Shareholders received dividends partly paid out of capital gains (selamis and land acquisition compensation) accumulated by a company. The Supreme Court held that since shareholders were beneficially interested in the company's capital asset, such receipts were capital receipts in their hands and not taxable income.
This page shows the compact analysis of this judgement. The full analysis — procedural history, issue-by-issue holdings with ratio and obiter, advocates, and paragraph-level evidence for every claim — is being added to the record in batches and will appear here when this judgement has been through it.
225
A COMMISSIONER OF INCOME TAX, WEST BENGAL.
v.
KAMAL BEHARI LAL SINGHA ETC.
August 16, 1971
B
(K. S. HEGDE AND A. N GROVER.,. Jf}
Income Tax-Capital or Revenue-Tests for determining-Divide111/ paid by . company out of accumulated capital gan. received by company in the shape of Salamis and Land Acqws1t1~n C<1mpensation-Since share holders took a share of the capital asset in which they were beneficially interested, receipt is capital c receipt.
During the relevant accounting year the respondents-assessec· received a certain amount as dividend from a company. . A part of the· amount was paid out of the accumulated capital gains received by the company in the shape of Salamis and land acquisition compensaoon. Such capital gains were taken to the reserve· fund and thereafter D distributed as dividend. On the question of the taxability of that 'hare of the dividend paid out of the capital gains in the hands of the company the Income-tax Officer held the same was taxable as "dividend." The Appellate Assistant Commissioner held that the amount coulll not be considered as "dividend" withill the meaning of section· 2(6A) of the Income-tax Act. 1922, but the same was taxable as income· in the hands of the assessee. The Tribunal confirmed the order of the· E Appellate Assistant Commissioner. The High Court on reference· "nswered in favour of the assessee.
Dismissing the apix:als,
HELD: It is well-settled that in order to find out whether a receipt '' a capital receipt or revenue receipt, it has to be seen what it is in the· F h;:.nds of the receiver and not its nature in the hands of the payer. In other words. the nature of the receipt is determined entirely by its character· m the hands of tt.~ receiver and the source from which the payment· is made has no bearing on the question. [ 417 G]
. The assessees who were share-holders in the company were beneficially entitled o the capital of the company. The amount in question G was not somethmg eamed by the company in the course of its business. Undoubtedly it was a capital receipt in the hands ofthe company but that. by .itself is not sufficient. It has to be seen whether it was a capital' receipt m the hands of the assessee. Since the assessee had a beneficial' interest in the sum when it was in the hands of the company, when that sum was distributed amotrnst the share-holders of the company, each ,,f the share-holders took a share of the capital asset in which they were· II beneficially entitled. That being so, the receipt in the present case· must also be considered as capital receipt. The fact that those sums were distributed as "dividends" does not change the true· nature· of the· rceipt. [229 D-G]
J l 97 I ] I S.C.R .
. 226
SUPREME COURT REPORTS
Commissioner of 'Income-tax, West Bengal v. Nalin Behari Lall Singha, 74 l.T.R. 749 and Trustees of the will of H.K. Brodie (Deceased) v. Commissioner of Inland Revenue, 17 T.C 432, referred to.
A
CIVIL APPELLATE JuR1smcrioN : Civil Appeals Nos. 1667 to 1673 to 1968.
Appeals from the judgment and order dated August 30, 1967 of the Calcutta High Court in Income-tax Reference Nos. 3, 6, 7, 8, 9, IO and 11 of 1964.
B
B. D. Sharma, for the .appellant (in all the appeals).
Sukumar <Jhose and Swapna Ghosh, for the appellant C -(in all the appeals),
The Judgment of the Court was delivered by
Hegde, J. Two questions of law which arise for decision in these appeals are:
o
"(!) Whether on the facts and in the circumstances of the case of Tribunal was right in holding that the distribution to the assessee of the amount attributable to land acquisition compensation received by the Ukhara Estate Zamindaries Ltd. after 31st March, J 948 was in the hands of the assessee, receipt of dividend within the meaning of Section 2(Al of the Indian Income-tax Act, 1922 ?
(2) Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the receipt by the assessee of the amount attributable to selamis realised by the Ukhara Estate Zamindaries Ltd., for grant of long-term leases after 31st March, 1948 was a receipt of income of the assessee and taxable as the income of the assessee from other sources?"'
E
F
On both these questions the decision of the authorities under the Indian Income-tax Act, 1922 (in brief the Act) as well as that of the Tribunal was against the assessees. But disagreeing with the view taken by these authorities the High Court answered both these questions in favour of the assessees. The Commissioner of Income-tax, West Bengal aggrieved by this decisions has brought these appeals .to this Court on the strength of the certificates given by .the High Court.
G
H
c.I.T. v. K. B. SINGHA (H'egde, J:)
227
A As facts in each of these appeals are more or less similar,. it is sufficient if we set out the facts in the case of Kamal Behari Lal Singha, for th~ assessment year 1950-51, the corresponding accounting year being 1356 B. S. ending on April 13, 1950. It is said that Kamal Behari Lal Singha, who will hereinafter be referred to as the assessee was a B shareholder in the Ukhara Estate Zamindaries Ltd. (to be hereinafter referred to as the "company"). During the relevant accounting year, the asses see received a sum of Rs. 13,200 as dividend from the said company. The said dividend was declared on October 19, 1949. Out of that c amount a sum of Rs. 8,829 was paid out of the accumulated capital gains, received by the company in the shape of Selamis and land acquisition compensation receipts after March 31, 1948. Such capital gains were taken to the reserve fund and thereafter distributed as dividends. The remainder of the dividends was paid out of the balance of D the profit and loss account. In these appeals the dispute centres round the taxability of that share of the dividend which has been paid out of the capital gains in the hands of the company. The Income-tax Officer came to the conclusion that no dividend distributed can be considered as having been paid out of the "capital gains" of the com• E pany, therefore the same is taxable as "dividend". In appeal the Appellate Assistant Commissioner accepted the contention of the assessee that the receipt of Rs. 8,829 cannot be considered as dividend within the meaning of s.2 (6A) of the Act but he held that the same is taxable as · income in the hands of the assessee. The Tribunal con-· F firmed the order of the Appellate Assistant Commissioner
It is now well settled that in order to find out whether a receipt is a capital receipt or a Revenue receipt one has to see what it is in the hands of the receiver and not its nature in the hands of the payer. In other words, the nature of G receipt is determined entirely by its character in the hands of the receiver and the source from which the payment is made has no bearing on the question. Where an amount is paid which, so far as the payer is concerned, is paid wholly or partly out of the capital, and the receiver receives it as income on his part, the entire receipt is taxable in the H hands of the receiver. Therefore the fact that the amount sought to be taxed in these appeals was capital gains irt the hands of the company is not a relevant circumstance. What
11 9? I J 1 S.C.R.
SUPRH!l COL'RT REPORTS
228
we have to see is what it was in the hands of the assessee" .\ The question whether a particular receipt is a capital receipt or a revenue receipt is a somewhat difficult question ,10 decide though the principles bearing on the question arc well settled. The application of those principles to a given set of facts often creates difficulties. The decision by and large depends upon the facts of each case.
So far as the first question set out earlier is concerned the same is settled by the decision of this Court in Commissioner of 111come·tax, West Bengal v. Na/in Behari Lall Singha (1 ). The assessec therein was also one of the shareholders of Ukhara Estate Zamindaries Ltd. His case was no different from that of the respondents herein. But the only point that arose for decision in that appeal was whether the receipts similar to those we arc considering here can be considered as 'dividends'? This court answered that question in the negative. This Court refused togo in to the question whether the same could be considered as income -other than dividend. Dealing with that contention this ·Court observed :
''Counsel for tile revenue sought to argue that the 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."
B
C
D
E
J.o'
rn these appeals we have to decide what was left undecided in that casl:. ·
Coming back to the question how exactly to draw the .line between a capital receipt and a revenue receipt in .cases of the type tlrnt are before us, one can-do no better than refer to the observations of Finlay J. in Trustel!s of the Will of H. K. Brodie (deceased) v. Commissioner Inland ..Re1'e1u1e (2).
G
"But, I think, the governing consideration is this: the question be ing, was the sum received as income, H one has to consider what was the source from which
·(I) 74 l.T.IC 749.
c.J 17 T.C. 43 ilt p. 439.
C.I.T. v. K. B. SINGHA (Hegde, J.)
229
A
A it was received and what were the circumstances in which it was received. lf the capital belonged to the person receiving the sums--if he or she was beneficially entitled not only to the income but to the rapital then I should think that, when the. payments were made, they ought to be regarded, and would be regarded, as payments out of capital, but where there is a right to the income, but the capital belongs to somebody else, then, if payments out of capital are made and made in such a form that they come into the hands of the beneficiaries as income, it seems to me c that they are income and not the less income, not of the person receiving them, but in the hands of somebody else-capital.''
The above observations, inJ.our opinion, correctly set out the law.
D Let us now turn to the facts of this case. The assessees were shareholders in the company. They were beneficially entitled to the capital of the company. The amount with which we are concerned in these appeals was received by the company as Salamis and as compensation for the acquisition of the lands of the company. It was not something earned by the company in the course of its business. Undoubtedly it was a capital receipt in the hands of the company but that by itself is not sufficient. We have next to >ee whether it was a capital receipt in the hands of the assessee. As mentioned earlier, the asscssce had a beneficial interest in that sum when it was in the hands of the F company. Therefore when that sum was distributed amongst the shareholders of the company, each of the shareholders took a share of the capital set in which they were beneficially entitled. That being so the receipt with which we are concerned in these appeals must also be considered as capital receipt. The fact that G those sums were distributed as 'dividends' does not change the true nature of the receipt. A receipt is what it is <.1nd not what it is called.
In the result these appeals fail and they are dismissed with costs-hearing fee one set.
H
Appeal dismissed.
K.B.N.
2 issues framed by the court
Whether the distribution to shareholders of amounts attributable to land acquisition compensation received by Ukhara Estate Zamindaries Ltd. was a taxable dividend in the assessee's hands?
Whether receipts attributable to selamis realised by the company for long-term leases were income of the assessee from other sources?
Colour shows how this judgement treated each authority
Commissioner of Income-tax, West Bengal v. Nalin Behari Lall SinghaRelied on
74 l.T.R. 749
Trustees of the Will of H.K. Brodie (Deceased) v. Commissioner of Inland RevenueRelied on
17 T.C. 432
2 provisions across 2 enactments
Commissioner of Income Tax, West Bengal
Kamal Behari Lal Singha
K. S. Hegde
A. N. Grover
As recorded by the court registry
Judgements on the same questions, provisions and authorities, from every court
