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Distribution of accumulated profits by company to its shareholders is dividend
Distribution of accumulated profits by company to its shareholders is dividend
The assessee-company held preference shares in a company, which had issued shares at a premium and kept premiums so received as capital reserve. Assessee was paid a dividend on the preference shares. ITO taxed the sum received as dividend u/s 2(6A). AAC held that said dividend was not taxable. Tribunal and High Court overruled AAC. Supreme Court upheld the High Court's order. -010753
1. The assessee-company held preference shares in R company, which had in the year 1945 issued shares at a premium and kept the shares premiums so received under the head Capital Reserve. Out of the above capital reserve, the R company paid a sum as dividend on the said preference shares to the assessee.
2. For the assessment year 1954-55, the ITO taxed the said sum in the hands of the assessee as dividend within section 2(6A) of 1922 Act.
3. On appeal, the AAC held that said dividend was not taxable.
4. On appeal, the Tribunal, however, agreed with the ITO.
5. On reference, the High Court upheld the order of the Tribunal.
6. On appeal, the Supreme Court held as under:In this connection it is necessary to appreciate the scheme of section 78 of the Companies Act, 1956. Subsection (1) enjoins a company, when it issues shares at a premium, to transfer the premiums to an account called "the Share Premium Account" and it then applies the provisions of the Act relating to the reduction of the share capital of a company as if the share premium account were paid-up capital of the company. Sub-section (2) then provides how the share premium account may be applied. It is said that it impliedly provides that it cannot be used for the purpose of paying dividends. Sub-section (3) then deals with the issue of shares at a premium before the commencement of this Act. It deems them to have been issued after the commencement of the Act and applies the provisions of section 78. The effect of this would be that a company which had issued shares at a premium before the commencement of this Act would by virtue of section 78 have to open a share premium account and transfer to it the premium so received. What is to happen if before the commencement of the Act the company had already dealt with the premium in such a way that they had ceased to remain as an identifiable part of the company's reserves? The sub-section says that in that event the premiums so dealt with shall be disregarded in determining the sum to be included in the share premium account. If such premiums are to be disregarded for the creation of the share premium account, it means that they fall outside the purview of section 78. It has no application to them. If this is so, it is difficult to appreciate how the appellant can utilise this section for the purpose of showing that the premiums which have already been distributed become invested with the character of capital in the hands of the distributing company. We do not say that for the purpose of income-tax any future application of the share-premium account in one of the ways mentioned in sub-section (2) will be treated as distribution of capital. No such question arises for our determination in this case. But we do hold that section 78 of the Companies Act does not in any way change the taxability of dividends declared out of premiums on shares received by a company before the Act of 1956 came into force. If it was taxable, apart from section 78, it remains so taxable.The case of Duff's Settlements [1951] Ch 92 referred to above, on which the learned counsel strongly relied, might or might not help him if the declaration of dividend had taken place after the Act of 1956. We are of the opinion that what was decided in this case has no relevance to the facts of this appeal,Before concluding, we may refer to the decision of the House of Lords in Inland Revenue Commissioners v. Reid's Trustees [1949] 1 All ER 354, relied on by the learned counsel for the respondent. This case would be relevant if we were considering generally whether the receipt of Rs. 50,787 was income or capital in the hands of the assessee. The question, however, referred to the High Court is limited, and that is whether the receipt of Rs. 50,787 was a receipt of dividend and taxable. It is, therefore, unnecessary to say more about this case.
In the result, we agree with the High Court that the answer to the question referred to it is in the affirmative. The appeal fails and is dismissed with costs.
