Law: Income-tax Act (IX of 1922)

Section: 44

Income-tax-Avoidance   Arrangement involving sale of shares cum "special dividend"-"Special dividend" held to be included in assessable income-Commonwealth Income Tax and Social Services Contribution Assessment Act, 1936-1951, S. 260-[Income-tax Act (XI of 1922), S. 44F.   An arrangement by way of "sale of shares cum special dividend" resulted in avoidance of large amounts of income-tax.   The arrangement was operated in the following manner:--   The company (a motor concern) amended its articles of association so as to give special dividend rights to 80,000 ordinary 1 shares, which entitled the holders of the shares to a dividend of 5 15s. 10d. on every 1 share. That comes to a total of nearly 460,000 as special dividend. After the payment of that dividend, those shares were to carry only a 5 per cent. fixed dividend. The original shareholders then sold these shares to a company called Pactolus Limited (which was a private company controlled by a consulting accountant) at a price of nearly 460,000-roughly equal to the anticipated dividend. The Pactolus company paid to the original shareholders the price by cheque, and at about the same time received from the motor company a cheque for the special dividend. The two cheques were for about the same amount- 460,000. The Pactolus company was only able to pay for the shares because of the special dividend it received on them.   The Pactolus company also applied to the motor company for 400,000 5% preference 1 shares (freshly issued) and paid for them by a cheque in favour of the motor company for 400,000. On the next day the Pactolus company sold these 400,000 shares to the original shareholders (from whom. they had bought the 80,000 ordinary shares) at a price of 400,000. The original share holders paid this sum, by cheque in favour of the Pactolus company, out of the 460,000 they had received for the 80,000 ordinary shares.   All the cheques in the above transaction were banked simultan eously, with the result that by the end of December, 1949, the motor company had distributed 460,000 as special dividend. This had found its way back to the original…