# COMMISSIONER OF INCOME-TAX, WEST BENGAL v. CENTRAL INDIA INDUSTRIES LTD. September 7. 1971

- **Citation:** [1972] 1 S.C.R. 619
- **Court:** Supreme Court of India
- **Decided:** 1972
- **Case number:** Civil Appeals Nos. 2347 of 1968
- **Bench:** !(. S. Hegde, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-west-bengal-v-central-india-industries-ltd-september-5414
- **Pages:** 8

## Headnote

/nco111e-tax Act 1922, s. 16(2)-Parent co111pany distributing dividend
to assessee con1pany partly in cash and partly in scrips-In
coniputing
inco111e of assessee co111pany fron1 dividend said scrips whether to be valued at fuce vaflle or niarkei value-Considerations.
The assessee company was holding certain shares
in an investment
company which was its parent company.
The an1ount of dividend receivable by the asscsscc company was paid to it partly in cash and partly in
share scrips of hvo other companies. The relevant assessment year was
1959-60.
For the purpose of assessment under the Income-tax Act, 1922
the Income-tax Officer valued those shares as per their market value on
the date on which those shares became the assets of the assessee company.
He therefore added to the amount of dividend purported to have
bce.n declared a sum of Rs. 61,500/- in computing the assessable income
of the asscssee company. The Appellant Assistant Commissioner upheld
the order of the Income-tax Offi:.-:cr and rejected
the contention of the
assessee company that those shares should be valued as per their
face
value.
The Tribunal allowed the assessee's appeal on the grounds that :
(i) the distribution of share scrips was not a distribution of dividend, (ii)
the share scrips received 'by the assessee company had been valued at their
face value in the hands df the pa-rent company for the purpose of assessment of its profits and (iii) the assessee company had not sold the shares
and so there could be no profit in respect of
those shares.
The High
Court accepted the first two grounds relied on by the Tribunal. In addition it relied on the circumstance
that under s. 18(5) of the Act, the
assessee can get refund of tax only on !he, basis on which the parent company was taxed.
The certificate granted 'by the High Court for appeal to
this Court was found to be invalid because it did not give any reasons.
This Court however allowed the revenue to appeal by special leave.
On
behalf of the ·respondent assessee it was submitted that on a proper interpretation of the ·relevant provisions of the Income-tax
Act,
1922 the
scheme of the Act in the matter of levying tax on dividend income was
that the Income-tax Officer should adopt a uniform method in assessing
both the company declaring dividend as well as its shareholders who
receive the dividend.
c
HELD : (i) It is well settled by the decision in Kantilal Manilal's cme
that dividend need not be distributed in money only. It may be distributed by cJcliYerv of property or right having moni:tary value .. f623 B]
Kantilal Manila! and Ors. v. Comn1issioner of Incon1e-tax, Bombay
North, Kutch and Saurashtra, A hmedabad, 67 I.T.R, 315, applied.
Further the question whether a dividend has been lawfully distributed
or not is also irrelevant in the n1attcr o'f bringing the dividend declared
fo tax so long as the distributing con1pany passes a resolution distributing
dividends.
In so doing the distributing company. may act illegally
an.d
thereby incur penalties.
But yet the an1ount so d1~tnbuted as d1v1dend 1s
assessable in the hands of receiver of the dividend in view of s. 16(2)
which provides that for the purpose ut inclu,ion in the to!JI income of an
620
SUPREME COURT REPORTS
[1972] 1 S.C.R.
asscssee, any dividend shall be deemed to be income of the previous year
in which it is paid. [623 C-D]
Kishnic/zand Chellarani and Ors. v. Con1n1issioner of Income-tax,
Bombay, 36 !.T.R. 640, relied on.
(ii) It is well known that the face value of shares need not be their
real value at a given point of time. It would be wrong to say that when
shares are distributed as dividend, the person who receives them· gets only
their face value in terms of money.
What he really receives is the
market value of those shares as on the date he became entitled to those
shares.
The value of the shares distributed does not depend on the valuation made by the distributing company. The
income
earned
by an
asscssee has to be determined by the auth

## Text

A
B
c
D
E
F
G
H
619
COMMISSIONER OF INCOME-TAX, WEST BENGAL
v.
CENTRAL INDIA INDUSTRIES LTD.
September 7. 1971
[!(. S. HEGDE AND A. N. GROVER, JJ.]
/nco111e-tax Act 1922, s. 16(2)-Parent co111pany distributing dividend
to assessee con1pany partly in cash and partly in scrips-In
coniputing
inco111e of assessee co111pany fron1 dividend said scrips whether to be valued at fuce vaflle or niarkei value-Considerations.
The assessee company was holding certain shares
in an investment
company which was its parent company.
The an1ount of dividend receivable by the asscsscc company was paid to it partly in cash and partly in
share scrips of hvo other companies. The relevant assessment year was
1959-60.
For the purpose of assessment under the Income-tax Act, 1922
the Income-tax Officer valued those shares as per their market value on
the date on which those shares became the assets of the assessee company.
He therefore added to the amount of dividend purported to have
bce.n declared a sum of Rs. 61,500/- in computing the assessable income
of the asscssee company. The Appellant Assistant Commissioner upheld
the order of the Income-tax Offi:.-:cr and rejected
the contention of the
assessee company that those shares should be valued as per their
face
value.
The Tribunal allowed the assessee's appeal on the grounds that :
(i) the distribution of share scrips was not a distribution of dividend, (ii)
the share scrips received 'by the assessee company had been valued at their
face value in the hands df the pa-rent company for the purpose of assessment of its profits and (iii) the assessee company had not sold the shares
and so there could be no profit in respect of
those shares.
The High
Court accepted the first two grounds relied on by the Tribunal. In addition it relied on the circumstance
that under s. 18(5) of the Act, the
assessee can get refund of tax only on !he, basis on which the parent company was taxed.
The certificate granted 'by the High Court for appeal to
this Court was found to be invalid because it did not give any reasons.
This Court however allowed the revenue to appeal by special leave.
On
behalf of the ·respondent assessee it was submitted that on a proper interpretation of the ·relevant provisions of the Income-tax
Act,
1922 the
scheme of the Act in the matter of levying tax on dividend income was
that the Income-tax Officer should adopt a uniform method in assessing
both the company declaring dividend as well as its shareholders who
receive the dividend.
c
HELD : (i) It is well settled by the decision in Kantilal Manilal's cme
that dividend need not be distributed in money only. It may be distributed by cJcliYerv of property or right having moni:tary value .. f623 B]
Kantilal Manila! and Ors. v. Comn1issioner of Incon1e-tax, Bombay
North, Kutch and Saurashtra, A hmedabad, 67 I.T.R, 315, applied.
Further the question whether a dividend has been lawfully distributed
or not is also irrelevant in the n1attcr o'f bringing the dividend declared
fo tax so long as the distributing con1pany passes a resolution distributing
dividends.
In so doing the distributing company. may act illegally
an.d
thereby incur penalties.
But yet the an1ount so d1~tnbuted as d1v1dend 1s
assessable in the hands of receiver of the dividend in view of s. 16(2)
which provides that for the purpose ut inclu,ion in the to!JI income of an
620
SUPREME COURT REPORTS
[1972] 1 S.C.R.
asscssee, any dividend shall be deemed to be income of the previous year
in which it is paid. [623 C-D]
Kishnic/zand Chellarani and Ors. v. Con1n1issioner of Income-tax,
Bombay, 36 !.T.R. 640, relied on.
(ii) It is well known that the face value of shares need not be their
real value at a given point of time. It would be wrong to say that when
shares are distributed as dividend, the person who receives them· gets only
their face value in terms of money.
What he really receives is the
market value of those shares as on the date he became entitled to those
shares.
The value of the shares distributed does not depend on the valuation made by the distributing company. The
income
earned
by an
asscssee has to be determined by the authorities under the Act and not by
a third person.
If it is othe·rwi~c several companieS may distribute their
dividend in kind and undervalue the goods distributed and thereby facilitate evas;0n o[ tax by their share-holders. ~623 G-624 Bl
·
(iii) The question whether the share-holder retains those shares
or
sells them to others at profit or loss ls irrelevant.
An income does not
cease to be an income merely because the person who receives it retains
it in his hands. The fact that he receives it in kind does not make any
difference in principle. The Tribunal went wrong in thinking that as the
assessee company had retained those shares in its own hands those shares
should. be valued at their face value. [623 E-H]
(iv) The Tribunal and the High Court also went wrong in holding
that it \Vas not open to the authorities under the Act to value the shares
differently in the hands of the assessee company when they had valued
them at their face value in assessing the parent company.
The assessce
company could not insist that the error should
also be carried to the
assessment of the assessee company.
No one gets any vested right in an
,erroneous order, [624 G-H]
(v) Because of erroneous valuation of the shares in the hands of the
parent company, the assessee may conceivably get a lesser amount as refund under s. 18(5) but that circumstance could not alter the levy to be
imposed on the assessee company.
There
is no provision
in the Act
which makes the assessment of income dependent on refund.
The provisions relating to assessment are independent of refund through the provisions relating to refund may depend on assessment. [625 E-G]
The appeal must accordingly be allowed.
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 2347 of
1968 and 1175 of 1971.
Appeals by certificate/special leave from the judgment and
order dated November 15; 1967 of the Calcutta High Court in
Income-tax Refereince No. 155 of 1963;
S. T. Desai, B. B. Ahuja, R. N. Sachthey and B. D. Sharma,
A
B
c
D
E
F
G
for the appellant (in both the appeals).
H
B. Sen, N. R. Khaitan, B. P. Maheshwari and Krishna Sen,
for the respondent (in both the appeals).
A
B
c
D
E
F
G
H
·c.I.T. v. CENTRAL INDIA INDUSTRIES (Hegde, J.)
621
The Judgment of the Court was delivered by
, Hcgde, J.
The.se appeals arise from the decision of the High
Court of Calcutta m a Reference under s. 66 ( l ) of the lrn.irnn
Income-tax Act, 1922 (to be hereinafter reierred to as the Act).
That was a Reference made by the Income-tax Appellate Tribunal, 'A' bench, Calcutta.
In that Reference after statino the
case, the Tribunal referred the following question for obtaininrr
the opinion of the High Court.
0
"Whether on the facts and in the circumstanc~s of
the case the Tribunal rightly excluded the
sum
of
Rs. 61,656/- from being assessed as an extra dividend
income of the assessee."
The High Court answered that question in the affirmative.
Aggrieved by that decision, the Commissioner. of West Bengal
has brought Civil Appeal No. 2347 of 1968 on the strength of
the certificate issued by the High Court under s. 66-A ( 2) of the
Act. But the certific_ate given by the High Court is not supported
by any reason.
Hence the same cannot be held to be a valid
.:ertificate. Because of the invalidity of the certificate that appeal
must be held to be not maintainable. In order to get over this
difficulty, the Commissioner moved this Court for ;pecial leave
to appeal against the judgment of the High
Court.
Special
Leave asked for was granted after condoning the delay in filing
the appeal and the appeal arising therefrom was numbered as
Civil Appeal No. 1175 of 1971.
The assessee is a company.
Herein we are concerned with
its assessment for the assessment year 1959-60, the relevant previous year ending on March 31, 1959. The assessee company
was holding 458,071 shares ln Pilani Investment
Corporation
Ltd. (which will hereinafter be referred to as the "parent company"). As per the resolution of the parent company declaring
the dividends, the assessee company became entitled te receive
on November 18, 1958 dividend amounting to Rs. 1,83,228/40
Np. That was at the rate ot 40 N.P. per share. The amount of
dividend receivable by the assessee company was paid to it partly
in cash and partly jn share scrips. It may be noted at this stage
that the parent company is an investment company.
The share
scrips delivered to the asses see company were of M/ s. Gwalior
R:tyon and Silk Manufacturing Co. Ltd. and Hind Cycles Ltd.
The Income-tax Officer valued those shares as per their market
value on. the date on which those shares became the assets of the
assessee company.
The market value of those shares on that
date was Rs. 2,44,526/-. He, therefore, added to the amount
of dividend purported to have
been
declared,
a
sum
of
Rs. 61,500/- in computing the assessable income of the assessee
SUPREME COURT REPORTS
[1972] l S.C.R.
company. Aggrieved by that order, the assessee company wem
up in appeal to the AppelJate Assistant Commissioner. The
Appellate Assistant Commissioner upheld the Jrder of the Income-tax Officer and rejected the comention of the
assessec
wmpany, that those shares should be valued as per their face
value.
Thereafter the assessee company took up the matter in
second appeal to the Appellate Tribunal.
The Tribunal allowed
the assessee's appeal.
lt held that in order to bring any distribuuon within the category of dividend, it must
IJ;~ proved as a
fact that what was distributed by the company was its accumulated profits.
The Tribunal appears to have been of the view
that the distribution of share scrips was not a distribution of
profits.
Hence their value cannot be considered as dividend.
One other reason which persuaded the Tribuual to accept the
appeal of the assessee company was that the share scrips received
by the assessee company had been valued at their face value in
the hands of the parent company for the purpose of assessment
of its profits.
The Tribunal thought that it was impermissible
for the Income-tax Officer to value those shares in one maDner
in. the hands of the parent company and in another manner in
the hands of the assessee company.
Yet anothe~ consideration
that weighed with the Tribunal was that the assessee company
had not sold those shares.
Therefore it made no profits in respect of those shares.
So long as it retained those shares in its
own handS, it cannot be said that it made any profits in respect
of those shares as it cannot be said that it sold those shares to
itself for a higher price. The High Court accepted the first two
grounds relied on by the Tribunal.
In addition it relied on the
circumstance that under s. 18 ( 5) of the Act, the assessee can get
refund of tax only on the basis on which the parent company was
taxed.
Before proceeding to examine the correctness of the conclusions reached by the Tribunal and the High Court, it is necessary
to note at this stage that one other firm which was a shareholder
of the parent company is Ujjain General Trading Society (P)
Ltd. During the assessment year 1959-60. the assessment year
with which we are concerned in these appeals in acordance with
the aforementioned resolution dated November 18, 1958, that
Company had also been paid dividend by \he parent company
partly in cash and partly in shares of Gwalior Rayon and Silk
Manufacturing Co. Ltd.
and Hind Cycles Ltd. In the assessment of that firm also, the question arose whether it was open
to the Income-tax Officer to value the shares distributed to that
company at a price higher than its face value.
The facts of this
t:ase and that case are identical. Therein the Appellate Tribunal
(a different Tribun~l) held that it was permisible for the IncomeA
R
c
D
E
F
G
H
A
B
c
D
E
F
G
H
C.I.T. v. CENTRAL INDIA INDUSTRIES (Hegde, J.)
623
tax Officer to ~~ so. In appeal the Madhya Pradesh High Court
upheld the dec1S1on of the Tribt\nal-see U jjain General Trading
Society (P) Ltd. v. Commissioner of Income-tax, Delhi('). Thus,
on the same question of law two different High Courts have
arrived at two different conclusions.
It is now well settled by the decision of this Court in Kantila/
Mani/al and ors. v. Commisioner of Income-tax, Bombay North,
K_ut~h and Saurashtra, Ahmedabad(') that dividend need not be
d1stnbuted in. money ~mly. It may be distributed by delivery of
property or nght havmg monetary value.
Further, the question
whether a dividend has been lawfully distributed or not, in the
matter of bringing the dividend declared to taK is also irrelevant
so fong as the distributing company passes a resolution distributing dividends.
In so doing, the distributing company may act
illegally and thereby incur penalties. But yet the amount so
distributed as dividend is assessable in the hands of the receiver
of the dividends in view of S, 16(2) which provides that for the
purpose of inclusion in the iota! income of an assessee, any dividend shall be deemed to be income of the previous year in which
it is paid.
This position is made clear by the decision of this
Court in Kishlnchand Chellaram and .ors. v. Commisioner of
Income-tax, Bombay('). Therefore the question whether dividi:nd
distributed by the parent company was out of the profits of that
company or not is immaterial though in view of s. 205 of the
Companies Act, 1956 and s. 2(6A) of the Act, only the profits
earned in the year of assessment·· and the accumulated profits
could have been distributed as dividends.
All that we have to
see is as to what is the income received by the assessee company
in the shape of dividends. We have earlier seen that the income
received by the assessee company need not be in the shape of
cash only.
It may also be some other property or right which
has monetary value.
Therefore when dividend is received in
kind, in order to find out the true income received by an assessee,
the property that has been received by him has to be valued on the
basis of its market value.
Otherwise it is not possible to compute the income received by him. It is well known that the face
value of shares need not be their real value at a given point of
time. The market price of particular shares may be very much
more than their face value or very much less. It would he wrong
to sav that when shares are distributed as dividend, the person
who ~eceives. them gets onbr their face value in tenns of money.
What he really receives is· the market value of those shares as
on the date he became entitled to those shares. The value of
(1) 67 J.T.R. 315.
(2) 41 I.T.R. 275.
(3) 46 I.T.R. 640.
624
SUPREME COURT REPORTS
(1972] 1 S.C.R.
the shares distributed does not depend on the valuation made
by the distributing company. The income earned by an assessee
has to be determined by the authorities under the Act and not
by a third person.
If it is otherwise several companies may
distribute their dividends in kind and under-value
the
goods
distributed and thereby facilitate evasion of tax by their share
holders. Acceptance of such a contention will be destructive of
1he .,,~ry basis of taxation of dividends. The question whether the
shareholder retains those shares or sells them to others at profit
or loss is irrelevant. An income does not cease to be an income
merely because the person who receives it retains it in his hands.
The fact that he receives it in kind makes no difference in principle.
What is broug)lt to tax in the concerned assessment year
is the income received by th<" assess<"e and not the profits earned
by him by dealing with that income. In our opinion, the Tribunal
weQt wrong in thinking that as the assessee company had retained
those shares in its own hands those shares should be valued at
their face value. At this juncture, it is necessary to mention that
in some previous years also the parent company had distributed
a portion of its share holding as dividend to its share holders.
It appears, in those years the market value of those shares was
less than their face value and the parent company valued those
shares for the purpose of its income .tax on the basis of market
value and not according to their face value. The parent company
appears to believe in the saying "Heads I win tails you loose".
But that is only by the way. The only question that we have to
decide is what is the income received by the assessee company
during the assessment year in question-the income in the real
sense.
On this question there can be no two answers and the
only answer is that the income received by it is the cash amount
received plus the value of the shares received-the real value of
the shares as on the date the asesssee company became entitled
to it.
Both the Tribunal and the High Court have attached considerable importance 'to the fact that while assessing the parent
company, the assessing authority had valued those shares at their
face value. That being so, they have opined that it was not open
to the authorities under the Act to value those shares differently
in the hands of the assessee company. Here again we are unable
to appreciate their reasoning. The fact that the Department incorrectly valued those shares in the hands of the parent company
does not confer a rig)lt on the assessee company 'to insist that
the error should also be carried to the assessment of the assessee
company.
No one gets a vested right in an erroneous order.
Because of erroneous valuation of the shares in the hands of the
parent company, the assessee may conceivably get a lesser amount
A
B
.c
D
E
F
G
H
A
B
c
D
E
G
C.I.T. v. CENTRAL INDIA INDUSTRIES (Hegde, J.)
625
as refund under s. 18 ( 5) but that circumstance cannot alter the
levy to be imposed on the ass'-ssee company.
Mr. B. Sen, learned Counsel for the assessee company, tried
to give a different shaRe. to the case in the course of his arguments.
He, rn our opm10n, nghtly did not base his urguments
on the grounds relied on by the Tribunal and the High Court.
On the other hand, he contended that on a proper interpretation
of the relevant pro\'isions of the Act, it would be seen that the
scheme of the Act, in the matter of levying tax on dividend income is that the Income-tax Officer should adopt
a
uniform
method in assessing both the company declaring dividends as
well as its shareholders who receive the dividend.
In support
of this theory of his he r>~lied on ss. 12(1-A), 16(2), 18(5), 20
and 35(9) of the Act.
Dividend is treated as income in view
of s. 12(1-A). Net dividend receiv~d by the
shareholder is
grossed up for inclusion in the total income of the assessee under
s. 16 ( 2). Section 18 ( 5) provides for refund of the tax paid on
the dividend income by the company
which has
distributed
dividend.
Section 20 provides for the issuance of a certificate
showing the gross dividend, tax payable on that dividend and the
net dividend.
Section 35(9) empowers the Income-tax Officer
to recover from the person who receives dividend the tax in
respect of the same, payable by the company which distributed
the dividend but in fact not paid by that company within the
prescribed time.
On the basis of these provisions, he urged that
if the dividend paid in kind is valued In one manner in the hands
of the company ,which distributed it and in a different manner
in the hands of the person who received it, then the assessee will
not be able to get the reflll!1d to which he would have been
entitled to had that property been valued properly in the hands
of the distributing company.
Therefore, he urged that we must
spell out the scheme put forward by him. Ingenious, though the
argument is, it rests on no foundation.
There is no provision
in the Act which makes the assessment of income dependent on
refund.
The provisions relating to assessment are independent
of refund though the provisions relating to refund may depend
on assessment. Equitable considerations are not rel·~vant in interpreting the provisions of a taxing statute, apart from the fact the
equity pleaded in this case is remote possibility.
None of the
provisions relied on by Mr. Sen affnrd any basis for the scheme
sought to be established bv him.
In our opinion the High Court erred in answering the question
referred to it in the affirmative and in favour of the assessee.
H
For the reasons mentioned above we discharge that answer and
answer that question in the negative and in favour of the Department.
6-L 3s 1p.c.1.1;2
626
SUPREME COURT REPORTS
[1972] 1 s.c.R.
In the result Civil Appeal No. 1175/71 is
allowed with
costs. Civil Appeal No. 2347 of 1968 is dismissed as being not
maintainable but without any order as to costs.
G.C.
C.A. No. 1175 of 1971 allowe<l.
C.A. No. 2347 of 1968 dismissed.
A
B