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Issues: (i) Whether the distribution of shares held as stock-in-trade by way of dividend in specie gave rise to taxable business profit in the hands of the company. (ii) Whether, for the purpose of withdrawal of corporation tax rebate, the amount of dividend distributed in specie had to be taken at the market value of the shares distributed.
Issue (i): Whether the distribution of shares held as stock-in-trade by way of dividend in specie gave rise to taxable business profit in the hands of the company.
Analysis: Dividend may be distributed in cash or in specie, but the legal character of such distribution must be examined from the standpoint of the distributing company. When the company merely parts with property by way of dividend, there is no trading activity by the company and no commercial realization of profit on that act alone. The value received or enjoyed by the shareholders is not the measure of profit in the hands of the company declaring the dividend.
Conclusion: The distribution of shares in specie did not result in taxable business profit in the hands of the assessee company, and the answer was in favour of the assessee.
Issue (ii): Whether, for the purpose of withdrawal of corporation tax rebate, the amount of dividend distributed in specie had to be taken at the market value of the shares distributed.
Analysis: The rebate computation depended upon the amount of dividend distributed by the company. Since the distribution in specie did not amount to a trading profit or loss in the hands of the company, the market value of the shares distributed could not be imported for the purpose of computing the dividend amount for rebate. The relevant inquiry was limited to what the company distributed, not the value of the asset in the hands of the shareholders.
Conclusion: The market value of the shares distributed in specie was not to be added for computing the dividend amount for withdrawal of rebate, and the answer was in favour of the assessee.
Final Conclusion: The references were answered in favour of the assessee on the substantive questions decided, and the company was not chargeable to business profit on the dividend-in-specie distribution.
Ratio Decidendi: A distribution of assets in specie by a company as dividend does not, by itself, constitute trading profit in the hands of the company, and the value realized by shareholders is irrelevant to the company's assessment unless the company itself has realized a taxable profit.
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