rohtas Industries Ltd., for the calendar year that ended on 31 December 1953. Rohtas Industries Ltd. paid a sum of Rs 50,787 as dividend on those Preference shares to the assessee, and the Income Tax Officer had taxed that amount in the hands of the assessee for the assessment year 1954‑55 under section 2(6A) of the Indian Income Tax Act, 1922. The assessee appealed this assessment and the Appellate Assistant Commissioner ruled that the dividend was not taxable. The Department then appealed, and the Income Tax Appellate Tribunal reversed the Assistant Commissioner’s view, agreeing with the Income Tax Officer that the amount was taxable, and it allowed the appeal. The tribunal, on the assessee’s application, sought a definitive opinion from the Punjab High Court. The High Court upheld the Department’s position and answered the question referred to it, holding that the receipt was indeed taxable. After failing to obtain a certificate under section 66A(2) of the Income Tax Act, the assessee obtained special leave to appeal to this Court, and the appeal now stood before the Supreme Court for disposal. The specific question presented to the High Court, and now before this Court, was whether, on the facts and circumstances of the case, the receipt of Rs 50,787 constituted a dividend and was therefore taxable under the Indian Income Tax Act. Before addressing the arguments, the Court reproduced the relevant statutory language. Section 2(6A) of the Income Tax Act defined ‘dividend’ to include any distribution by a company of accumulated profits, whether capitalised or not, if such distribution released any part of the company’s assets to its shareholders, subject to the proviso that “accumulated profits” did not include capital gains arising before 1 April 1946 or after 31 March 1948. The Court also noted section 78 of the Companies Act, 1956, which authorised a company, in paying up unissued shares, writing off preliminary expenses, or writing off commissions or discounts on issues of shares or debentures, to treat such amounts as part of the surplus carried to the reserve fund, which could properly be applied to paying further dividends, and that dividends could be declared only out of profits of the company unless expressly authorised by statute. The appellant’s counsel had argued that English law prohibited the payment of dividends out of capital but did not require directors to pay dividends solely out of profits; the Court, however, indicated that this contention would be rejected by reference to the present statutory scheme.

The Court noted that the statutory language permitted a company to make certain distributions, namely (a) the issue of fully paid bonus shares, (b) the writing off of the company’s preliminary expenses, and (c) the writing off of expenses, commissions paid, or discounts allowed on any issue of shares or debentures of the company. In addition, the Court reproduced a quotation stating that “the surplus which was carried to the reserve fund represented that which might have been properly applied at the time, if the company had so thought fit, in paying further dividends to shareholders and no person could have complained if they had done so.” The Court further quoted the provision that “the Directors may, with the sanction of a general meeting, from time to time declare dividends or bonuses, but no such dividend shall (except as by (2)[1937] Ch. 402. the statutes expressly authorised) be payable otherwise than out of the profits of the company.” Counsel for the appellant argued that English law differed, asserting that English law prohibited the payment of dividends out of capital but did not require directors to pay dividends out of profits. The Court rejected this contention, holding that the cited English authority did not support the appellant’s position.

The Court then turned to the authorities cited by the parties. It observed that the appellant had relied heavily on the decision in In re Duff’s Settlements, National Provincial Bank Ltd. v. Gregson (1) and quoted Judge Jenkins, L.J., at page 926, who remarked that the case might or might not assist the appellant if the dividend declaration had occurred after the enactment of the Companies Act, 1956. The Court expressed the opinion that the decision in Duff’s Settlements was not relevant to the facts of the present appeal. The Court also mentioned the House of Lords decision in Land Revenue Commissioners v. Reids Trustees (2), which the respondent’s counsel had cited. It explained that this case would be relevant only to a general inquiry as to whether the receipt of Rs 50,787 was income or capital in the assessee’s hands, but the specific question before the High Court was limited to whether that receipt constituted a dividend and was therefore taxable. Accordingly, the Court found it unnecessary to discuss the Reids Trustees case further. Concluding its analysis, the Court agreed with the High Court that the answer to the referred question was affirmative, that the receipt was a dividend and therefore taxable. The appeal was dismissed with costs, and the order of dismissal was entered.