Pro rata distribution of company assets as profits can be taxed as dividend despite no formal dividend declaration.
A pro rata distribution to shareholders of a company asset representing distributable profits is treated as dividend for income-tax purposes when the asset is not part of the company's capital. The absence of a formal dividend declaration under company law does not prevent the tax authority from looking to the true character of the transaction. Where the company could have realised the asset and distributed the proceeds, a direct transfer of the asset itself may equally amount to dividend. On this reasoning, the right to apply for shares distributed to shareholders was held taxable as dividend in their hands.
Issues: Whether the distribution of the right to apply for shares amounted to dividend taxable in the hands of the shareholders.
Analysis: A shareholder who receives, by reason of his shareholding, a part of the company's profits or assets takes it as income if the asset distributed is not part of the company's capital. The absence of a formal declaration of dividend under company law does not prevent the taxing authority from looking to the true character of the transaction. Where the company could have realised the asset and distributed the proceeds as dividend, a direct transfer of the asset itself, if it represents distributable profits and involves a release of assets to shareholders, is equally capable of amounting to dividend. The inclusive definition of dividend in section 2(6A)(a) also covers such a distribution, but the receipt was taxable even under the ordinary meaning of dividend.
Conclusion: The distribution of the right to apply for the Bank of India shares amounted to dividend and was taxable in the hands of the assessees.
Final Conclusion: The reference was answered in the affirmative, holding that the shareholders' receipt constituted dividend for income-tax purposes.
Ratio Decidendi: For income-tax purposes, a pro rata distribution to shareholders of a company asset representing profits is dividend if the asset is not capital, even though the company has not complied with the formal company-law procedure for declaring dividend.
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