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COMMISSIONER OF INCOME TAX v. MACAN MARKAR
NLR41V73
1939 Present.
Hearne and de Kretser JJ.
COMMISSIONER OF INCOME TAX v. MACAN MARKAR
12-D. C. (Inty.) Special
Income tax-Bonus to shareholder-Shares issued, as fully paid up, for capitalization of profits-Meaning
of dividend-Income Tax Ordinance, s. 2 (Cap. 188.)
Fully paid up shares issued to the shareholder of a company by way
of capitalizing the profits of the company do not constitute a dividend as
defined by section 2 of the Income Tax Ordinance so as to render the
shareholder liable to tax on their value.
THIS was a case
stated by the Board of Review under section 74 of the Income Tax Ordinance.
The facts are stated as follows : -
Sir H. M. Macan Markar was notified in September, 1938, of
an additional assessment of Rs. 68,712, in respect of the year of assessment,
1936-37, and was called upon to pay a tax of Rs. 3,280.05 on this additional
assessment. The sum assessed was said to be a " dividend" received
from The Galle Face Land & Building Company, Limited.
The Company is a private company and, except for five
shareholders holding one share each, the entire capital is owned by four
members of the appellant's family. In February, 1936, the Company resolved to
use Rs. 250,000 out of its reserve fund for the payment of a bonus to
shareholders, in proportion to the amount paid up on their shares, by the issue
of 2,500 fully paid up shares of the Company of Rs. 100 each.
These 2,500 fully paid shares were duly issued to the four
principal shareholders (except for 48 shares which were held for charity). The
assessee received 793 shares.
The Income Tax Assessor was of the view that this
distribution was a " dividend" as defined in section 2 of the
Ordinance and as such was taxable in the hands of the recipient (except as to
so many of the shares as represented profits arising in the accounting periods
ended before April 1, 1936). The assessee was accordingly assessed to pay a tax
on Rs. 68,712 in addition to the tax he had already been assessed for the year
of assessment, 1936-37.
The assessee appealed to the Commissioner against the
assessment on the ground that the distribution of shares was not a "
dividend" within the meaning of the Income Tax Ordinance, and was
accordingly not taxable.
The Commissioner referred the appeal to the Board of Review,
under the provisions of section 72 of the Income Tax Ordinance. The appeal was
heard by the Board of Review on November 14, 1938.
At the hearing it was agreed between the parties, that the
undistributed profits of the Company had been capitalized and that as a result
of the issue of all these bonus shares the capital of the Company had been
increased by Rs. 194,958 ; that the
resolutions of the Company and of its Directors relative to the distribution of
the reserves by the issue of shares were intra vires the Company ; and
that these shares had been issued as fully paid shares. There is also no
dispute on the amount of tax payable, if liability to tax attaches.
The assessee produced the balance sheet of the Company to
the year ending June 30, 1935, (marke
