Appeal No 364 of 1957
Appeal from the judgment and order dated February 22 1956 of the former Bombay High Court in ITR No 311955
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 Mills Ltd Kalol a public limited company hereinafter referred to as the Mills
Between the years 1943 47 the Mills purchased 5000 shares of the Bank of India Ltd At an extraordinary general meeting of the shareholders of the Bank of India held on May 6 1948 a resolution was passed increasing the share capital of the Bank and for that purpose offering 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 each new share
The Mills as the holder of 5000 shares became entitled to receive 16662 shares of the Bank of India at the rate of Rs 100 per share
The Bank of India communicated its resolution by letter dated May 25 1948 and enclosed therewith three forms form A for acceptance form 586 B for renunciation and form C which may compendiously be called a form for allotment to nominees
On receiving the circular letter the Directors of the Mills passed the following resolution Resolved that the company having a holding of 5000 ordinary shares in the capital of the Bank of India Ltd having now received an intimation from the said Bank that this company is entitled to get 16662 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 1600 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 1666 shares offered by the Bank of India Ltd and the right to the remaining 1600 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
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 1600 shares be distributed amongst its 800 share holders
The seven appellants as holders of 570 shares of the Mills became entitled to 1140 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 section 341a 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 though taxable 587 under section 12 of the Act had escaped tax
The order of the Income Tax Officer reassessing the income of the seven appellants was confirmed in appeal by the Appellate Assistant Commissioner and by the Appellate Tribunal
At the instance of the appellants the i following question was submitted by the Tribunal to the High Court at Bombay under section 661 of the Income Tax Act 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 within the meaning of section 26A of the Indian Income Tax Act
 The High Court reframed 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 section 26A 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 section 26A it was still dividend within the ordinary meaning 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 being dividend within the meaning of the definition in section 26A 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 section 26A as inclusive of various items and exclusive of certain others which it is not necessary to set out for the purpose of this appeal
Dividend in its ordinary meaning is a 588 distributive share of the profits or income of a company given to its shareholders
When the Legislature by section 26A sought to define the expression dividend it added to the normal meaning of the expression several other categories of receipts which may not otherwise be included therein
By the definition in section 26A dividend means dividend as normally understood and includes in its connotation several other receipts set out in the definition
The Tribunal had referred 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 section 26A 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 section 26A
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 589 this benefit if it did not desire to do so it could accept the shares or decline to accept those shares or exercise the option of surrendering them in favour of its nominees
This last option could be exercised by nominating the persons who were to take over the shares and that is what the Mills did
The Mills requested the Bank of India to allot the shares to its 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


Summary:
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 section 341a 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 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 585 The High Court answered the question in the affirmative
On appeal with a certificate of the High Court Held that the view taken by the High Court was correct
The distribution to the shareholders of the Mills of the right to obtain two shares of the Bank of India for each share held by them at half the market value amounted to distribution of dividend which was liable to be taxed