ivil Appeal No 2115 of 1968
SupCl69 5 768 Appeal from the judgment and order dated January 6 1965 Of the Calcutta High Court in Income tax Reference No 145 of 1961
B Sen section A L Narayana Rao RN Sachthey and BD Sharma for the appellant
section Mitra and PK Mukherjee for the respondent
The Judgment of the Court was delivered by Ramaswami J
The respondent is a private limited company hereinafter referred to as the assessee
The appeal relates to the assessment year 1956 57 for which the previous year is the year ending September 30 1955
The business of the assessee was to deal with shares and securities
On September 30 1954 the assessee purchased 11900 shares of Kedarnath Jute Manufacturing Co Ltd in two
lots one at the rate of Rs 9 8 0 per share and the other at Rs 9 4 0 per share from one Beharilal Nathani Share broker for a total consideration of Rs 112575 
When the assessee purchased the said shares a large amount of dividends was in arrear as the previous owners had not claimed the dividends declared between 1936 and 1945 although a large part of the dividends on the said shares in respect of the years 1945 to 1954 had been collected by the previous owners of the said shares
A letter addressed by Beharilal Nathani to the assessee bearing the date September 30 1954 goes to show that the shares had been sold with arrear dividends
It is admitted that the dividends which had been declared between the years 1936 and 1945 and were received by the assessee during the accounting period amounted to Rs 43925 
The assessee first credited this sum to the profit and loss appropriation account and thereafter transferred the same to a reserve fund in the accounting year ending September 30 1955
No adjustment was made in the share purchase account on account of the receipt of dividend
The value of the shares which represented the stock in trade of the assessee remained the same both in the opening and the closing stocks
Before the Income tax Officer it was contended on behalf of the assessee that as the arrear dividends pertained to the years 1936 to 1945 the arrear dividend received by the assessee Was not in the nature of income liable to income tax as
it was merely a realisation of capital
The Income tax Officer rejected the contention of the assessee and treated the amount of arrear dividend as the business income of the assessee liable to tax
On appeal by the assessee the Appellate Assistant Commissioner of Income tax examined the question whether the amount of Rs 43925 should be treated as dividend and should therefore be assessed under section 12 of the Indian Income tax Act 1922 hereinafter referred to as the Act or whether it should be treated as 769 profits and gains of business arising to the assessee and taxed under section 10 of the Act
He however held that the amount could not be regarded as dividend  as the assessee was not the registered shareholder in the years for which the arrear dividends were declared
But he held that since the shares were purchased by the assessee with the knowledge that it would be entitled to receive the arrear dividends which represented profits arising on the acquisition of such shares the assessee could be deemed to have entered into a scheme of profit making an adventure in the nature of trade The assessee brought a second appeal to the Appellate Tribunal but the appeal was dismissed
The Appellate Tribunal confirmed the findings by the Income tax authorities and held that the assessee acquired the shares on which the arrear dividends were received in the course of its share dealing business and that the sum of Rs 43925 so received by the assesee formed an integral part of its income arising from business which was liable to tax
At the instance of the assessee the Appellate Tribunal stated a case to the High Court on the following question of law Whether on the facts and in the circumstances of the case the sum of Rs 43925 received by the assessee represented business income arising under section 10 from an adventure in the nature of trade or it was a dividend within the meaning of section 12 of the Income tax Act  After looking into the statement of case and also the application of the assessee under section 661 of the Act the High Court held that the question which the Tribunal had referred did not correctly and accurately describe the stand and contention taken by the assessee throughout which was that no part of the arrear dividend received by the assessee was income at all liable to tax
The High Court thereafter addressed itself to the real issue between the parties and ultimately held that the amount of Rs 43925 was not liable to tax
This appeal is brought on behalf of the Commissioner of Income tax against the judgment of the High Court dated January 6 1965 by a certificate granted under section 66A2 of the Act
It is necessary that the question referred to by the High Court should be reframed in the following manner in order to bring out the real point in controversy between the parties Whether in the facts and circumstances of the case the assessee had purchased the arrears of dividend  If so whether the said sum of Rs 43925 could at all be assessed either as dividend or as profit  It is manifest that dividends declared by Kedarnath Jute Manufacturing Co between the years 1936 and 1945 were the 770 property of the persons whose names stood on the share register on the relevant dates
When a company declares dividend the same can only be paid to the person who is then the registered holder
A purchaser of shares becomes entitled to all dividends declared since his purchase but not before
If the purchase is made on the eve of declaration of dividend but the purchaser does not get his name mutated in the records of the company in time to have the dividend warrant issued in his own name he is entitled to call upon his vendor to make over the dividend to him if and when received
It is well settled that after a sale of the shares and so long as the purchaser does not get his name registered the vendor is for certain purposes considered a trustee for the purchaser of the rights attaching to the shares or accruing thereonincluding the voting rights
In the present case there was a contract between the assessee and the registered shareholders to sell the shares to the assessee with arrear dividends
In other words the assessee entered into the contract with the registered shareholders not only to purchase share scrips but the dividends which had been declared but not collected by him or paid over to shareholders
As the dividends had been declared long ago there was no uncertainly as to the exact amount receivable in respect of them
It is
therefore Clear that both the purchaser and the vendor knew exactly what sum of money would come to the vendor by way of such dividend
In other words the purchase consideration included the amount of the arrear dividends and as the dividends had been declared long ago there was no uncertainty as to the exact amount receivable in respect of them
The existence of a contract binding the vendors to make over to the purchaser the arrear dividends clearly implied that the price paid by the purchaser was not only for the value of the share scrips but also for the sum of Rs 43925 which was going to be realised in the form of arrear dividends by the purchaser
The High Court held upon an examination of the evidence that such an arrangement implied that the value of Rs 9 8 0 and Rs 9 4 0 per share as settled into the broker s bills was not the real value of the share scrips alone but also included the element of the arrear dividends agreed to be receivable by the purchaser
The legal position therefore is that the arrear dividends were not claimable by the purchaser by virtue of his right as such purchaser and could not become his income from the shares
He was to get the same because the vendor had contracted to pass the arrear dividends on to him
They were the income of the vendors ie the registered holders but they could not become the income of the purchaser
In fact the assessee had purchased the amount of arrear dividends for a price which was included in the total consideration of Rs 112575 
What the assessee acquired in the form of share scrip represented its stock in trade which consisted of the shares and the dividends potential which had to be realised
771 In this state of facts it is manifest that the assessee paid the amount of Rs 112575 not only for the share scrips but also for the arrear dividends which was inextricably connected with the purchase of the share scrips
In our opinion the High Court rightly held that the amount of Rs 43925 was not income which could be assessed in the hands of the assessee
It was said that the assessee had itself credited the amount of Rs 43925 to the profit and loss appropriation account and thereafter transferred the same to a reserve fund in the accounting year ending September 30 1955
No adjustment was made in the share purchase account on account of the receipt of dividend
But it is well established that a receipt which in law cannot be regarded as income cannot become so merely because the assessee erroneously credited it to the profit and loss account
see Commissioner of Income tax Bombay City I vs Ms Shoorji Vallabhdas  Co1
The assessee s case had all along been that the amount of arrear dividends received could not be treated as income of the assessee liable to tax for the assessment year 1956 57
As we have already shown the consideration paid by the assessee was given not only for the shares but also for share dividends amounting to Rs 43925 and the amount of Rs 112575 was paid not only for the share scrips but also for the arrear dividends
In other words there was capital purchase by the assessee
of the shares together with arrear dividends due on the shares for the years 1936 to 1945
It is therefore not possible to treat the payment of Rs 43925 as income liable to tax either as profit under section 10 of the Act or as dividend under section 12 of the Act
For the reasons expressed we hold that there is no merit in this appeal
It is accordingly dismissed with costs
YP Appeal dismissed


Summary:
The assessee a dealer in shares and securities purchased certain shares on which dividends relating to previous years were in arrears
The shares were sold with the arrear dividends
The assessee received the amount of arrear dividends and he first credited this sum to the profit and loss appropriation account and thereafter transferred the same to a reserve fund
No adjustment was made in the share purchase account on account of the receipt of the dividend
The value of the shares which represented the stock in trade of the assessee remained the same both in the opening and the closing stocks
The assessee claimed that the amount of arrear dividends received was not income liable to income tax as it was merely a realisation of the capital
The Income tax Officer rejected the contention and brought it to tax
This decision was upheld in further appeals
But on reference the High Court held that the amount was not liable to tax
Dismissing the appeal by the Revenue this Court HELD The consideration paid by the assessee was given not only for the shares but also for the share dividends
As the dividend had been declared long ago there was no uncertainty as to the exact amount receivable in respect of them and so both the purchaser and the vendor knew exactly what sum would come to the vendor by way of such dividend
The existence of a contract binding the vendors to make over to the purchaser the arrear dividends clearly implied that the price paid by the purchaser was not only for the value of the share scrips but also for the amount which was going to be realised in the form of arrear dividends by the purchaser
Such an arrangement implied that the value of the per share settled into the broker s bill was not the real value of the share scrips alone but also included the element of the arrear dividends agreed to be receivable by the purchaser
The legal position therefore was that the arrear dividends were not claimable by the purchaser by virtue of his right as such purchaser and could not become his income from the shares
He was to get the same because the vendor had contracted to pass the arrear dividends on to him
They were the income of the vendors ie the registered holders but they could not become the income of the purchaser
What the assessee acquired in the form of share scrip represented its stock in trade which consisted of the shares and the dividends potential which had to be realised
770 D H A receipt which in law cannot be regarded as income cannot become so merely because the assessee erroneously credited it to the profit and loss account
771 C Commissioner of Income tax Bombay City I vs Ms Shoorji Vallabhdas  Co  referred to