Law:

Section:

Section 2(22) , of the Income-tax Act, 1961 [Corresponding to section 2(6A) of the Indian Income-tax Act, 1922] - Deemed dividend - Whether dividend need not be distributed in money; it may be distributed by delivery of property or right having monetary value - Held, yes - Whether therefore, distribution of right to apply for and obtain two shares at half their market value for each share held by shareholders of a company amounted to distribution of dividend by company and would be taxable in hands of shareholders - Held, yes FACTS The assessees were shareholders of a mill which purchased 5000 shares of a bank. At an extraordinary general meeting of the shareholders of the bank, a resolution was passed increasing the share capital of the bank and for that purpose offering new shares to the exiting shareholders in the proportion of one new share for every three shares held by the shareholders. The mill as the holder of 5,000 shares thus, became entitled to receive 1,666 â…” shares of the bank. Later mill decided to renounce some shares of the said issue in favour of its shareholders. Consequently, assessees as holders of 570 shares of the mill became entitled to 1,140 shares of the bank. The assessees agreed to the allotment of these shares and ultimately transferred them to a private company. The assessment of the assessees and of other shareholders of the mill was reopened by the ITO on the footing that the release by the mill of the shares of the bank amounted to distribution of dividend and the value of the right released in favour of the shareholders though taxable under section 12, had escaped tax. The order of the ITO reassessing the income of the assessees was confirmed in appeal by the AAC and by the Tribunal. On reference, the High Court observed that the definition of "dividend" in section 2(6A) was an inclusive and not an exhaustive one, and even if the distribution of the right to the shares of the bank could not be regarded as dividend within the extended meaning of that expression in section 2(6A), it was still dividend within the ordinary meaning of that expression and was taxable as income in the hands of the assessees. On appeal to the Supreme…

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