MANU/BH/0109/1974 Equivalent Citation: [1976]46CompCas155(Patna), [1976]102ITR517(Patna) IN THE HIGH COURT OF PATNA Tax Case Nos.

63 and 64 of 1971 Decided On: 18.07.1974 Appellants: Bihar State Financial Corporation Vs. Respondent: Commissioner of Income-tax Hon'ble Judges: N.L. Untwalia, C.J. and S.K. Jha, J. Counsels: For Appellant/Petitioner/Plaintiff: Tarkeshwar Prasad, K.N. Jain, M.N. Varma and Rameshwar Prasad II, Advs. For Respondents/Defendant: Shambhu Sharan and Awadh Bihari Prasad, Advs. Subject: Direct Taxation Catch Words Mentioned IN Acts/Rules/Orders: Finance Act, 1964; Finance Act, 1965; Companies Act, 1956 - Sections 85 and 86; State Financial Corporations Act - Sections 6, 13, 35(2) and 35(3); Income Tax Act, 1961 - Section 108 Case Note: Direct Taxation - Rebate - Tribunal held that shares of corporation were not preference shares and Asessee was not entitled to 7 1/2 per cent rebate - Hence, this reference Petition - Whether, shares of Bihar State Financial Corporation were preference shares and Asessee was not entitled to a further rebate of 7 1/2% on amount of dividend declared - Held, there was only one class of shares - Therefore, there was no question of preferential treatment of one class of shareholders over any other class either in matter of payment of dividends or in matter of fixed dividends to be so preferentially paid - Further, even with regard to capital, there was no preferential right given to any shareholder vis--vis other shareholders because all were equally entitled to repayment in accordance with provisions of Corporation Act as per guarantee of State Government - However, shareholders of Corporation were potentially entitled even at a future date to receive dividend at a rate of more than 3 1/2 per cent - Such shareholders could not be termed as preferential shareholders - Thus, shares of Bihar State Financial Corporation were not preference shares - Hence, Tribunal was right in holding that Asessee was not entitled to a

further rebate of 7 1/2 per cent on amount of dividend declared - Reference was answered against Asessee and in favor of department - Reference Petition disposed of. Ratio Decidendi: "It is not necessary that equal rights and privileges shall be attached to all shares." JUDGMENT S.K. Jha, J. 1. These two references have been made by the Income Tax Appellate Tribunal, Patna Bench, in respect of the assessee's assessment for the assessment years 1964-65 and 1965-66. The assessee is the Bihar State Financial Corporation (hereinafter referred to as "the Corporation") formed in pursuance of the provisions of Section 3 of the State Financial Corporations Act, 1951 (Act LXIII of 1951), hereinafter referred to as the Corporation Act, the relevant provisions of which shall be dealt with at some length hereinafter at an appropriate place. The common question of law, which has been framed and referred to this court by the Tribunal, runs in these terms : "Whether, on the facts and in the circumstances of the case, the shares of Bihar State Financial Corporation, Patna, were preference shares and the Tribunal was right in holding that the assessee was not entitled to a further rebate of 7 1/2% on the amount of dividend declared." 2. The Corporation was formerly assessed for the assessment year 1964-65 by the Income Tax Officer, who subsequently found a mistake apparent on the face of the record in the calculation of tax to be paid by the assessee. Under the Finance Act, 1964, a mode of calculation of super-tax payable by companies is set out in Paragraph D of Part II of the First Schedule of that Act, which applies to the assessment for the year 1964-65. Similarly, the mode of calculation of Income Tax, in so far as the assessment year 1965-66 is concerned, is set out in Paragraph F of Part I of the First Schedule to the Finance Act, 1965. There is no dispute that under the 1964 Act in calculating the super-tax payable a rebate of 37'5 per cent. was allowable but the amount of rebate so calculated was provided to be reduced by a sum equal to the amount of 7 1/2 per cent. on the whole amount of dividend other than the dividend on preference shares. So far as the Finance Act, 1965, is concerned, a similar provision with regard to calculation of Income Tax is laid down with the only difference that the rate of rebate under this Act was fixed at 30 per cent. with a further provision for reduction of the similar amount of 7 1/2 per cent. from the amount of rebate allowable in respect of dividend other than dividend on preference shares. In other words, under both the Acts of 1964 and 1965, in calculating the rebate allowable in the case of preference shares 7 1/2 per cent. of the dividend thereon have been laid down not to be reduced from the amount of rebate so calculated. The quotation from the Finance Act, 1965, given by the Tribunal in paragraph 8 of its appellate order is neither complete nor correct. It is for that reason that I have referred to the salient features of the two Finance Acts. 3. Reverting to the facts of the present cases, in calculating the rebate allowable to the assesseecorporation for the assessment year 1964-65 the Income Tax Officer found that 7 1/2 per cent. on the whole amount of dividend, which had not been reduced from the amount of rebate calculated in accordance with the provisions aforesaid, were wrongly and inadvertently so done because, according to the case of the department, the shares of this corporation were not preference shares

at all. Accordingly, in respect of the assessment year 1964-65 a notice under Section 154 of the Income Tax Act, 1961, was duly issued to the assessee and after service of such notice a rectification was made giving reduction in rebate at 7 1/2 per cent. of the super-tax on Rs. 3,50,000, which was admittedly the amount of dividend. Similarly, while completing the assessment for the year 1965-66 the Income Tax Officer reduced the rebate at the rate of 7 1/2 per cent. on Rs. 3,50,000, being the admitted amount of dividend declared and paid by the corporation. The assessee having preferred appeals before the Appellate Assistant Commissioner, the appeals were rejected and the assessee's contention that the shares of the corporation were preference shares was not held to be tenable. The assessee then preferred further appeals before the Tribunal and the Tribunal agreeing with the contention of the department and rejecting the stand taken by the assessee held that the shares of the corporation were not preference shares and, being so, were not entitled to the 7 1/2 per cent. rebate. The assessee having lost there, the common question of law, as stated above, has been referred. 4. In order to appreciate the respective stands taken by the assessee and the department, it is worth referring to some of the provisions of the Corporation Act. The Corporation is a statutory corporation established, as already stated earlier, under the provisions of Section 3 of the Corporation Act. Section 4(3) of this Act lays down that : "The State Government shall, with the approval of the Central Government, determine the number of shares which may, respectively, be distributed among-(a) the State Government, (b) the Reserve Bank, (c) scheduled banks, insurance companies, investment trusts, cooperative banks or other financial institutions, and (d) parties other than those referred to in Clauses (a), (b) and (c): Provided that the number of shares which may be allocated to the parties referred to in Clause (d) shall in no case exceed twenty-five per cent. of the total number of shares." 5. In accordance with the provisions of Section 4(3) aforesaid, the Corporation was established with a paid-up capital of rupees one crore divided into one lakh shares of rupees one hundred each and the shareholders were (i) the State Government holding 40,000 shares, (ii) the Reserve Bank of India holding 15,000 shares, (iii) scheduled banks 12,700 shares, (iv) co-operative banks 14,720 shares and other financial institutions and others holding the balance shares. It would thus be seen that the State Government and the Reserve Bank of India between themselves are holding 55,000 shares of this Corporation out of the total of one crore (sic) shares. Section 6 of the Corporation Act provides for shares to be guaranteed by the State Government and it, inter alia, lays down that the shares of the Corporation shall be guaranteed by the State Government as to the repayment of principal and the payment of annual dividend at such minimum rate as the State Government may, with the approval of the Central Government, fix by notification published in the official Gazette. In pursuance of this provision, the State Government issued a notification numbered 4143-D, dated 30th October, 1954, which reads as follows :

"In pursuance of the provisions of Sub-section (1) of Section 6 of the State Financial Corporations Act, 1951 (LXIII of 1951), the Governor of Bihar is pleased hereby to guarantee the shares of the Bihar State Financial Corporation as to the repayment of principal and the payment of annual dividend at the minimum rate and to fix with the approval of the Central Government such minimum rate of annual dividend at 3 1/2 per cent. per annum." 6. Thus, apart from the guarantee with regard to the repayment of principal, a minimum rate of annual dividend at 3 1/2 per cent. was also guaranteed by the State Government to be paid to the shareholders of the Corporation. Under Section 35(3) of the Corporation Act, the maximum rate of dividend, to which the shareholders may be entitled, has been fixed at 5 per cent. in the event of the contingencies contemplated in Sub-section (2) of Section 35 being met. We are not concerned in the present cases with the contingencies set out in Section 35(2). Suffice it for the present purpose to say that, while by the notification aforesaid issued in pursuance of Section 6 the minimum rate of dividend has been guaranteed by the State Government to be payable at 3 1/2 per cent. the maximum statutory limit put by Sub-section (3) of Section 35 of the Corporation Act is at the rate of 5 per cent. The only other relevant provision of the Corporation Act, which deserves notice for the purposes of these cases, is Section 43 which lays down that for the purposes of the Income Tax Act the Financial Corporation shall be deemed to be a company within the meaning of that Act and shall be liable to Income Tax and super-tax accordingly on its income, profits and gains, subject to certain provisos, with which we are not concerned. 7. Turning now to the provisions of the Income Tax Act, 1961, it is the admitted case that the Corporation could not be termed as a company subjected to the provisions of Section 104 of the 1961 Act, as Section 108 expressly excludes any company, in which the public are substantially interested, from the operation of the provisions of Section 104, and Section 2(18) of the Income Tax Act defines "company in which the public are substantially interested " as a company owned by the Government or the Reserve Bank of India or in which not less than 40 per cent. of the shares are held (whether singly or taken together) by the Government or the Reserve Bank of India or a corporation owned by that bank. As already pointed out above, the present Corporation will obviously fall within the definition of a company in which the public are substantially interested and thereby governed by the provisions of Section 108 of the Income Tax Act, 1961. It is merely for the sake of clarity that I have set out the provisions of the Income Tax Act aforesaid, for the matter in controversy in the present cases does not turn in any way upon the provisions of these sections. All that is material in the present cases is to notice that the Corporation is deemed to be a company for the purposes of the Income Tax Act and it will fall within the category of the company in which the public are substantially interested. But the crux of the question in the present cases is as to whether the shares so floated by the Corporation and guaranteed as above both with regard to the minimum rate of dividend payable to the shareholders and in regard to the repayment of the capital can bring the shares of the Corporation within the term 'preference shares' The term 'preference shares' in its turn does not find any definition in the Income Tax Act. Evidently, therefore, for the purpose of finding out as to whether the Corporation is entitled to a further relief of 7 1/2 per cent in the rebate, it will have to be determined whether the shares of the Corporation are preference shares within the meaning of the Companies Act, 1956. Section 85(1) of the Companies Act reads thus : "'Preference share capital' means, with reference to any company limited by shares, whether

formed before or after the commencement of this Act, that part of the share capital of the company which fulfils both the following requirements, namely :-(a) that as respects dividends, it carries or will carry a preferential right to be paid a fixed amount or an amount calculated at a fixed rate which may be either free of or subject to Income Tax ; and (b) that as respects capital, it carries or will carry on a winding-up or repayment of capital, a preferential right to be repaid the amount of the capital paid up or deemed to have been paid up, whether or not there is a preferential right to the payment of either or both of the following amounts......." and Section 85(2) says that "equity share capital" means, with reference to any such company, all share capital which is not preference share capital. Section 86of the Companies Act lays down that the share capital of a company limited by shares shall be of two kinds only--(a) equity share capital, and (b) preference share capital. It would thus be seen that the effect of Section 85 read with Section 86 of the Companies Act is that all share capital which is not preference share capital is equity share capital. And for the purpose of being brought within the purview of preference share capital, prima facie, it seems, both the conditions (a) and (b) have to be satisfied, namely, that as respects dividends, it carries of will carry a preferential right to be paid a fixed amount or at a fixed rate and that, as respects capital, it carries or will carry, on a winding-up of repayment of capital, a preferential right to be repaid the amount of the capital paid up. Though this seems to be prima facie the meaning of Section 85, since Clauses (a) and (b) are joined by the word "and", it is not necessary to give any concluded opinion with regard to the true meaning and purport of the term "and" intervening between Clauses (a) and (b) of Sub-section (1) of Section 85, for, in certain cases, it is well settled, "and" will also mean "or". I am, therefore, proceeding upon the assumption that on the fulfilment of either of the two conditions set out in Clauses (a) and (b) of Sub-section (1) of Section 85, the assessee may be entitled to relief. Mr. Tarkeshwar Prasad, learned counsel for the assessee, urged in the first instance that, as respects dividends, a fixed rate has been laid down at 3 1/2 per cent. which is the minimum guaranteed by the Government under the notification quoted earlier. In any event, learned counsel submitted, both the minimum 3 1/2 per cent. and the maximum 5 per cent. being fixed, the entire share capital of the Corporation must be deemed to be preference share capital as the reduced dividends are fixed within two limits. In my view there is no merit in this contention of learned counsel for the assessee. Both under the Indian law and the English law it is well settled that it is not necessary that equal rights and privileges should be attached to all shares, some may be preferential either as to capital or as to dividend or as to both and where a preferential dividend of a specified amount is attached to shares, the holders of such shares are limited to these fixed dividends and not entitled to participate in profits to any greater extent. It would be seen, therefore, that there must be at least two classes of dividends governing two such classes of shares in which one class is given a preferential treatment over the other and the rate of dividends once being fixed to be preferentially paid to such a class of shareholders, those shareholders are not entitled to participate in the profits to any extent more than that which is fixed. In the instant cases, it will be noticed that there is only one class of shares. Therefore, there is no question of preferential treatment of one class of shareholders over any other class either in the matter of payment of dividends or in the matter of fixed dividends to be so preferentially paid. All the shareholders are of one class, each one being entitled to a minimum dividend at the rate of 3 1/2 per cent. guaranteed by the State Government and this minimum is subject to fluctuation,

depending upon the actual profits of the Corporation, up to a maximum of 5 per cent. If the rate of dividend is liable to fluctuation between two limits so that in one particular year a shareholder gets at the minimum rate of 3 1/2 per cent. at the same time being entitled to participate in the profits to a greater extent up to a limit of 5 per cent., depending upon the contingencies set forth in Section 35(2) of the Corporation Act, it cannot be said that it is a fixed rate of dividend to which the shareholders are entitled. "Fixed" in common parlance or even in legal language must always mean "unalterable" or "invariable". Even with regard to the capital, there is no preferential right given to any shareholder vis-a-vis the other shareholders. All are equally entitled to the repayment in accordance with the provisions of the Corporation Act as per guarantee of the State Government. Treating both the Clauses (a) and (b) of Section 85(1) even disjunctively, therefore, it would be found that the shares of the Corporation cannot fall within the category of preference shares. 8. It was next contended by learned counsel for the assessee that, in any event, because since the inception of the Corporation right up to 1965-66 or even later, as a matter of fact, no shareholder was paid dividend at the rate of more than 3 1/2 per cent., therefore, it should be treated as being a fixed rate for the purpose of bringing it within the purview of Section 85(1)(a) of the Companies Act. I am afraid the contention is too fallacious. This submission overlooks the point that even though the shareholders may not have received any amount of dividend at more than a rate of 3 1/2 per cent., yet it cannot be said that the shareholders are not entitled to participate in the profits at any higher rate at any time. To determine the nature of the shares of any company, it is not the actual payment of dividends which will decide the issue but the rate or amount to which the shareholders may be entitled to receive or the company may be liable to disburse. So long as the shareholders of the Corporation are potentially entitled even at a future date to receive dividend at a rate of more than 3 1/2 per cent., such shareholders cannot in any view of the matter be termed as preferential shareholders. 9. In the result, therefore, I must answer the first part of the question referred in the negative and hold that, on the facts and in the circumstances of the cases, the shares of the Bihar State Financial Corporation, Patna, were not preference shares, and the second part of the question in the affirmative holding that the Tribunal was right in holding that the assessee was not entitled to a further rebate of 7 1/2 per cent. on the amount of dividend declared; the question is thus answered against the assessee and in favour of the department. The department will be entitled to its costs from the assessee ; a consolidated hearing fee is assessed at Rs. 200. Untwalia, C.J. 10. I agree.

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