# CALCUTTA v. INDIA DISCOUNT CO. LTD

- **Citation:** [1970] 1 S.C.R. 767
- **Court:** Supreme Court of India
- **Decided:** 1969-08-07
- **Bench:** J. C. Shah, Acting C.J, V. Ramaswami, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/calcutta-v-india-discount-co-ltd-4692
- **Pages:** 5

## Headnote

Income-tax Act (11 of 1922), ss. 10 •nd 12-Shares sold with arrear
dividends-Amount of arrear dividends received by purchaser-Whether
taxable.
·
The assessee--e. dealer in shares and securities, purchased ceitain shares
on which dividends relating to previous years were in arrears. The shares
were sold with the arrear dividends.
The assessee received the amount
of arrear dividends and he first credited this sum to the profit and Joss
appropriation account end thereafter transferred the same to a reserve
fund. No adjusttnent was made in the share purchase account on account
of the receipt of the dividend. The value of the shares which represented
the stock-in-trade of the assessee remained the same both in the opening
and the closing $(.ocks.
The assessee claimed that the amount of arrear
dividends received was not income liable to income-tax as it was merely a
realisation of the .capital. The Income-tax Officer rejected the contention
and brought it to tax. This decision was upheld in further appeals. But,
on reference, the 1Iigh Court held that the amount was not liable to tax.
Dismissing the appeal by the Revenue, this Court,
HELD : The .consideration paid by the assessee was given not only
for the shares but' also for the share dividends. As the dividend had been
declared long ago there was no uncertainty as to the exact amount receivable. in respect of them, and so, both the purchaser and the vendor knew
exactly what sum would come to the vendor by way of such dividend.
The existence of a contract binding the vendors to make over to the
purchaser the arrear dividends clearly implied that the price paid by the
purchaser was not only for the value of the share scrips but also for the
amount whi'!h was going to be realised in the form of arrear dividends by .
the purchaser. Such an arrangement· implied that the value of the per
share settled into the broker's bill was not the real value of the share
scrips alone but also included the element of the arrear- dividends agreed
to be receivable
by the purchaser.
The legal position, therefore, was
that the arrear dividends were not claimable by the purchaser by virtue
of his right as such· .. purchaser and could noc become .his income from
the· shares.
He Wall to ~et the same because the yendor bad contracted
to pass the arrear dividends on to him.
They were the income of the
vendors, i.e., the regiMered holders but they could not become the income
of the purchaser. What the assessee acquired in the form of share scrip
represented its stock-in-trade which consisteO of the shares and the dividends potential which had to be realised. [770 D-H]
A receipt whiclt in law cannot be regarded as income cannot become
so merely because the assessee erroneously cTedited it to the profit anJ
loss account. [771 CJ
·
Commissioner of Income-tax, Bombay City I v. Mis. Shoorji Vallabhdas & Co. 46 I.T.R. 144, referred to.
C!V!L APPELLATE JURISDICTION : Civil Appeal No. 2115 of
1968.
LISSupCI/69-5
.SUPREME OOU..T Jll!PORTS
[1970) l S.C.11. .
Appeal from the- judgment and onter dated January 6, 1965
A
of. the Calcutta High ('.ourt in Income-tax Reference No. 145 of
1961.
B. Sen, S. A. L. Narayana Rao, R. N. Sachthey and B. D.
Sharma, for the appellant.
S. Mitra and P. K. Mukherjee, for the respondent.
The Judgment of the Court was ~livered by
Ramaswaml, J. The respondent is a private limited company
(hereinafter referred to as the asscsscc).
The appeal relates to
the assessment year 1956·57 for which the previous year is the
year ending September 30, 1955.
The business of the usessee
was to deal with shares and securities.
On September 30, 1954
the assessee purchased 11 ,900 shares of Kedarnath Jute Manufacturing Co. Ltd. in two lots, one at the rate of Rs. 9-8-0 per
share and U1e other at Rs. 9-4-0 per share from one Beharilal
Nathani, Share broker, for a total consideration of Rs. 1,12,575/·.
When the assessee purchased the said shares a large amount of
dividends was in arrear as the previous owners

## Text

767
A
COMMISSIONER OF INCOME-TAX (CENTRAL)
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CALCUTTA
v.
INDIA DISCOUNT CO. LTD.
August 7, 1969
[J. C. SHAH, ACTING C.J., V. RAMASWAMI AND A. N. GROVER, JJ.]
Income-tax Act (11 of 1922), ss. 10 •nd 12-Shares sold with arrear
dividends-Amount of arrear dividends received by purchaser-Whether
taxable.
·
The assessee--e. dealer in shares and securities, purchased ceitain shares
on which dividends relating to previous years were in arrears. The shares
were sold with the arrear dividends.
The assessee received the amount
of arrear dividends and he first credited this sum to the profit and Joss
appropriation account end thereafter transferred the same to a reserve
fund. No adjusttnent was made in the share purchase account on account
of the receipt of the dividend. The value of the shares which represented
the stock-in-trade of the assessee remained the same both in the opening
and the closing $(.ocks.
The assessee claimed that the amount of arrear
dividends received was not income liable to income-tax as it was merely a
realisation of the .capital. The Income-tax Officer rejected the contention
and brought it to tax. This decision was upheld in further appeals. But,
on reference, the 1Iigh Court held that the amount was not liable to tax.
Dismissing the appeal by the Revenue, this Court,
HELD : The .consideration paid by the assessee was given not only
for the shares but' also for the share dividends. As the dividend had been
declared long ago there was no uncertainty as to the exact amount receivable. in respect of them, and so, both the purchaser and the vendor knew
exactly what sum would come to the vendor by way of such dividend.
The existence of a contract binding the vendors to make over to the
purchaser the arrear dividends clearly implied that the price paid by the
purchaser was not only for the value of the share scrips but also for the
amount whi'!h was going to be realised in the form of arrear dividends by .
the purchaser. Such an arrangement· implied that the value of the per
share settled into the broker's bill was not the real value of the share
scrips alone but also included the element of the arrear- dividends agreed
to be receivable
by the purchaser.
The legal position, therefore, was
that the arrear dividends were not claimable by the purchaser by virtue
of his right as such· .. purchaser and could noc become .his income from
the· shares.
He Wall to ~et the same because the yendor bad contracted
to pass the arrear dividends on to him.
They were the income of the
vendors, i.e., the regiMered holders but they could not become the income
of the purchaser. What the assessee acquired in the form of share scrip
represented its stock-in-trade which consisteO of the shares and the dividends potential which had to be realised. [770 D-H]
A receipt whiclt in law cannot be regarded as income cannot become
so merely because the assessee erroneously cTedited it to the profit anJ
loss account. [771 CJ
·
Commissioner of Income-tax, Bombay City I v. Mis. Shoorji Vallabhdas & Co. 46 I.T.R. 144, referred to.
C!V!L APPELLATE JURISDICTION : Civil Appeal No. 2115 of
1968.
LISSupCI/69-5
.SUPREME OOU..T Jll!PORTS
[1970) l S.C.11. .
Appeal from the- judgment and onter dated January 6, 1965
A
of. the Calcutta High ('.ourt in Income-tax Reference No. 145 of
1961.
B. Sen, S. A. L. Narayana Rao, R. N. Sachthey and B. D.
Sharma, for the appellant.
S. Mitra and P. K. Mukherjee, for the respondent.
The Judgment of the Court was ~livered by
Ramaswaml, J. The respondent is a private limited company
(hereinafter referred to as the asscsscc).
The appeal relates to
the assessment year 1956·57 for which the previous year is the
year ending September 30, 1955.
The business of the usessee
was to deal with shares and securities.
On September 30, 1954
the assessee purchased 11 ,900 shares of Kedarnath Jute Manufacturing Co. Ltd. in two lots, one at the rate of Rs. 9-8-0 per
share and U1e other at Rs. 9-4-0 per share from one Beharilal
Nathani, Share broker, for a total consideration of Rs. 1,12,575/·.
When the assessee purchased the said shares a large amount of
dividends was in arrear as the previous owners had not claimed
the dividend; declared between 1936 and 1945, although a large
part of the dividends on the said shares in respect of the years
1945 to 1954 had been collected by the previous owners of the
said shares.
A letter addressed by Behari!al Nathani to the
assessee bearing the date September 30, 1954 goes to show that
the shares had been "sold with arrear dividends".
It is adinitted
that the dividends which had been declared between the years
1936 and 1945 and were received by the assessee during
th~
accounting period amounted to Rs. 43,925/·. The assessee first
credited this sum to the profit and loss appropriation account and
thereafter transferred the same to a reserve fund in the accounting
year ending September 30, 1955.
No adjustment was made in
1he share purchase acoount on account of the receipt of dividend.
The value of the shares which represented the stock-in-trade Jf
the assessee remained the same both in the opening and the clos·
ing stocks.
Before the Income-tax Officer it was contended on
behalf of the assessee that as the arrear dividends pertained to the
years 1936 to 1945 the arrear dividend received by the assessee
was not \n the nature of income liable to income-tax as it was
merely a realisation of capital.
The Income-tax Officer rejected
the contention of the assessee and treated the amount of arrear
di\·idend as the business income of the assessee liable to tax.
On
appeal by th~ assessee the Appellate Assistant Commissioner of
Income-lax examined the question whether the amount of
Rs. 43,925/- should be treated as dividend and should therefore,
be assessed under s. 12 of the Indian Income.tax Act, 1'922 (hereinafter referred to as the Act) or whether it should be treated as
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C.I.T. v. INDIA DISCOUNT co. (Ramaswami, I.)
769
profits and gains of business arising to the assessee and taxed
under s. 10 of the Act.
He, however, held that the amount could
not be regarded as 'dividend' as the assessee was not the registered
shareholder in the years for which the arrear dividends were
declared. But he held that since the shares were purchased by
the assessee with the knowledge that it would be entitled to receive
the arrear dividends which represented profits arising on the
acquisition of such shares, the assessee could be deemed to have
entered into a scheme of profit making, an adventure in the nature
of trade.
The assessee brought a second appeal to the Appellate
Tribunal but the appeal was dismissed.
The Appellate Tribunal
confirmed the findings by the Income-tax authorities and held that
lhe assessee acquired the shares on which the arrear dividends
were received in the course of its share-dealing business and that
the sum of Rs. 43 ,925 /- so received by the assessee formed an
integral part of its income arising from business which was liable
to tax.
At the instance of the assessee the Appellate Tribunal
stated a case to the High Court on the following question of law :
"Whether on the facts and in the circumstances of
the case the sum of Rs. 43,925/- received by the assessee
represented business income arising under section 10
from an adventure in the nature of trade or it was a
dividend within the meaning of section
12
of
the
Income-tax Act ?"
After looking into the statement of case and also the application
of the assessee under s. 66 (1) of the Act the High Court held
that the question which the Tribunal had referred did not correctly
and accurately describe the stand and contention taken by the
assessee throughout which was that no part of the arrear dividend
received by the assessee was income at all liable to tax.
The
High Court thereafter addressed itself to the real issue between
the parties and μJtimately held that the amount of Rs. 43,925 /-
was not liable to tax.
This appeal is brought on behalf of the
Commis>ioner of I11come-tax against the judgment of the High
Court dated January 6, 1965 by a certificate granted under s.
66A(2) of the Act.
It is necessary that the question referred to by the High Court
should be reframed in the following manner in order to bring out
the real point in controversy between the parties :
"Whether in the facts and circumstances of the case
the assessee had purchased the arrears of dividend ? If
so whether the. said sum of Rs. 43,925/- could at all be
assessed either as dividend or as profit ?"
It is manifest that dividends declared by Kedarnath Jute
Manufacturing .Co., between the years 1936 and 1945 were the
770
SljPREME COURT REPORTS
[ 1970] I S.C.R.
property of the persons whose names stood on the share register
on the relevant dates.
When a company declares dividend the
same can only be paid to the person who is then the registered
holder.
A purchaser of shares becomes entitled 10 all dividemds
declared since his purchase but not before. If the purchase is
made on the eve of declaration of dividend but the purchaser does
not get his name mutated in the records of the company in time
to have the dividend-warrant issued in his own name be is entitled
to call up011 his vendor to make over the dividend to him if and
when reccil'ed.
It is well settled that after a sale of the shares
:ind so loug as the purcha.ser docs not get his name registered, the
vendor is for certain purposes considered a trustee for the purchasfr of the rights attaching to the shares or accruing thereon,
including the voting rights.
Jn the present case there was a contract betwec.n the assessee and the registered shareholders to sell
the shares to the assessee with arrear dividends.
In other words
the assessce entered into the contract with the registered shareholders n:it only to purchase share scrips but the dividends which
had been declared but not collected by him or paid over to shareholders.
As the dividends had been declared long ago there was
no uncertainty as to the exact amount receivable in
respect of
them.
It is. therefore, clear that both the purchaser
and
the
vendor kn~w exactly what sum of money would
come
to
the
vendor by way of such dividend.
In other words the purchase
consideration included the amount of the arrear dividends and as
the dividc.nds had been declared long ago, there was no uncertainty as to the exact amount receivable in respect of them. The
existence of a contract binding the vendors to make over to the
purchaser the arrear dividends clearly implied that the price paid
by the purchaser was not only for the value of the share scrips
but also for the sum of Rs.
43.925/- which was
going to be
reJ!ised in the form of arrear dividends by the purchaser.
The
Hi.~h Court held upon an examination of the evidence that such
an arrangement implied that the value of Rs. 9-8-0 and Rs. 9-4-0
per share as settled into the broker's bills was not the real value of
the share scrips alone but also included the clement of the arrear
dividends a~rccd to be receivable by the purchaser.
TI1e legal
Position, therefore. is that the arrear dividends were not claimable
by thr. purchaser by virtue of his right as such
purchaser and
could n0t b~come his income from the shares.
He was to get the
same because the vendor had contracted to pass the arrear dividends 0•1 to him.
They were the income of the vendors, i.e., the
registered holders but they could not become the income of the
purchaser.
In fact the assessee had purchased the
amount of
arrear div1Jends for a price which was included in the total consideration of Rs .. I.12.575/-.
What the assessce acquired in the
form of share scnp represented its stock-in-trade, which con~isted
of the shares and .the dividends potential which had to be realised.
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C.I.T. v. INDIA DISCOUNT co. (Ramaswami, J.)
77 I
In this state of facts it is manifest that the assessee paid the
amount of Rs. 1,12,575/- not only for the share scrips but also
for the arrear dividends which was inextricably connected with
the purchase. of the share scrips.
In our opinion the High Court
rightly held that the amount of Rs. 43,925/- was not income which
could be assessed in the hands of the assessee.
It was said that the assessee had itself credited the amount of
Rs. 43,925/- to the profit and loss appropriation account and
thereafter transferred the samei to a reserve fund in the accounting
year ending September 30, 1955. No adjustment was made in
the share purchase account on account of the receipt of dividend.
But it is well established that a receipt which in law cannot be
regarded as income cannot become so merely because the assessee
erroneoμsly credited it to the profit and loss account.
[see Commissiona of Income-tax, Bombay City Iv. M/s. SJworji Va/labhdas & Co.(')]. The assessee's case, had all along been that the
amount of arrear dividends received could not be treated as
income of.-ihe assessee liable to tax for the assessment year
1956-57. As we have already shown the consideration paid by
the assessee was given not only for the shares but also for share
dividends amounting to Rs.
43,925/-
and the amount of
Rs. 1,12,575/- was paid not only for the.share scrips but also
for the arrear dividends.
In other words there was capital purchase by the assessee of the shares together with arrear dividends
due on the &hares for the years 1936 to 1945. It is therefore not
possible to treat the payment of Rs. 43,925/- as income liable to
tax either as profit under s. 10 of the Act or as dividend under
s. 12 of the Act.
For the 1easons expressed we hold that there is no merit in
this appeal.
It is accordingly dismissed with costs.
Y.P.
Appeal dismissed.
(I) 46 I.T.R. 144.