# KANTILAL MANILAL AND ORS v. THE COMMISSIONER OF INCOME-TAX

- **Citation:** [1961] 2 S.C.R. 584
- **Court:** Supreme Court of India
- **Decided:** 1961
- **Case number:** Civil Appeal No. • 364 of 1957
- **Bench:** J. L. Kapur, M. Hidayatullah, J. c. SH;\H
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/kantilal-manilal-and-ors-v-the-commissioner-of-income-tax-1993
- **Pages:** 6

## Headnote

'•
Income-tax-Distribution of new shares at half the market
value-If amounts to distribution of dividend-Assessment-Reopening of-The Indian Income-tax Act, r9a2 (II of r9zz), ss. a(6A)
(a), 66(r).
The appellants were shareholders of a company known as
Navjivan Mills ltd. which held a large number of shares of the
Bank of India. The Bank with the object of increasing their
share capital offered some more shares to the Mills for a price
including premium which was about half the market value. The
Mills purchased a small number of the shares so offered with
their own funds and distributed their right to acquire the
remaining shares to their shareholders in the proportion of two
shares of the Bank for one share held by them. The assessment
of the appellant was reopened by the Income Tax Officer under
s. 34(1)(a) of the Income-tax Act on the footing that the release
of the right to the shares of the Bank of India amounted to
distribution of dividend.
Appeals against the order of the
Income Tax Officer having failed, the High Court at the instance
of the appellants framed the following question:-
"Whether on the facts and circumstances of the case, the
diskibution 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"?
-.
2 s.c.R. SUPREME COURT REPORTS
585
The High Court answered the question in the affirmative. On
r960
appeal with a certificate of the High Court,
H ld h
h
·
k
b
h H' h C
. J(antilal Manilal
e , t at t e view ta en y t e
1g
ourt was correct.
.,. Others
The distribution to the shareholders of the Mills of the
v.
right to obtain two shares of the Bank of India for each share The Commissioner
held by them at half the market value amounted to distribution
of Income-lox,
of "dividend" which was liable to be taxed..
Bombay
r

## Text

584
SUPREME COURT REPORTS
(1961]
'960
therefore allow the petition, and declare that the
n. HingirOrissa Mining Areas Development Fund Act, 1952, is
Rampu• coal co., beyond the constitutional competence of the Orissa.
Lid. & Othm Legislature to pass it. The whole Act must be struck
v.
down because there will be very little left in the Act
Th• Stat• 01 ifs. 4 falls as it must. The legislature would never
Orissa ©- Otlurs have passed the Act without s. 4.
Wanchoo J.
BY COURT. In accordance with the majority Judgment of the Court, the Writ Petition is dismissed with
costs.
r960
November aa.
KANTILAL MANILAL AND ORS.
v.
THE COMMISSIONER OF INCOME-TAX,
BOMBAY
(J. L. KAPUR, M. HIDAYATULLAH and J. c. SH;\H, JJ.)
'•
Income-tax-Distribution of new shares at half the market
value-If amounts to distribution of dividend-Assessment-Reopening of-The Indian Income-tax Act, r9a2 (II of r9zz), ss. a(6A)
(a), 66(r).
The appellants were shareholders of a company known as
Navjivan Mills ltd. which held a large number of shares of the
Bank of India. The Bank with the object of increasing their
share capital offered some more shares to the Mills for a price
including premium which was about half the market value. The
Mills purchased a small number of the shares so offered with
their own funds and distributed their right to acquire the
remaining shares to their shareholders in the proportion of two
shares of the Bank for one share held by them. The assessment
of the appellant was reopened by the Income Tax Officer under
s. 34(1)(a) of the Income-tax Act on the footing that the release
of the right to the shares of the Bank of India amounted to
distribution of dividend.
Appeals against the order of the
Income Tax Officer having failed, the High Court at the instance
of the appellants framed the following question:-
"Whether on the facts and circumstances of the case, the
diskibution 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"?
-.
2 s.c.R. SUPREME COURT REPORTS
585
The High Court answered the question in the affirmative. On
r960
appeal with a certificate of the High Court,
H ld h
h
·
k
b
h H' h C
. J(antilal Manilal
e , t at t e view ta en y t e
1g
ourt was correct.
.,. Others
The distribution to the shareholders of the Mills of the
v.
right to obtain two shares of the Bank of India for each share The Commissioner
held by them at half the market value amounted to distribution
of Income-lox,
of "dividend" which was liable to be taxed..
Bombay
r
CIVIL APPELLATE JURISDICTION: Civil Appeal No.
•
364 of 1957.
Appeal from the judgment and order dated February 22, 1956, of the former Bombay High Court in
I.T.R. No. 31/1955.
·
N. A. Palkhivala and I. N. Shroff, for the Appellants.
A. N. Kripal and D. Gupta, for the_ Respondent.
1960. November 22. The Judgment of the Court
was delivered by
·
SHAH, J.-This is an appeal by seven appellants
with leave granted by the High Court of Judicature
at Bombay certifying that it involves a question of
importance.
The appellants held 570 out of a total issue of 800
shares of the Navjivan l\Iills Lt<l., Kaloi, a public
limited company-hereinafter referred to as the Mills.
Between the years 1943-4 7, the l\Iills purchased 5,000
shares of the Bank of India Ltd. At an extraordinary
general meeting of the shareholders of the Bank of
India held on l\Iay 6, 1948, a resolution was passed
increasing the share capital of the Bank and for that
purpose off~ring new shares to the existing . shareholders in the proportion of one new share for every
three shares held by the shareholders. The face value
of the new shares was to be Rs. 50, but the shares
were issued at a premium of Rs. 50. The shareholders had to pay Rs. 100 for ea.oh new share. The Mills
as the holder of 5,000 shares became entitled to receive
l,666i shares of the Bank of India at the rate of
Rs. 100 per share. The Bank of India communicated
its resolutio1~ by letter dated l\Iay 25, 1948 and enclosed therewith three forms, form A for acceptance, form
Shah j.
586
SUPREME COURT REPORTS
[1961]
196o
B for renunciation and form C which may compenK .
. -
.1 1 diously be called a form for allotment to nominees.
anfilal Mani a 0
. .
th
.
1
1 tt
th D'
t
f th
& Othars
n rece1vmg
e circu ar e er,
e .1rec ors o
e
v.
Mills passed the following resolution:
TA• Commissioner
"Resolved that the company having a holding of
of Income-ta#, 5,000 ordinary shares in the capital of the Bank of
Bombay
India Ltd. having now received an intimation from
the said Bank that this company is entitled to get
l,666J more ordinary shares on payment of Rs. 50 as
capital and Rs. 50 as premium per each share and it
is considered proper to invest in the said issue of the
said Bank the funds of this company to the extent of
66 shares only and to distribute the right of this company to the remaining 1,600 shares of the said issue
amongst the shareholders of this company in the proportion of the shares held by them in this company.
IT IS HEREBY RESOLVED that the funds of this
company may be invested in the 66 shares out of 1,666
shares offered by the Bank of India Ltd., and the
right to the remaining l,600 shares is hereby distributed among 800 shares of this company in the proportion of right to two shares of the Bank per one
ordinary share held in this company.
Shah .f.
The Managing Agents may take steps to intimate
the shareholders to exercise the right if they like to
do so."
Accordingly, the Mills exercised the right to take
over only 66 shares out of the shares offered and
resolved that the right to the remaining 1,600 shares
be distributed amongst its 800 share holders. The
seven appellants as holders of 570 shares of the Mills
became entitled to 1,140 shares of the Bank of India.
The appellants agreed to the allotment of these shares
and ultimately transferred them to a private company
-Jesinghbai Investment Co., Ltd.
.
The assessment of the seven appellants and of other
shareholders of the Mills was reopened under s. 34(l)(a)
of the Indian Income Tax Act by the Income Tax
Officer on the footing that the release by the Mills of
the shares of the Bank of India amounted to a distribution of "dividend" and the value of the right
released in favour of the shareholders thouirh t~xable
•
2 s.c.R. SUPREME COURT REPORTS
587
under s. 12 of the Act, had escaped tax. The order of
r96o
the Income Tax Officer reassessing the income of the K
,.1-1 M
,, 1
.
h
(JIM 4
llllnO
seven appellants was confirmed m appeal by t e
tJ;. othtrs
Appellate Assistant Commissioner and by the Appelv.
late Tribunal. At the instance of the appellants, the The Commission,,
following question was submitted by the Tribunal to
0! b"ome-tax,
the High Court at Bombay under s. 66(1) of the
Bombay
Income Tax Act:
"Whether on the tacts and circumstances of the
case the distribution of the right to apply for the
shares of the Ba.nk of India by Navjivan Mills Ltd. in
fa.vonr of the assessees amounted to a distribution of
"dividend" within the meaning of s. 2(6A) of the
Indian Income Tax Act."
The High Court re-framed the question as follows:
"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"?'',
and answered it in the affirmative.
The High Court observed that the definition of
"dividend" in s. 2(6A) was an inclusive and not an
exhaustive definition, and even if the distribution of
the right to the shares of the Bank of India could not
be regarded as dividend within the extended meaning
of that expression in s. 2(6A), it was still dividend
within the ordinary ll,leaning of that expression and
was taxable as income in the hands of the appellants.
Counsel for the appellants contended that the High
Court was not justified, having regard to the form of
the question which expressly related to the distribution of the right to the Bank of India shares beirig
dividend within the meaning of the definition in s.
2(6A) of the Income Tax Act, in enlarging the scope
of the question and in answering it in the light of its
ordinary meaning. There is no substance in this contention. "Dividend" is defined in s. 2(6A) as inclqsive
of various items and exclusive of certain others which
it is not necessary to set out for the piirpose of this
appeal. "Dividend" in its ordinary meaning is a
Shah J.
I
588
SUPREME COURT REPORTS
[1961]
r96o
distributive share of the profits or income of a comI<
t"l -;-M .1 1 pany given to its shareholders. When the Legislature
an~ "other~"'!' bys. 2(6A) sought to define the expression "dividend"
v.
it added to the normal meaning of the expression
Th• Commission" several other categories of receipts which may not
of Income-tax. otherwise be included therein.
By the definition in
Bombay
s. 2(6A), "dividend" means dividend as normally
Shah ].
understood and includes in its connotation several
other receipts set out in the definition. The Tribunal
had refen-ed the question whether the distribution of
the right to apply for the Bank of India shares
amounted to distribution of dividend within the
meaning of s. 2(6A) and in answering that question,
the High Court had to take into account both the normal and the extended meaning of that expression. In
the question framed by the Tribunal, there is nothing
to indicate that the High Court was called upon to
advise on the question whether the receipts by the
appellants amounted to dividend only within the
extended definition of that expression in s. 2(6A).
It was also urged that in nominating its shareholders to exercise the option to purchase the new issue
of the Bank of India, the Mills did not distribute any
dividend. The Mills were, it is true, not obliged to
accept the offer made by the Bank of India, however
advantageous it might have been to the Mills to accept
the offer: it was open to the Mills to renounce the
offer. The Mills had three options, (1) to accept the
shares, (2) to decline to accept the shares, or (3) to surrender them in favour of its nominee. It is undisputed that when the'shares were offered by the Bank of
India to its shareholders, the right to apply for the
shares had a market value of Rs. 100 per share. The
face value of the new share was Rs. 50 but the shareholders had to pay a premium of Rs. 50, thus making
a total payment of Rs. 100 for acquiring the new
share. The new shares were quoted in the market
at more than Rs. 200: and the difference between the
amount payable for acquiring the shares under the
right offered by the Bank of India and the market
quotation of the shares was indisputably the value of
the right. The Mills could not be compelled to obtain
2 S.O.R. SUPREME COURT REPORTS
589
this benefit if it did not desire to do so: it could
i96o
accept the shares or decline to accept those shares or ,,
t 'l -,
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h
t•
f
d •
th
• £
. f nan' a
ani a
exer01se t e op 10n o surren ermg
em m avour o
6 . Others
its nominees. This last option could be exercised by
v.
nominating. the persons who were to take over the The Commissioner
shares and that is what the Mills did. The Mills reof Income-tax,
quested the Bank of India to allot the shares to its
·Bombay
nominees, and the request for allotment to its nominees
amounted to transfer of the right. By its resolution,
the Mills in truth transferred a right of the value of
Rs. 200 for each share held by its shareholders. This
was manifestly not distribution of the capital of the
Mills. It was open to the Mills to sell the right to the
shares of the Bank of India in the market, and to distribute the proceeds among the shareholders. Such
a distribution would undoubtedly have been distribution of dividend. If instead of selling the right in the
. market and then distributing the proceeds, the Mills
directly transferred the right, the benefit in the hands
of the shareholders was still dividend.
Dividend need not be distributed in money; it may
be distributed by delivery of property or right having
monetary value. The resolution, it is true, did not
purport to distribute the right amongst the shareholders as dividend. It did not also take the form of a
resolution for distribution of dividend ; it took the
form of distribution of a right which had a monetary
value. But by the .form of the resolution sanctioning
the distribution, the true character of the resolution
could not be altered. We are therefore of the view
that the High Court was right in holding that the
distribution of the right to apply for and obtain two
shares of the Bank of India (at half their market
value) for each share held by the shareholders of the
Mills amounted to distribution of dividend.
The appeal fails and is dismissed with costs .
.Appeal dismissed.
Shah].