Judgement

RAMASWAMI, J.:- The respondent is a private limited company (hereinafter referred to as the assessee). The appeal relates to the assessment year 1956-57 for which the previous year is the year ending September 30, 1955. The business of the assessee was to deal with shares and securities. On September 30, 1954 the assessee purchased 11,900 shares of Kedarnath Jute Manufacturing Co. Ltd., in two lots, one at the rate of Rs. 9-8-0 per share from one Beharilal Nathani, Share broker, for a total consideration of Rs. 1,12,575. When the assessee purchased the said shares a large amount of dividends was in arrear as the previous owners had not claimed the dividends declared between 1936 and 1945, although a large part of the dividends on the said shares in respect of the years 1945 to 1954 had been collected by the previous owners of the said shares. A letter addressed by Beharilal Nathani to the assessee bearing the date September 30, 1954 goes to show that the shares had been "sold with arrear dividends". It is admitted that the dividends which had been declared between the years 1936 and 1945 and were received by the assessee during the accounting period amount to Rs. 43,925. The assessee first credited this sum to the profit and loss appropriation account and thereafter transferred the same to a reserve fund in the accounting year ending September30, 1955. No adjustment was made in the share purchase account on account of the receipt of dividend. The value of the shares which represented the stock-in-trade of the assessee remained the same both in the opening and the closing stocks. Before the Income-tax Officer it was contended on behalf of the assessee that as the arrear dividends pertained to the years 1936 to 1945 the arrear dividend received by the assessee was not in the nature of income liable to income-tax as it was merely a realisation of capital. The Income-tax Officer rejected the contention of the assessee and treated the amount of arrear dividend as the business income the assesssee liable to tax. On appeal by the assessee the Appellate Assistant Commissioner of Income-tax examined the question whether the amount of Rs. 43,925 should be treated as dividend and should therefore, be assessed under Section 12 of the Indian Income-tax Act, 1922 (hereinafter referred to as the Act) or whether it should be treated as profits and gains of business arising to the assessee and taxed under Section 10 of the Act. He however, held that the amount could not be regarded as dividend as the assessee was not the registered shareholder in the years for which the arrear dividends were declared. But he held that since the shares were purchased by the assessee with the knowledge that it would be entitled to receive the arrear dividends which represented profits arising on the acquisition of such shares, the assessee could be deemed to have entered into a scheme of profit making, an adventure in the nature of trade. The assessee brought a second appeal to the Appellate Tribunal but the appeal was dismissed. The Appellate Tribunal confirmed the findings by the Income-tax authorities and held that the assessee acquired the shares on which the arrear dividends were received in the course of its sharedealing business and that the sum of Rs. 43,925 so received by assessee formed an integral part of its income arising from business which was liable to the tax. At the instance of the assessee the Appellate Tribunal stated a case to the High Court on the following question of law:

"Whether on the facts and in the circumstances of the case the sum of Rupees 43,925 received by the assessee represented business income arising under Sec. 10 from an adventure in the nature of trade or it was a dividend within the meaning of Section 12 of the Income-tax Act?"

After looking into the statement of case and also the application of the assessee under Section 66 (1) of the Act the High Court held that the question which the Tribunal had referred did