Court rules amalgamation order makes declared dividends non-taxable for company due to legal effect

Mafatlal Gangabhai And Company (Private) Limited Versus Commissioner Of Income-Tax

Mafatlal Gangabhai And Company (Private) Limited Versus Commissioner Of Income-Tax - [1992] 193 ITR 188, 95 CTR 1, 58 TAXMANN 150 Issues Involved:
1. Taxability of dividend income received by the assessee-company.
2. Legal implications of the amalgamation order on the taxability of the dividend.

Summary:

Issue 1: Taxability of Dividend Income Received by the Assessee-Company

The primary issue was whether the sum of Rs. 2,14,250 declared as dividend by Gagalbhai Jute Mills Pvt. Ltd. on September 2, 1968, was liable to be taxed as income in the hands of the assessee-company. The Tribunal held that the dividend was assessable as the assessee's income since it was received when the assessee was a recorded shareholder, referencing section 8(a) of the Income-tax Act, 1961, and the Supreme Court decision in Kishinchand Chellaram v. CIT [1962] 46 ITR 640.

Issue 2: Legal Implications of the Amalgamation Order on the Taxability of the Dividend

The court considered the legal effect of the amalgamation order dated January 6, 1969, which was to take effect from April 1, 1968. The amalgamation order implied that from April 1, 1968, the jute company was deemed non-existent, and the assessee-company ceased to be a shareholder of the jute company. Consequently, the dividend received was essentially the assessee's own money, and not income. The court noted that a company cannot hold shares of its own company or receive dividends from itself.

The court referred to section 394(1) of the Companies Act, 1956, and section 8(a) of the Income-tax Act, 1961, emphasizing that the dividend income accrues in the previous year it is declared. However, if the declaration becomes illegal or invalid within the same previous year, it cannot be considered as income. The court distinguished this case from Kishinchand Chellaram v. CIT, where the invalidation of dividend occurred after the end of the previous year.

Conclusion:

The court concluded that the amount of Rs. 2,14,250 could not be taxed as dividend income in the hands of the assessee-company, as it was the assessee's own money received due to the legal effect of the amalgamation order. The question was answered in the affirmative and in favor of the assessee, with no order as to costs.