Preference share test requires a fixed preferential dividend right; fluctuating statutory dividend shares do not qualify for rebate relief.

Shares of the Bihar State Financial Corporation were not preference shares because they did not carry a legally fixed and preferential dividend right; all shareholders formed a single class, and the dividend operated within a statutory range rather than at an invariable rate. On that footing, the additional rebate on dividend was unavailable, because the Finance Acts linked the further concession to dividend on preference shares. The actual payment of dividend at 3 1/2% did not alter the legal character of the shares, since entitlement under the governing law, not past payment practice, was the relevant test.

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Issues: (i) Whether the shares of the Bihar State Financial Corporation were preference shares within the meaning of the Companies Act, 1956; and (ii) whether the assessee was entitled to a further rebate of 7 1/2% on the amount of dividend declared.

Issue (i): Whether the shares of the Bihar State Financial Corporation were preference shares within the meaning of the Companies Act, 1956.

Analysis: The Corporation Act provided a statutory guarantee of a minimum annual dividend at 3 1/2% and a ceiling of 5%, but all shareholders held one class of shares and no class enjoyed a preferential position over another. For preference share capital under section 85(1) of the Companies Act, 1956, the shares had to carry a preferential right as to dividend and, in substance, a fixed or invariable rate. A fluctuating dividend within a range, dependent on profits and statutory contingencies, did not amount to a fixed rate, and the existence of only one class of shareholders negatived the element of preference.

Conclusion: The shares were not preference shares and the finding was against the assessee.

Issue (ii): Whether the assessee was entitled to a further rebate of 7 1/2% on the amount of dividend declared.

Analysis: The additional rebate under the Finance Acts depended on the dividend being on preference shares. Since the shares were held not to be preference shares, the assessee could not claim the additional reduction from the rebate otherwise computed. The actual historical payment of dividend at 3 1/2% did not alter the legal character of the shares, because the relevant test was the shareholder's entitlement under the governing law and not the amount actually paid in earlier years.

Conclusion: The assessee was not entitled to the further rebate of 7 1/2% and this issue was also decided against the assessee.

Final Conclusion: The reference was answered in favour of the revenue on both questions, confirming that the shares were not preference shares and that the assessee could not claim the additional rebate on dividend.

Ratio Decidendi: Shares are not preference shares unless they carry a legally fixed and preferential dividend right, and a dividend that fluctuates within statutory limits for a single class of shareholders does not satisfy that test.

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