Preference share test turns on fixed dividend and capital priority, not merely a guaranteed minimum return.

Preference share capital under section 85 of the Companies Act requires a preferential right to a fixed dividend or fixed rate, together with a preferential right on winding-up or repayment of capital. The Bihar State Financial Corporation shares did not satisfy that test because all shareholders stood in the same class, the dividend was only a guaranteed minimum within a fluctuating range, and there was no preferential right as to capital. The legal character of the shares depended on the rights created by the instrument and governing law, not on the fact that the minimum rate had in practice been paid. The shares were therefore not preference shares, and no further rebate on the dividend was available.

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Issues: Whether the shares of the Bihar State Financial Corporation were preference shares within the meaning of the Companies Act and whether the assessee was entitled to a further rebate of 71/2% on the dividend declared.

Analysis: Preference share capital under section 85 of the Companies Act requires, as to dividends, a preferential right to be paid a fixed amount or fixed rate, and as to capital, a preferential right on winding-up or repayment of capital. The Corporation's shares were not held in distinct classes giving one class preferential treatment over another; all shareholders stood in the same position. The dividend was only guaranteed at a minimum rate and could fluctuate up to a higher ceiling depending on profits, so it was not a fixed and invariable rate. The actual payment history at the minimum rate did not alter the legal nature of the shares, because the test is the entitlement created by the instrument and governing law, not merely what was in fact paid. There was also no preferential right as to capital vis-a -vis other shareholders.

Conclusion: The shares were not preference shares, and the assessee was not entitled to the further rebate of 71/2% on the dividend declared.

Ratio Decidendi: Shares are preference shares only when they confer a fixed preferential dividend or repayment right as against other shares and not merely a guaranteed minimum return subject to fluctuation within the same class.

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