S.C. Sen, J. - (1.) The Tribunal has referred the following three questions of law to this Court under Sec. 256 of the Income -tax Act, 1961 ('the Act'): 1. Whether, on the facts and in the circumstances of the case the sum of Rs. 60,432 should be assessed as business income of the assessee ? 2. Whether, on the facts and in the circumstances of the case, sum of Rs. 60,432 was dividend income of the assessee under Sec. 2 of the Income -tax Act, 1961 ? 3. If the answer to question No. 2 is in the affirmative then whether on the facts and in the circumstances of the case the assessee was entitled to relief under Sec. 80M of Income -tax Act, 1961 in respect of the sum of Rs. 6,04,320 ? The assessment year involved is 1974 -75 for which the relevant accounting period is the year ended 31 -3 -1974. The facts of this case, as found by the Tribunal, are as follows: The assessee -company had purchased 20, 144 shares of the Punjab National Bank Ltd., on 2 -1 -1974 at Rs. 37 per share. The cost price of the shares amounted to Rs. 7,45,320. In the meanwhile, however, the Punjab National Bank Ltd. was nationalised by the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970. Thereafter the Bank decided to undertake other types of activities like financing and setting up of joint ventures. In this connection, an assurance was given to the members that in case the company proposed to carry on any other business other than banking, an option would be given to these members who did not wish to continue as such to receive cash on their entire shareholdings in the company on surrendering such shares to the company. The assessee being one of the shareholders of the said Bank to the extent of 20, 144 shares purchased by it on 2 -1 -1974, exercised the option to sell to the Punjab National Bank Ltd. its shares at Rs. 40 per share. Since the shares in question were purchased by the assessee -company for Rs. 7,45,328 there was a profit in this transaction. The Punjab National Bank Ltd. purchased the shares from the assessee company as well as from other shareholders pursuant to the scheme of reduction of capital of the company from Rs. 2 crores to Rs. 80,12,685 in terms of resolution passed in the Annual General Meeting of the shareholders held on 25 -9 -1973. The confirmation of the Delhi High Court was also received in this behalf. The face value of one share was Rs. 10. The purchase consideration of the shareholders who had exercised the option to sell their shares to the Punjab National Bank Ltd. at Rs. 40 per share was paid from the general reserve of the Punjab National Bank Ltd. The assessee claimed the excess realisation over the face value of shares of Rs. 10 each in the nature of dividend as per the definition of dividend under Sec. 2 of the Act. It was, therefore, claimed that out of the total realisation of Rs. 8,05,760 a sum of Rs. 6,04,320 being the realisation over the face value of the shares was in the nature of distribution by the company of its accumulated profits of reduction of the capital and, thus, constituted dividend within the meaning of Sec. 2. It was also claimed that dividend income of Rs. 6,04,320 entitled the assessee -company to relief under Sec. 80M of the Act, the ITO however, did not allow the claim. The assessee, thereafter, filed an appeal to the AAC, who held that the assessee was entitled to relief under Sec. 80M because even the deemed dividends were dividends within the meaning of Sec. 2. The AAC while deciding the appeal of the assessee placed reliance on the circular issued by the Commissioner, Delhi vide CIT/Tech/M -14(57)/62 -73/23854, dated 19 -1 -1975. Against this order of the AAC the revenue filed an appeal to the Tribunal. The Tribunal after examining the position in law came to the conclusion that the AAC was justified in holding that the deemed dividends under Sec. 2 were also dividends for the purposes of allowing relief under Sec. 80M. The Tribunal, therefore, dismissed the departmental appeal.
(2.) The first contention raised on behalf of the revenue is that the computation of the dividend income was wrong. My attention was drawn to Sec. 2 and it was argued that the distribution from the company could not be treated as dividend. The payment by the company to the extent of the face value of the shares must be treated as return of capital. It has been further argued on behalf of the revenue that the assessee did not pay the face value but something extra for the acquisition of the shares. The shares were purchased not at par but at a premium from the market. If that be the case, the cost of acquisition of the shares must be deducted for the purpose of arriving at the surplus which alone can be regarded as the dividend income which qualified for relief under Sec. 80M. Lastly, Mr. Naha, on behalf of the revenue, has drawn my attention to the order of the ITO from which it appears that the assessee has debited his business account with the purchase price of the shares and had claimed a loss of Rs. 5,43,888 being the difference between the purchase price and the face value of 20, 144 shares. Mr. Naha has contended that the assessee tried to obtain double benefit. He has debited the purchase price in his trading account of share -dealing and once again had deducted the face value of the shares from the dividend income. The ITO held: The assessee -company purchased 20, 144 shares of the Punjab National Bank on 2nd January, 1974 at the rate of Rs. 37 per share. The cost price of the shares amounted to Rs. 7,45,328. But the shares were sold to the Punjab National Bank in exchange of a consideration of Rs. 40 per share amounting to Rs. 8,05,760. Thus, the assessee earned a profit of Rs. 60,432. Total receipt for surrender of shares by the assessee -company on reduction of capital by Punjab National Bank is Rs. 8,05,760 out of which a sum of Rs. 1,38,993/60 p. has been retained by Punjab National Bank Ltd., for tax deducted at source liability. The face value of 20, 144 shares at the rate of Rs. 10 each amounted to Rs. 2,01,440. The difference between Rs. 9,03,760 and Rs. 2,01,440 is Rs. 6,04,320 which has been shown by the assessee as dividend income. Similarly in the share dealing a/c the assessee has claimed a loss of Rs. 5,43,888 being the difference between the purchase price and face value of 20, 144 shares. Besides the net profit of Rs. 60,432 the assessee also earned interest of Rs. 16,115 from the Punjab National Bank out of which a sum of Rs. 3,384 was deducted at source on account of income -tax. The assessee has simultaneously claimed loss of Rs. 5,43, 888 in share dealing a/c and profit of Rs. 6,04,320 as dividend income. Thus instead of showing net income of Rs. 60,432 in share dealing a/c, the assessee had made the above two types of entries in the book of a/c as the assessee is not quite sure about the nature of income.
(3.) I have carefully considered the arguments of both the sides and I am of the view that the Tribunal fell into an error in disposing of the case in the manner it did. The expenditure incurred for the purposes of acquisition of shares cannot be treated as expenditure for the purpose of earning dividend income. Even if a person buys shares for the purpose of getting dividend year after year, the price for acquisition of the shares will be capital expenditure. Sec. 56 of the Act makes it clear that the dividend must be computed under the head 'Income from other sources'. Therefore, even if a share dealer obtains dividend, it will be assessed as income from other sources. The loss or gain from share -dealing will, however, be computed as business loss or business gain, as the case may be. Sec. 57 of the Act lays down that income chargeable on computation of income from other sources includes dividend income. Sec. 57 specifically allows deduction for any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of realising such dividend on behalf of the assessee. Sec. 57 does not relate to dividend income. Sec. 57 lays down that any other expenditure not being in the nature of capital laid out or expended wholly and exclusively for the purpose of making or earning such income is to be excluded from the income from other sources. This, of course, will not include any capital expenditure. This will also not include purchase price of the shares which will be in the business account of share -dealing. Shares are to be treated as stock -in -trade of a share -dealer and the purchase price is a part of the circulating capital of the share -dealer.;