Court rules dividend income based on market value at declaration date, not resolution valuation. Shares distributed as dividend taxed at market value.

The court ruled that the dividend income of the assessee should be based on the market value of the shares on the date of the dividend declaration, not the valuation fixed in the resolution. The shares distributed by the company were considered part of its assets released to shareholders, constituting dividend income. The court emphasized that shareholders accepting shares as dividend assume market risk, and the dividend accrues on the declaration date. Therefore, the assessee was taxed on the actual market value of the shares received as dividend. The court ordered the assessee to bear the reference costs, including counsel's fee of Rs. 200.

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Issues:
Calculation of dividend income based on market value of shares on the date of declaration of dividend versus valuation fixed in the resolution.

Analysis:
The judgment pertains to a reference under section 66(1) of the Indian Income-tax Act, 1922, made by the Income-tax Appellate Tribunal regarding the dividend income of the assessee-company. The issue at hand was whether the dividend income should be based on the market value of shares on the date of declaration of dividend or the valuation fixed in the resolution. The Pilani Investment Corporation Ltd. declared dividend on its shares, offering shareholders the option to receive either shares or cash. The assessee received shares of two companies and cash as dividend. The Income-tax Officer calculated the dividend income based on the market value of the shares on the declaration date, which was contested by the assessee.

The judgment delves into the definition of "dividend" as a distributive share of a company's profits to its shareholders. The Supreme Court's ruling in Kantilal Manilal v. Commissioner of Income-tax is cited to establish that dividend can be distributed in forms other than cash. The court opined that the shares distributed as dividend by the Pilani company were part of its assets released to shareholders, constituting dividend income. It emphasized that the market value of the shares on the declaration date should determine the equivalent money value received by the assessee, not the valuation in the resolution or books.

The court rejected the argument that the value of shares should be based on the date of actual receipt, asserting that the dividend accrued on the declaration date, making it a debt owed by the Pilani company. It highlighted that shareholders accepting shares as dividend assume the risk of market fluctuations. Drawing parallels to relevant cases, the court held that the assessee should be taxed on the actual market value of the shares received as dividend. Therefore, the dividend income of the assessee was deemed to be the market value of the shares on the date of the dividend declaration. The court ordered the assessee to bear the costs of the reference, setting the counsel's fee at Rs. 200.

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