Bombay High Court
New Shorrock Spg. And Mfg. Co. Ltd. vs Commissioner Of Income-Tax on 15 March, 1994
Equivalent citations: [1994]208ITR765(BOM)
Author: Sujata Manohar
Bench: Sujata V Manohar
JUDGMENT Mrs. Sujata Manohar, C.J.
1. This reference pertains to the assessment year 1973-74. For the assessment year 1973-74, the relevant previous year of the assessee was January 1, 1972, to March 31, 1973. The assessee-company carried on the business of running a textile mill. On May 25, 1972, the assessee-company declared its dividend for the year 1971. A company called Mafatlal Gagalbhai and Co. Pvt. Ltd. (hereinafter referred to as "M. G. Ltd."), holding shares in the assessee-company, received dividend in respect of its holdings in the assessee-company. However, on October 27, 1972, a proposal was initiated for the amalgamation of M. G. Ltd. with the assessee-company, the assessee-company being the transferee-company while M. G. Ltd. being the transferor-company. Petitions were filed in the Bombay High Court as well as in the Gujarat High Court by the two concerned companies for amalgamation. The order of the Bombay High Court approving the amalgamation was passed on September 24, 1973, while the order of the Gujarat High Court approving the amalgamation was passed on September 26, 1973. Under both these orders, the amalgamation was effected from April 1, 1972. In the assessment year 1973-74, the assessee-company was sought to be taxed in respect of the dividend income received by M. G. Ltd. which was amalgamation with the assessee-company during the previous year.
2. The contention of the assessee was that M. G. Ltd. had ceased to exist from April 1, 1972, by virtue of the orders of amalgamation passed by the two High Courts and that the dividend income which was received by M. G. Ltd., which, at the relevant time, was amalgamated with the assessee-company, could not be taxed as income in the hands of the assessee-company. This argument has been ultimately negatived by the Tribunal. Hence the following question is referred to us under section 256(1) of the Income-tax Act, 1961 :
"Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in holding that the amount of Rs. 24,31,424 was liable to be taxed as dividend income in the hands of the assessee-company?"
3. The question is directly covered by the ratio of the judgment of this court in the case of Mafatlal Gagalbhai and Co. Pvt. Ltd. v. CIT [1992] 193 ITR 188. The assessee, in this reported case, was M. G. Ltd., which is the transferred-company in the present case. One Messrs. Gagalbhai Jute Mills Pvt. Ltd. (for short, "the jute company") was amalgamated with M. G. Ltd. with effect from April 1, 1968, by reason of the orders of amalgamation passed by the concerned High Courts. In that case, during the relevant previous year, the jute company had declared a dividend. The assessee-company was a major shareholder of the jute company and it received Rs. 2,14,250 as dividend. On September 16, 1968, both the assessee-company and the transferred jute company presented applications for amalgamation. On January 6, 1969, the court passed its order sanctioning the amalgamation as proposed with effect from April 1, 1968. For the period from April 1, 1968, till the sanction to the amalgamation, the jute company was deemed to have carried on business in trust for the assessee-company. The court held that as a result of the order of sanction, the jute company became a part of the assessee-company from the commencement of the previous year in which the dividend was declared and hence the assessee had ceased to be a shareholder of the jute company. The court said that the legal position was that neither could the jute company declare any dividend nor could the assessee-company receive dividend from the jute company after April 1, 1968. The same ratio will apply to the present case as the order of amalgamation took effect during the relevant previous year in which the dividend was declared.
4. Dr. V. Balasubramaniam, learned counsel for the Revenue, relied upon the decision of the Supreme Court in the case of Kishinchand Chellaram v. CIT [1962] 46 ITR 640. In the said case, the company had declared a dividend and the amounts payable to the shareholders as dividend had been credited in the books of account of the company to the accounts of the shareholders or pair to them. After a period of some years, it was found that the company could not have in law declared and distributed any such dividend. Accordingly, the company passed an extra-ordinary resolution declaring that the dividends should be treated as loans. The court said that in the year in which the dividend had been declared and distributed, it was assessable as income in the hands of the shareholders. In the present case, the amalgamation was effected in the same previous year in which the dividend was declared. Hence, it will be covered by the ratio of the judgment of this court in Mafatlal Gagalbhai and Co. Pvt. Ltd. v. CIT [1992] 193 ITR 188 and not by the ratio of the judgment in Kishinchand Chellaram v. CIT .
5. Accordingly, we answer the question referred to us in the affirmative and in favour of the assessee. There will be no order as to costs.