PETITIONER: COMMSSIONER OF INCOME TAX, WEST BENGAL. Vs. RESPONDENT: KAMAL BEHARI LAL SINGHA ETC. DATE OF JUDGMENT16/08/1971 BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. GROVER, A.N. CITATION: 1971 AIR 2375 1972 SCR (1) 225 CITATOR INFO : R 1992 SC1495 (17,37) ACT: Income Tax-Capital or Revenue-Tests for determining-Dividend paid by company out of accumulated capital gains received by company in the shape of Salamis and Land Acquisition Com- pensation-Since share holders took a share of the capital asset in which they were beneficially interested, receipt is capital receipt. HEADNOTE: During the relevant accounting year the respondents- assesseereceived a certain amount as dividend from a company. A part of the amount was paid out of the accumulated capital gains received by the company in the shape of Salamis and land acquisition compensation. Such capital gains were taken to the reserve fund and thereafter distributed as dividend. On the question of the taxability of that share of the dividend paid out of the capital gains in the hands of the company the Income-tax Officer held the same was taxable as "dividend." The Appellate Assistant Commissioner held that the amount could not be considered as "dividend" within the meaning of section, 2(6A) of the Income-tax Act, 1922, but the same was taxable as income in the hands of the assessee. The Tribunal confirmed the order of the Appellate Assistant Commissioner. 'the High Court on reference answered in favour of the assessee. Dismissing the appeals, HELD: It is well-settled that in order to find out whether a receipt is a capital receipt or revenue receipt, it has to be seen what it is in the hands of the receiver and not its nature in the hands of the payer. In other words, the nature of the receipt is determined entirely by its character In the hands of the receiver and the source from which the payment is made has no bearing on the question. [417 G] The assessees Who were share-holders in the company were beneficially entitled to the capital of the company. The amount in question was not something earned by the company in the course of its business. Undoubtedly it was a capital receipt in the hands of the company but that by itself is not sufficient. It has to be seen whether it was a capital receipt in the hands of the assessee. Since the assessee had a beneficial interest in the sum when it was in the hands of the company, when that sum was distributed amongst the share-holders of the company, each of the share-holders took a share of the capital asset in which they were beneficially entitled. That being so, the receipt, in the present casement also be considered as capital receipt. The fact that those sums were distributed as "dividends" does not change the true nature of the receipt. [229 D-G] 226 Commissioner of Income-tax, West Bengal v. Nalin Behari Lall Singha, 74 I.T.R. 749 and Trustees of the will of H.K. Brodie (Deceased) v. Commissioner of Inland Revenue, 17 T.C. 432, referred to. JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 1667 to
1673 to 1968.
Appeals from the judgment and order dated August 30, 1967 of
the Calcutta High Court in Income-tax Reference Nos. 3, 6,
7, 8, 9, 10 and II of 1964.
B. D. Sharma, for the appellant (in all the appeals).
Sukumar- Ghose and Swapna Ghosh, for the appellant in all
the appeals),
The Judgment of the Court was delivered by
Hegde, J. Two questions of law which arise for decision in
these appeals are:
“(1) Whether on the facts and in the circum-
stances of the case of Tribunal was right in
holding that the distribution to the assessee
of the amount attributable to land acquisition
compensation received by the Ukhara Estate
Zamindaries Ltd. after 31st March, 1948 was in
the hands of the assessee, receipt of
dividend within the meaning of Section 2(A) of
the Indian Income-tax Act, 1922 ?
(2) Whether on the facts and in the
circumstances of the case the Tribunal was
right in holding that the receipt by the
assessee of the amount attributable to selamis
realised by the Ukhara Estate Zamindaries
Ltd., for grant of long-term leases after 31st
March, 1948 was a receipt of income of the
assessee and tax,able as the income of the
assessee from other sources?”
On both these questions the decision of the authorities
under the Indian Income-tax Act, 1922 (in brief the Act )
,as well as that of the Tribunal was against the assessees.
But disagreeing with the,, view taken by these authorities
,the High Court answered both these questions in favour -of
the assessees. The Commissioner of Income-tax, West Bengal
aggrieved by this decisions has brought these appeals to
this Court on the strength of the certificates given by the
High Court.
227
As facts in each of these appeals are more or less similar,
it is sufficient if we set out the facts in the case of
Kamal Behari Lal Singha, for the assessment year 1950-51,
the corresponding accounting year being 1356 B. S. ending On
April 13, 1950. It is said that Kamal Behari Lal Singha,
who will hereinafter be referred to as the assessee was a
shareholder in the Ukhara Estate Zamindaries Ltd. (to be
hereinafter referred to as the “company”). During the
relevant accounting year, the assessee received a sum of Rs.
13,200 as dividend from the said company. The said dividend
was declared on October 19, 1949. Out of that amount a sum
of Rs. 8,829 was paid out of the accumulated capital gains,
received by the company in the shape of Selamis and land
acquisition compensation receipts after March 31, 1948. Such
capital gains were taken to the reserve fund and thereafter
distributed as dividends. The remainder of the dividends
was paid out of the balance of the profit and loss account:
In these appeals the dispute centers round the taxability of
that share of the dividend which has been paid out of the
capital gains in the hands, of the company. The Income-tax
Officer came to the conclusion that no dividend distributed
can be considered as having been paid out of the “capital
gains” of the company, therefore the same is taxable as
“dividend”. In appeal the Appellate Assistant Commissioner
accepted the contention of the assessee that the receipt of
Rs. 8,829cannot be considered as dividend within the meaning
of s.2 (6A) of the Act but he held that the same is taxable
as income in the hands of the assessee. The Tribunal con-
firmed the order of the Appellate Assistant Commissioner
It is now well settled that in order to find out whether a
receipt is a capital receipt or a Revenue receipt one has
to. see what it is in the hands of the receiver and not its
nature in the hands of the payer. In other words, the
nature of’ receipt is determined entirely by its character
in the hands. of the receiver and the source from which the
payment is. made has no bearing on the question. Where an
amount is paid which, so far as the payer is concerned, is
paid wholly or partly out of the capital, and the receiver
receives it as income on his part, the entire receipt is
taxable in the hands of the receiver. Therefore the fact
that the amount sought to be taxed in these appeals was
capital gains in the hands of the company is not a relevant
circumstance. What
228
we have to see is what it was in the hands of the assessees.
The question whether a particular receipt is a capital
receipt or a revenue receipt is a somewhat difficult
question -,to decide though the principles bearing on the
question are welt settled. The application of those
principles to a given set of facts often creates
difficulties. The decision by and ‘,large depends upon the
facts of each case.
So far as the first question set out earlier is concerned
the same is settled by the decision of this Court in
Commissioner of Income-tax, West Bengal v. Nalin Behari Lall
Singha (1). The assessee therein was also one of the share-
holders of Ukhara Estate Zamindaries Ltd. His case was no
different from that of the respondents herein. But the only
point that arose for decision in that appeal was whether the
receipts similar to those we are considering here can be
considered as ‘dividends’? This court answered that
question in the negative. This Court refused to go in to
the question whether the same could be considered as income
@other than dividend. Dealing with that contention this
Court observed :
“Counsel for there venues ought to argue that
the share of dividend which is not chargeable
total by virtue of the exemption clause is
still liable to tax as income other than
dividend. But no such contention was raised
before the Tribunal or the High Court and no
question was raised in that behalf. We will
not be justified in entering upon the question
which was not raised or argued before the
Tribunal and before the High Court.”
In these appeals we have to decide what was left undecided
in that case.
Coming back to the question how Inexactly to draw the line
between a capital receipt and a revenue receipt in cases of
the type that are before us, one, can do no better than
refer to the observations of Finley J. in Trustees of the
Will of H. K. Brodie (deceased) v. Commissioner Inland.
Revenue (2).
“But, I think, the governing consideration is
this: the question be ing, was the sum
received as income, one has to consider what
was the source from which
(1) 74 I.T.R. 749.
(2) 17 T.C. 432 at p. 439.
2 29
it was received and what were the
circumstances in which it was received. If
the capital belonged to the person receiving
the sums–if he or she was beneficially
entitled not only to the income but to the
capital then I should think that, when the
payments were made, they ought to be regarded,
and would be regarded, as payments out of
capital, but where there is a right to the
income, but the capital belongs to somebody
else, then, if payments out of capital are
made and made in such a form that they come
into the hands of the beneficiaries as income,
it seems to me that they are income and not
the less income, not of the person receiving
them, but in the hands of somebody else
-capital.”
The above observations, in our opinion, correctly set out
the law.
Let us now turn to the facts of this case. The assessees
were shareholders in the company. They were beneficially
entitled to the capital of the company. The amount with
which we are concerned in these appeals was received by the
company as Salamis and as compensation for the acquisition
of the lands of the company. It was not something earned by
the company in the course of its business. Undoubtedly it
was a capital receipt in the hands of the company but that
by itself is not sufficient.’ We have next to see whether it
was a capital receipt in the hands of the assessee. As
mentioned earlier, the assessee had a beneficial interest in
that sum when it was in the hands of the company. Therefore
when that sum was distributed amongst the shareholders of
the company, each of the shareholders took a share of the
capital set in which they were beneficially entitled. That
being so the receipt with which we are concerned in these
appeals must also be considered as capital receipt. The
fact that those sums were distributed as ‘dividends’ does
not change the true nature of the receipt. A receipt is
what it is and not what it is called.
In the result these appeals fail and they are dismissed with
costs-hearing fee one set.
K.B.N. ApPeal dismissed.
230