1. Centered as they are on certain common issues, these appeals by the assessees were heard together and are disposed of by a common order for the sake of convenience.
2. Though the controversy before us has naturally arisen under the Income-tax Act, 1961, yet its genesis is to be found in an Oppression Petition filed before the Court of law under Section 397 of the Companies Act, 1956. Not unnaturally, therefore, an understanding of the circumstances leading to the filing of the Oppression Petition will facilitate the resolution of the controversy before us. It is, therefore, necessary, at the outset, to notice the circumstances leading to the filing of the Oppression Petition.
3. At the relevant point of time, the assessees before us were shareholders of M/s. Needle Industries (India) Ltd. ('NIIL' for short).
The said company was initially incorporated as a private company under the Indian Companies Act, 1913, on July 20, 1949, with its registered office at Madras and its factory at Ketti, Nilgiris. The company makes and markets needles for various uses, fishhooks and related products.
At the time of its incorporation, NIIL was a wholly-owned subsidiary of Needle Industries (India) Ltd., Studley, England ('NI-Studley' for short). To be specific, of the 6756 equity shares of Rs. 100 each, 6750 shares were held by NI-Studley, the remaining 6 shares being held by one Devagnanam. The said Devagnanam became a Director of NIIL in 1956 and Managing Director in 1961. All along, it was he who was looking after the affairs of NIIL.
4. In 1961, NI-Studley entered into an agreement with Newey Bros. Ltd., Birmingham, England ('Newey' for short) wherein Newey agreed to participate in the equity capital of NIIL to the extent of Rs. 4,33,400, by taking up 4,334 equity shares of Rs. 100 each, with the result the issued and paid up capital stood augmented to Rs. 11,09,000.
In 1963, 2450 additional shares were issued all of which were taken up by NI-Studley. Thus, the 1963 profile of shareholding was as follows: Sometime during 1963, NI-Studley and Newey combined to form a new company called Needle Industries-Newey (Indian Holding) Ltd. ('Holding Company' for short), a company incorporated in the U.K. In the share capital of the said Holding Company, NI-Studley and Newey were equal shares. On the formation of the said Holding Company, NI-Studley and Newey transferred to the holding company the equity shares of NIIL held by them. As a result of this arrangement, the Holding Company was holding 99.96 per cent of the shares of NIIL with Devagnanam continuing to hold 6 shares as before.
5. As pointed out earlier, NIIL was incorporated in July, 1949, that is to say, two years after India attained independence. In the wake of independence, the Government of India took many policy decisions in diverse fields. In the economic field, the Government was naturally anxious to ensure that the newly gained political independence was not set at naught or attenuated in any way by the foreign companies' establishing economic hegemony in the country. Towards this end in view, the Parliament passed, inter alia, the Foreign Exchange Regulation Act, 1947. Since NIIL was incorporated after the independence, even at the time of its incorporation, it was obligated to Indianise its share capital. Accordingly, further shares were issued in 1968, 1969 and 1971, all at par. There was also an issue of Bonus shares in 1971.
It may here be mentioned that a major portion of the Indian holding amounting to 40.66 per cent was held by Devagnanam group.
6. In or about 1972, Coats Paton Limited, Glasgow, U.K. ('Coats for short) became almost the 100 per cent owner of NI-Studley. Since, as pointed out earlier, Nl-Studley was having a 50 per cent shareholding in the Holding Company to which the shares of NIIL held both by NI-Studley and Newey had earlier been transferred, Coats acquired, indirectly, a say in the affairs of NIIL.
7. The gaining of a foothold by Coats in NIIL signalled the development of not a little friction between Devagnanam and Coats. Prior to the entry of Coats, Devagnanam, who enjoyed the confidence of the foreign shareholders, was virtually the master of all he surveyed. Over the years, he had also become closer to Newey which had entrusted its far-east interests to his care and control. Since Newey was also in the same line of business as Coats, there developed, not unnaturally, competing interest in general and with regard to the affairs of NIIL in particular.
8. The Foreign Exchange Regulation Act, 1973 (FERA) came into force on January 1, 1974. The said Act contained a new section, namely, Section 29 dealing with restrictions on establishment of base of business in India. It is unnecessary to notice in detail the elaborate provisions of this section. Suffice it to note that the said section prohibits nonresidents, non-citizens and non-banking companies, not incorporated under any Indian law or in which the non-resident interest is more than 40 per cent, irom carrying on any activity in India of a trading, commercial or industrial nature, except with the general or special permission of the Reserve Bank of India ('RBI' for short)- The section also provides that, if such a person or company is engaged in any such activity at the commencement of the FERA, he or it has to apply to the RBI for permission to carry on that activity, within six months of the commencement of FERA or such further period as the RBI may allow. Since FERA came into force on 1-1-1974, the period of limitation prescribed came to an end on June 30, 1974. It would, however, appear that the RBI extended the period of limitation by two more months, with the result that the application contemplated by and under Section 29 had to be filed with the RBI on August 31, 1974.
9. NIIL was squarely hit by the provisions of Section 29 of the FERA.It, therefore, applied to the RBI for necessary permission under Section 29 of the FERA. By its letter dated May 11, 1976, the RBI allowed the application on the condition, inter alia, that NIIL must bring down the non-resident interest from 60 per cent to 40 per cent within one year of the receipt of the letter conveying RBI's approval.
The said letter was received by NIIL on May 17, 1976 and consequently, the deadline for reducing the non-resident interest to 40 per cent was May 17, 1977.
10. On its part, the Holding Company also applied to the RBI for Holding Licence under Section 29(4)(a) of FERA, on September 18, 1974.
During the period with which we are concerned, it would appear that the said application was pending before the RBI, perhaps in view of the fact that the issue of the Holding Licence was conditional on the reduction of the non-resident interest in NIIL to 40 per cent.
11. The coming into force of the FERA and particularly the deadline fixed by the RBI saw a flurry of activity in the NIIL for diluting the foreign holding. Various alternatives, such as going in for public subscription, private placement of shares and the like, were considered. For a fact, Devagnanam even considered selling of the block of shares belonging to his group to one Mr. Khaitan at a substantial price, part of which was allegedly payable outside India. Given the cold war that had developed between him and the Coats, Devagnanam was determined not to allow "Coats dominate Ketti". On its part. Coats took a decidedly anti-Devagnanam stand and refused to countenance the very idea of any block of shares being transferred to Khaitan. Coats made a counter proposal and that was that Devagnanam and his group sell their block of shares to Madura Coats, an Indian company having collaboration with Coats. This proposal was naturally unacceptable to Devagnanam group.
12. The hardening of attitudes on both sides resulted in the October 20-21,1976 meeting between the Indian shareholders and the U.K.shareholders (which was called to take a decision of the mode and mechanics of foreign holding) ending in a stalemate. To cut a long story short, the Board of Directors of NIIL met on April 6, 1977 to consider Indianisation. The Board resolved that the issued capital of NIIL be increased to Rs. 48 lakhs by an issue of 16,000 equity shares of Rs. 100 each, to be offered as right shares to the existing shareholders in proportion to the shares held by them. The offer was to be made by a notice and the offer was to be accepted within 16 days from the date on which it was made, failing which it was to be deemed to have been declined by the concerned shareholder.
Accordingly, letters of offer dated April 14, 1977 were prepared. The letter of offer meant for the foreign shareholders, together with Devagnanam's letter dated April 12, was posted on April 27, 1977 and received by one Mr. Raeburn, the Chairman of Newey, on 2-5-1977.
According to the terms of the letter of offer, the time limit to accept the right shares offered expired on 30-4-1977. In other words, the letter of offer itself was received by the foreign shareholders two days after the prescribed last date. Thus the Holding Company was denied an opportunity to exercise its option whether or not to accept the offer of right shares, assuming that any such option was open to it, particularly in view of the RBI's mandate that the foreign holdings be reduced to 40 per cent.
13. Meanwhile, on April 19, 1977, a notice was issued intimating that a meeting of the Board of Directors of NIIL would be held on May 2, 1977 to consider, inter alia, "Policy - (a) Indianisation, (b) Allotment of shares". The said notice was also despatched to the foreign shareholders only on 27-4-1977 and was received in England on May 2, 1977, that is to say, on the date when the meeting was scheduled to be held in India. It is also a matter of record that towards the end of April 1977, Raeburn had sent a telex message to Devagnanam which said: 'HAD HELPFUL DISCUSSION COATS YESTERDAY PLEASE MAKE NO DECISIONS RE INDIANISATION PENDING LETTER". Even so, the meeting of the Board of Directors was held on May 2, 1977 as scheduled and the whole of the new issue of 16,000 right shares was allotted to the Indian shareholders (including the members of Manoharan Group, with which we are not here concerned). Out of the said 16,000 right shares, the members of Devagnanam Group were allotted 11,734 shares. A dividend of 30 per cent subject to tax, was also recommended by the Board and it was resolved that the Annual General Meeting of NIIL be held on June 4, 1977. On the same date, Devagnanam wrote a letter to Raeburn intimating him that the Indianisation process was complete and that the company had come under the control of the Indian shareholders.
14. Stung to the quick by being presented with a fait accompli, Raeburn, through a series of telex messages and letters, told Devagnanam what he (Raeburn) thought about the entire affair. In particular, Raeburn stated that the right issue at par, which was considerably less than the fair value of the shares, was most unfair to the foreign shareholders who could not take up the right issue. On his part, Devagnanam tried to convince the foreign shareholders that given the FERA imperative and the pressure, of the deadline to dilute the foreign shareholdings, the only course that was open to NIIL was to allot the right shares to the Indian shareholders.
15. On May 17, 1977, Mackrael, one of the Directors of the Holding Company, filed a Company Petition in the Madras High Court under Sections 397 and 398 of the Indian Companies Act, 1956. The sum and substance of the petition was that the Indian Directors had abused their fiduciary position and had acted mala fide by deciding to issue right shares at par and by allotting the shares exclusively to the Indian shareholders. The fair value of the shares of NIIL was about Rs. 204 per share. By allotting the right shares exclusively to the Indian shareholders at par, the Indian Directors gained an illegal advantage for themselves.
16. The Learned Acting Chief Justice who tried the Company Petition found defects and infirmities in the meeting of the Board, of Directors held on May 2, 1977 and concluded that appropriate relief should be granted to the Holding Company under Section 398 of the Companies Act.
The learned Judge was of the view that the average market value of the right shares was about Rs. 190 per share on the crucial date and that since the right shares were issued at par, the Holding Company was unjustly deprived of a sum of Rs. 8,54,550 at the rate of Rs. 90 per share on the 9,495 right shares which it was offered. Exercising the power under Section 398(2) of the Companies Act, the learned Judge directed NIIL to make good that loss which, according to him, could have been avoided by it "by adopting a fairer process of communication" with the Holding Company and "a consequential dialogue" with them in the matter of the issue of right shares at a premium. Accordingly, the learned Judge directed NIIL to pay the Holding Company the aforesaid sum of Rs. 8,54,550 as a "solatium" in order to meet the ends of justice.
17. Aggrieved by the said decision of the trial court, the Holding Company filed O.S. Appeal No. 64 of 1978, while NIIL filed Cross objections to the decree. A Division Bench of the Madras High Court heard the appeal and on a consideration of the matter and material before it, held that it was just and equitable to wind up the company.
As to the Cross objections filed by NIIL, the Division Bench held that injuries suffered by the Holding Company on account of the oppression practised by the Board of Directors of NIIL could not be remedied by the award of compensation and, therefore, the action of the Board of Directors in issuing the right shares had to be quashed. Finally, by its order dated October 26, 1978, the Division Bench granted the following reliefs: (a) Devagnanam was removed forthwith both as the Managing Director and Director of NIIL and was asked to vacate the bungalow occupied by him, by November 1, 1978. He was paid one year's remuneration as compensation for the termination of his appointment as the Managing Director.
(b) The Board of Directors was superseded and an interim Board consisting of nine directors proposed by the Holding Company was constituted, with Shri M.M. Sabharwal as an independent Chairman.
(c) Harry Bridges, an executive of COATS, was appointed as the Managing Director for a period of four months.
(d) The rights issue made on 6th April, 1977 and the allotment of shares made on 2nd May, 1977 at the Board Meetings were set aside and the Interim Board was directed to make a fresh issue of shares at a premium to the existing shareholders, including the Holding Company which was to have a right of renunciation. The new Board was directed to apply to the Controller of Capital Issues for determining the amount of premium.
(e) The Articles of Association were to be altered by appropriate additions and deletions in order to provide for election of Directors by proportional representations; and (f) Devagnanam was asked to pay to the Holding Company the costs of appeal and cross-objections quantified at Rs. 25,000. He was also asked personally to reimburse the expenses incurred by NIIL in the appeal and cross-objections.
18. Thereupon, NIIL and some of the Indian shareholders, including Devagnanam, appealed to the Supreme Court. On a detailed consideration of the matter, the Supreme Court held that the Holding Company had failed to make out a case of oppression. Even so, it held that the Indian shareholders had unjustly and unjustifiably enriched themselves at the cost of the Holding Company by the simple expedient of issuing the right shares at par, when the value of those shares was much above par; and that they should be asked to pay the difference "in order to nullify their unjust and unjustifiable enrichment at the cost of the Holding Company". As to the quantum, the Supreme Court, agreeing with the learned trial Judge, held that it would be just and reasonable to take the average market value of the right shares on the crucial date at Rs. 190 per share. On this basis, the Supreme Court held that "the Holding Company, which was offered 9,495 right shares, will be entitled to receive from the Indian shareholders an amount equivalent to that by which they unjustifiably enriched themselves, namely, Rs. 90 x 9495 which comes to Rs. 8,54,550". The Court further directed that "Devagnanam, his group and the other Indian shareholders who took the right shares offered to the Holding Company shall pay, pro rata, the sum of Rs. 8,54,550 to the Holding Company. The amount shall be paid by them to the Holding Company from their own funds and not from the funds or assets of NIIL".
19. The Supreme Court gave certain other directions also. Of relevance to the matter on hand are the following: As a further measure of neutralisation of the benefit which the Indian shareholders received in the meeting of 2nd May, 1977, we direct that the 16,000 right shares which were allotted in that meeting to the Indian shareholders will be treated as not qualifying for the payment of dividend for a period of one year commencing from January 1, 1977, the Company's year being the Calendar year. The interim dividend or any further dividend received by the Indian shareholders on the 16,000 right shares for the year ending December 31, 1977 shall be repaid by them to NIIL, which shall distribute the same as if the issue and allotment of right shares was not made until after December 31, 1977. This direction will not be deemed to affect or ever to have affected the exercise of any other rights by the Indian shareholders in respect of the 16,000 right shares allotted to them.
Finally, in order to ensure the smooth functioning of NIIL and with a view to ensuring that our directions are complied with expeditiously, we direct that Shri M.M. Sabharwal who was appointed as a Director and Chairman of the Board of Directors under the orders of this Court dated November 6, 1978 will continue to function as such until December 31, 1982.
While granting Special Leave, the Supreme Court, by their interim order dated 6-11-1978, directed, inter alia, that there would be an interim Board of Directors headed by one M.M. Sabharwal, ex-Managing Director of Dunlop India Pvt. Ltd. With the handing down by the Supreme Court of the judgment dated May 7, 1981, it became necessary to pass suitable orders as respects the Board of Directors of NIIL. In that regard, the Supreme Court directed as under: The interim Board of Directors shall forthwith hand over charge to the Board which was superseded, but with Shri M.M. Sabharwal as Director and Chairman of the Board of Directors. After taking the charge from the interim Board, the Board of Directors will take expeditious steps for convening an Annual General Meeting for the year 1976-77 and the years thereafter for the purpose of passing the accounts, declaring dividends electing all Directors and for dealing with other necessary or incidental matters.
20. Thereupon, NIIL declared dividends the details of which are given below:C.Y. 1977 36 per cent* 29-6-1981 (29th AGM)C.Y. 1978 20 per cent 29-6-1981 (30th AGM)C.Y. 1979 19 per cent 14-9-1981 (31st AGM)C.Y. 1980 12 per cent 27-11-1981 (32nd AGM) 21. It was pursuant to the aforesaid directions of the Supreme Court that the assessees before us had paid to the Holding Company various sums as detailed below: 22. We may now notice the vicissitudes of the income-tax assessment of the assessees before us, relating to the assessment year 1982-83.
23. In the course of the assessment proceedings for the said assessment year, a two-fold claim was set up on behalf of the assessees. The first claim was that the amounts paid by the assessees to the foreign shareholders in accordance with the directions of the Supreme Court must be deducted from the income as and by way of dividends received by the assessees. This claim was made on the footing that the amounts paid by them to the foreign shareholders represented, to quote the assessees, "amount paid to foreign shareholders towards dividend due to them as per Supreme Court order".
The second claim was that even though NIIL had declared dividends for the years 1977 to 1980 (both inclusive) on various dates falling in the year of account relating to the assessment year 1982-83, yet, the said dividends should not be aggregated for purposes of bringing the sums to charge in the assessment for the said assessment year. In this regard, the assessee's case was that even though the dividends were not declared during the previous years relevant to the earlier assessment years and were declared and paid only during the previous year (ending on 31-3-1982) relevant to the assessment year 1982-83, yet, "in view of the litigous vicissitudes through which the company found, the dividends have to.be distributed every year uniformly, as the declaration was delayed because of litigation".
24. None of the aforesaid contentions found favour with the Assessing Officer. On the former issue, reading the Supreme Court judgment as meaning that the amount ordered to be paid by the Supreme Court represented the price which was payable by the Indian shareholders, the Assessing Officer held that the outlay was on capital account and hence not revenue deductible. As for the latter issue, going on the basis of the dates on which the annual General Meetings were held, the Assessing Officer held that all the meetings in question having been held during the relevant previous year, the dividends declared by NIIL for the years 1977 to 1980 (both inclusive) must be aggregated and brought to tax in the assessment for the assessment year 1982-83.
27. Shri G. Vaidyanathan the learned counsel for the assessee, took us through the facts and circumstances of the case and particularly the relevant portions of the Supreme Court judgment and contended that the lower authorities were not justified in deciding both the aforesaid issues against the assessees. The first limb of Shri Vaidyanathan's argument was that the lower authorities have clearly misdirected" themselves as to facts when they thought that, even according to the Supreme Court, the amount paid by the assessees to the foreign shareholders (as directed by the Supreme Court) was not a compensation properly so-called but price paid by the assessees to acquire the right shares allotted to them. Referring to the operative portions of the judgment, he pointed out that nowhere in the judgment the Supreme Court has held that the amount awarded by it represented price of the right shares.
Secondly, given the fact that in the context of the dilution of foreign holding from 59.34 per cent to 40 per cent no part of the rights issue would be allotted to the foreign shareholders, the amount paid could not be regarded as the price paid to the foreign shareholders for the transfer of any shares by them to the Indian shareholders. For a fact, there was no such transfer. Hence the sum awarded by the Supreme Court cannot be regarded as a price paid by the Indian shareholders for acquiring the right shares.
Thirdly, according to Shri Vaidyanathan, the case before us is one of judgment or decree debt inasmuch as, the foreign shareholders' claim having merged in the decree of the Supreme Court, the claim assumes the character of judgment debt - See the Supreme Court case of All India Reporter (4 ITR 444) (sic). And, as has been held by the Madras High Court in the case of CIT v. Abdul Coder Motor Service [1980] 122 ITR 812, the satisfaction of a decree debt cannot be taken as payment of a sale price.
28. The second limb of Shri Vaidyanathan's argument was that the sum awarded by the Supreme Court was not premium properly so-called, either. True, on page 201 of the judgment, the Supreme Court was talking of "fair premium of the shares". But the "fair premium of the shares" referred to by the Supreme Court cannot be equated with the premium at which shares are issued for subscription by companies. In the context in which it occurs, the term "fair premium" only means damages for the unjust and unjustifiable enrichment by the Indian shareholders at the cost of the foreign shareholders.
Secondly, when shares are issued at a premium, it is common knowledge, the amount of the premium goes to the Company issuing the shares. In this case, the sum awarded by the Supreme Court reached the foreign shareholders and not NIIL. If the award in question could not properly be regarded as premium in the accepted sense of the term, there is no question of treating the amounts paid by the assessees to the foreign shareholders as an outlay on capital account.
29. The third limb of Shri Vaidyanathan's argument was that, properly viewed, the sums in question were compensation simpliciter. Elaborating this aspect of the matter, he contended that the amount awarded by the Supreme Court to the foreign shareholders went to "fill in" the loss suffered by them by reason of, what according to the Supreme Court was, unjust and unjustifiable enrichment on the part of the Indian shareholders. The sum in question was thus nothing but compensation. In this regard, Shri Vaidyanathan referred to and relied upon the following extract from the Supreme Court case of State of Gujarat v.Shantial Mangaldas AIR In ordinary parlance the expression 'Compensation' means anything given to make things equivalent, a thing given to or to make amends for loss, recompense, remuneration or pay:...
30. The fourth limb of Shri Vaidyanathan's argument was that the compensation in question related not to capital field but to revenue field. In this regard, he contended first that the case before us is not one where the title to a particular asset (the right shares allotted to the Indian shareholders, in this case) is improved. Having regard to the significant fact that the Supreme Court did not find any infirmity in the rights issue as such, it should be held that the title of the Indian shareholders to the right shares allotted to them was perfect, even to start with. Therefore, the question of improving the title further does not arise. It should, therefore, follow that the compensation paid by the Indian shareholders to the foreign shareholders could not be regarded as an outlay on capital account.
Secondly, even if it is assumed that there was somehow some cloud over the right shares in question for the removal of which the Indian shareholders came to pay the compensation in question, the outlay will relate to revenue field only, because no new capital asset was acquired; nor was any imperfect title perfected. In this regard, he referred to and relied upon the Calcutta case of CIT v. De Luxe Film Distributors Ltd. [1978] 114 ITR 434.
According to Shri Vaidyanathan, the matter could be looked at from another angle. The right shares allotted to the Indian shareholders is an income-earning apparatus. The compensation paid by the Indian shareholders to the foreign shareholders could well be regarded as monies spent for the specific purpose of preventing an attack on and thereby preserving the income-earning asset, in which event also the outlay properly relates to revenue field.Elucidating this point further, Shri Vaidyanathan contended that had the Indian shareholders failed to pay the compensation amount to the foreign shareholders, there was a real threat of the right shares being attached in execution of the judgment decree in question. The amount paid by the Indian shareholders to the foreign shareholders could, in such circumstances, relate only to the revenue field. In this regard, he referred to and relied upon the following cases: (i) CIT v. H.H. Maharani Shri Vijaykuverba Saheb of Morvi [1975] 100 1TR 67 (Bom.) (ii) CIT v. Delhi Safe Deposit Co. Ltd. [1982] 133 ITR 756 (SC) (iii) CIT v. O.P.N. Arunachala Nadar [1983] 141 ITR 620 (Mad.) 31. To a specific query in this regard from the Bench, Shri Vaidyanathan admitted that no specific charge was created on the right shares in question so as to ensure prompt payment by the shareholders of the award amount to the foreign shareholders. Even so, drawing our attention to the net wealth position of the assessees before us, Shri Vaidyanathan contended that they did not have any other assets that could be attached. Consequently, the fact that no specific charge was created on the right shares in question did not materially alter the position.
In this connection, we wondered whether the assessees could not have made some other arrangement for paying the award amount in question, such as borrowing money from others and the like. Shri Vaidyanathan's response was that they could not have done so.
32. The next limb of Shri Vaidyanathan's argument was that if regard be had to the totality of the circumstances leading to the filing of the Oppression Petition, it will be readily seen that the amount awarded by the Supreme Court to the foreign shareholders was meant to compensate the foreign shareholders for the loss of dividends suffered by them.
According to him, the unjust and unjustififiable enrichment by the Indian shareholders adverted to by the Supreme Court could only refer to the right to dividends on the right shares which the foreign shareholders lost.
In this regard, Shri Vaidyanathan pointed out that as a result of the prolonged litigation, NIIL could not declare dividends for the years 1977 to 1980. Further, the Supreme Court in terms prohibited payment of dividends on the right shares for the year 1977. In other words, the right shares became eligible for dividend on and from the year 1978.
This would mean that the foreign shareholders had been deprived of dividend on the right shares for the years 1978 to 1980. The last dividend declared by NIIL was for the year 1976 and the rate of dividend declared was 30 per cent per share. On the basis of the said rate of dividend, the loss of dividend suffered by the foreign shareholders for the years 1978 to 1980 worked out to Rs. 90 per share.
This would also indicate, said Shri Vaidyanathan, that the amount of Rs. 90 per share fixed by the Supreme Court did indeed represent the loss of dividends suffered by the foreign shareholders. It should, therefore, naturally follow that the amounts paid by the Indian shareholders were payable from and out of the dividends received by them from NIIL.
Further, the award amount was actually paid by the Indian shareholders from and out of the dividends declared and paid to them by NIIL.
In view of the foregoing, therefore, contended Shri Vaidyanathan, the sums paid by the assessees were a proper deduction from the dividend income of the assessees before us.
33. Concluding his arguments on the nature of the sums paid by the Indian shareholders to the foreign shareholders, Shri Vaidyanathan finally contended that though the language of Section 37(1) is a little wider than that of Section 57(iii), it does not mean that Section 57(iii) must be given a narrow and constricted meaning. In other words, the sums in question were a proper deduction from the dividend income of the assessees. In this regard, he referred to and relied on the Supreme Court case of CIT v. Rajendra Prasad Moody [1978] 115 ITR 519.
34. On the issue whether the award money could be regarded as price of the right shares allotted to the Indian shareholders, the Bench wanted to know whether the consideration for a thing acquired (here, the right shares), will not encompass, in certain circumstances, not only the amount paid by the transferee to the transferor but also the amount paid by the transferee to someone other than the transferor, both the payments forming part of a package deal. Shri Vaidyanathan fairly stated that he was taking the line that, in the case before us, the award amount did not form part of the price of the right shares in question.
35. Turning next to the question whether the aggregate of the dividends declared by NIIL during the previous year relevant to the assessment year 1982 -83 should be brought to charge in the assessment for that year, Shri Vaidyanathan contended that the assessees were clearly entitled to have the dividend income spread over and assessed in the respective assessment years. Shri Vidyanathan said that the issue which is now before us has not come up for consideration in any of the earlier reported cases. Even the latest edition of the Commentary of Kanga & Palkhivala has cited only one case, namely, Vernon Milward Bason v. CIT 2 ITC 523 (Cal.) which could be said to come as closely as possible to the issue before us. Even here, the said case dealt with a different aspect of the matter. Nor does the latest Commentary of Sampath Iyengar cite any subsequent reported case directly on the issue before us.
36. Shri Vaidyanathan referred to the Madras case of Sree Meenakshi Mills Co. Ltd. v. Asstt. Registrar of Joint Stock Companies AIR 1938 Mad. 640, in which it had been held that a general meeting called on December 30, 1934 but which was adjourned to March 31, 1935, could not be treated as a meeting of 1935 so as to satisfy the provisions of Section 76(1) of the Indian Companies Act, 1913. The adjourned meeting was not a different meeting from the one which began on December 30, 1934; it was the same meeting. Taking a clue from the said Madras case, Shri Vaidyanathan contended that the 29th, 30th and the 31 st Annual General Meetings which were held in June, 1981 and September, 1981, must be regarded as having been held within the time allowed by and under Section 166 of the Indian Companies Act, 1956. In this regard, he repeatedly stressed the point that it was due to the prolonged litigation and the supersession of the Board of Directors that the said meetings could not be held in time. But for the fact that the Board of Directors was superseded by the orders of the Madras High Court, the Board of Directors would certainly have recommended, in time, dividends for the years 1977, 1978 and 1979; Annual General Meetings would have been held within the time allowed under Section 166 of the Companies Act; and the dividends declared in those meetings. In that event, the question of bringing to charge in the hands of the assessees the dividend income of more than one year would not have arisen.
In this regard, Shri Vaidyanathan highlighted the fact that the mandate of Section 166 of the Companies Act was that an Annual General Meeting be held each year within the stipulated time. This mandate Could not be followed or complied with by NIIL due to circumstances beyond its control - to wit the supersession by the High Court of the Board of Directors. Hence it is only fair that dividend income is brought to charge in the respective assessment years and not aggregated and brought to charge in the assessment for the assessment year 1982-83. In other words, having regard to the special facts and circumstances of the case, the dividends declared during the previous year relevant to the assessment year 1982-83 must relate back to the respective previous years and brought to charge only in the assessment for those assessment years. As a corollary, the compensation paid by the assessees which, as contended earlier, is revenue deductible, should also be spread over and deducted from the dividend of the respective assessment years.
37. In view of the foregoing, therefore, contended Shri Vaidyanathan, the assessees are entitled to succeed on both the issues before us.
38. On his part, Shri PA Iyengar, the learned Departmental Representative, strongly supported the impugned orders of the lower authorities. On the question whether the award money paid by the Indian shareholders to the foreign shareholders was revenue deductible, Shri Iyengar drew our attention to pages 205 et seq of the Supreme Court judgment and contended that the said amount was part of the price which the Indian shareholders had to pay for the right shares allotted to them.
In any event, contended Shri Iyengar, as has been pointed out by the Supreme Court in the case of CIT v. Malayakun Plantations Ltd. [1964] 53 ITR 140, the expression "for the purpose of making or earning such income" occurring in Section 57(iii) has a much narrower connotation than the expression "for the purposes of the business" occurring in Section 37(1) of the Act. In the case before us, the assessees received the dividend because they held the right shares in question. In other words, the ownership of the right shares was the proximate source of the dividends. The payment by the assessees to the foreign shareholders of the award money ordered by the Supreme Court did not have anything to do with the earning of the dividend. This is yet another reason why the assessees must fail.
39. On the question whether the assessees were entitled to the benefit of spread over of the dividends declared during the previous year relevant to the assessment year 1982-83 which is now before us, Shri Iyengar contended that, if regard be had to the scheme of the Act, it would be seen that the lower authorities were justified in bringing to tax in the assessment for the assessment year 1982-83 all the dividend declared by NIIL for the previous year relating to the said assessment year. According to him, the ratio of the case of Vernon Mliward Bason [supra) supported the Department.
40. In view of the foregoing, therefore, Shri Iyengar contended that the impugned orders of the lower authorities do not invite any interference.
41. In his reply, Shrl Vaidyanathan pointed out that the case referred to as Vernon Milward Bason (supra) went on the basis of different set of facts. There, a lump sum amount was paid as and by way of dividend and not an aggregate of distinct and separate amounts relating to different years. This case cannot, therefore, avail the Department.
42. As for the Supreme Court case of Mcdayalam Plantations Ltd. (supra), referred to and relied upon by the learned Departmental Representative, Shri Vaidyanathan contended that the decision therein is not applicable to the case before us. Further, as has been pointed out by the Supreme Court in the case of Rajendra Prasad Moody (supra), the fact that the language of Section 37(1) is alittle wider than that of Section 57((iii), it does not mean that the latter section must be given a narrow and constricted meaning. In the case before us, the assessees did not have any other assets worth the name other than the shares in question. Non-compliance with the Supreme Court order would have entailed the shares in question being attached and brought to sale. By paying the award money from out of the dividends, the assessees had managed to protect the income-earning apparatus.
Consequently, the award money paid by the assessees are a proper deduction from the dividend income received by them.
43. We have looked into the facts of the case. We have heard the rival contentions.
44. We may first deal with the issue whether the award amount paid by the Indian shareholders is part of the price which they have paid for acquiring the right shares in question. "What is the true nature of the award amount ?" The answer to this question holds the key to the issue before us.
45. To recapitulate, the assessees' case is that the award amount was essentially in the nature of compensation paid by the Indian shareholders to the foreign shareholders to recompense the latter for the loss of dividend on the right shares caused to them by the mode and mechanics followed by the Indian shareholders to allot right shares to themselves. It is also the assessees' case that the award amount represented three years dividends calculated at 30 per cent. The award amount was also paid by the Indian shareholders out of the dividends received by them. The cumulative effect of these facts, according to the assessees, is that the sum in question is a proper deduction from the dividend income.
46. Let us approach the matter first on first principles. It is well-settled that a bundle of rights is attached to shareholding. A shareholder enjoys the following rights: (a) Right to participate in meetings (including Annual General Meeting) and to vote on the resolutions placed before the meetings, (d) Right to subscribe to (including the concomitant right to relinquish) wholly or in part, the right shares offered, and, It would at once be clear from the foregoing lists that the right to receive dividend is only one of the many rights attached to shareholding.
47. Let us examine closely what are the consequances of the right to participate in the meetings (including Annual General Meeting) and to vote on the resolutions placed before the meetings. In the case before us, one of the proposals placed before the meeting was to issue right shares at par. The way the Indian shareholders went about the matter denied the foreign shareholders their valuable right to participate in the meetings and to vote on the proposal. Had they been given adequate notice of the meetings and had they attended the meetings, given the fact that they were the majority shareholders, they could certainly have resisted the proposal to issue the right shares at par and what was more, they could have decided on what should be the proper premium at which to issue the right shares.
48. True, the very process of dilution of foreign holding to 40 per cent through issue of right shares meant that the foreign shareholders would not have been allotted any right shares. But that circumstance, as we see it, is not material. What is material is that had they succeeded in getting the right shares issued at a premium, the premium collected would have been credited to share premium account which would, in course of time, come back to them as bonus shares. (The issue of bonus shares would not have entailed any change in the percentage of foreign holding). Or again, in the event of liquidation of NIIL, the money credited to the share premium account would have, other things being equal, increased the size of the moiety that would have been allotted to them.
49. In view of the foregoing, therefore, we hold that the foreign shareholders lost much more than the right to receive dividend. As we see it, to argue as though that only the right to receive dividend was jeopardised, is to oversimplify the issue.
50. We are not impressed by Shri Vaidyanathan's argument that simply because the amount awarded by the Supreme Court equals three years' dividend calculated at the rate of 30 per cent year, the award amount must be equated to dividend. It was just a happenstance that on the basis of the figures available before it, the Supreme Court came to fix the 'fair premium at Rs. 90 per share. Needless to add, the happenstance-based argument would not have been available to the assessees had the Supreme Court determined the 'fair premium' at, say, Rs. 77 per share. We, therefore, reject this argument.
51. Similarly, the fact that the Indian shareholders paid the award amount out of the dividends received by them from NIIL is neither here nor there. Even if the company had not declared dividend, they would have been forced to pay the award amount by raising adequate funds by some means or other.
52. Thus, on the basis of first principles, we have arrived at the conclusion that the amount awarded by the Supreme Court was a recompense for the totality of the rights of the foreign shareholders which was jeopardised by the manner in which the Indian shareholders handled the entire matter. For a fact, it would not be possible to relate the award amount to the loss of dividends if regard is had to the fact that under the scheme of Indianisation through issue of right shares, the foreign shareholders could not have been allotted the right shares to start with.
53. What was the Supreme Court's perception of the case? To this question, we must now turn. We must atonce point out that we have not been able to come across anything in the Supreme Court judgment even remotely suggesting that, when the Supreme Court fixed the 'fair premium' at Rs. 90 per share, they had in mind the dividends attributable to the right shares. What the Supreme Court did was this.
Having found that a case of oppression had not been made out, the Supreme Court held that it was necessary "to do substantial justice between the parties and place them, as nearly as it may, in the same position in which they would have been, if the meeting of 2nd May, 1977 were held in accordance with law". In this regard, the Supreme Court took note of the willingness of the Indian shareholders to pay a premium on the excess holding of the right shares to be issued. In particular, it took note of the fact that Devagnanam and his group were always ready and willing to buy the excess shares of the Holding Company at a fair price, as was clear from the related correspondence.
For a fact, in the affidavit dated May 25, 1977, Devagnanam had stated categorically that the Indian shareholders were always ready and willing to purchase one-third of the holdings of the non-resident shareholders at a price to be fixed in accordance with the Articles of Association by the Reserve Bank of India. It was, therefore, that the Supreme Court observed: Having had the benefit of that stance, they must now make it good.
Besides, it is only meet and just that the Indian shareholders, who took the right shares at par when the value of those shares was much above par, should be asked to pay the difference in order to nullify their unjust and unjustifiable enrichment at the cost of the Holding Company. We must make it clear that we are not asking the Indian shareholders to pay the premium as a price of oppression. We have rejected the plea of oppression and the course which we are now adopting is intended primarily to set right the course of justice, in so far as we may.
Accordingly, the Supreme Court, agreeing with the learned trial court, went on to hold that it would be just and reasonable to take the market value of the right shares on the crucial date at Rs. 190 per share, being the mean of the value of the shares as assessed by the Secretary of MIL (Rs. 175) and the value of the said shares as assessed by Price Waterhouse, Peat & Co., Calcutta, (page 204). It was thus that the 'fair premium' came to be fixed at Rs. 90 per share. It will be clear from the foregoing that the focus of the Supreme Court was not restricted to dividends. Its focus was on the totality of the circumsances of the case, something much more than mere dividends.
54. What then is the exact nature of the award amount in question? As we see it, it is nothing but additional price paid by the assessees to acquire the right shares in question. The Supreme Court held that a case of Oppression was not made. Even so, taking the totality of the circumstances into account, the Supreme Court felt that substantial justice needed to be done between the parties, so as to place them, as nearly as it was possible, in the same position in which they would have been, had the meeting been held on 2nd May, 1977, in accordance with law. It was at that meeting that the whole of the new issue of 16,000 right shares was allotted at par to the Indian shareholders. It was the same meeting which the foreign shareholders could not attend owing to lack of adequate notice. Had they attended the meeting, being the majority shareholders, they could have easily dictated the terms on which the rights issue was to be made. And, aware as they were of the offers made earlier by Devagnanam and his group, they would have ensured that the right shares were issued at a stiff premium. Since they could not attend the meeting, they were put to loss. It was in this context that the Supreme Court, held that the Indian shareholders had unjustly and unjustifiably enriched themselves at the cost of the foreign shareholders. Further, it will be ex facie clear from the excerpt at page 26 (supra) that the Supreme Court "set right the course of justice" by ordering that the Indian shareholders pay the foreign shareholders at the rate of Rs. 90 per share on the 9,495 right shares which were offered to the Holding Company. Reading the judgment of the Supreme Court as a whole, we have no hesitation in coming to the conclusion that the award amount was the additional price which the Indian shareholders had to pay to acquire the right shares allotted to them.
True, the additional price was not paid to NIIL as and by way of premium, properly so called, but to the foreign shareholders. Even so, from the point of view of the Indian shareholders, it was very much a price (both literally and metaphorically) which they had to pay for acquiring the right shares in question.
55. A related aspect of the matter is noteworthy. It is well-settled that the consideration for a thing acquired will encompass, in certain cases, not only the amount paid by the transferee to the transferor but also the amount paid by the transferee to someone other than the transferor, both the payments forming part of a package deal. The said proposition flows logically and directly from the rule that, under the Law of Contracts, consideration is the very life-breath of simple contracts and that detriment to the promisee is the sine qua non of consideration. In other words, in a given case, the promisee might have suffered detriment on two separate but inter-related counts, the first count being represented by the monetary consideration that the promisee pays directly to the promisor and the second count being represented by the monetary consideration that the promisee pays, under the terms of contract, to a third party.This situation is examplified by a case in which 'A' buys a house property from 'B' by paying (0 the stipulated monetary consideration to 'B' and (ii) the stipulated monetary consideration to 'C' who is the tenant of the property. In such a situation, from the point of view of the purchaser of the property, the cost to him of the property will be the sum total of the monetary consideration paid by him to 'B' and 'C.In the case before us, in the context of the acquisition of the right shares, the Indian shareholders have suffered detriment on two counts.
First, they had paid NIIL a sum of Rs. 100 each per share. They had also paid, on the directions of the Supreme Court, a further sum of Rs. 90 per share to the foreign shareholders. Thus, in monetary terms, the Indian shareholders suffered a detriment represented by the sum total of the two sums; that is to say, Rs. 100 + Rs. 90 = Rs. 190. It should, therefore, follow that the Indian shareholders had acquired the right shares at the rate of Rs. 190 per share.
56. True, the 'fair premium' amount of Rs. 90 was not paid by the Indian shareholders to NIIL. True again, the privity of contract was between NHL and the Indian shareholders. Even so, the judgment and order of the Supreme Court had altered the terms of the contract to mean that the Indian shareholders shall pay Rs. 190 in the aggregate for each of the right shares allotted to them.
57. In view of the foregoing, therefore, we hold that the award amount is nothing but additional price paid by the Indian shareholders to acquire the right shares in question and that consequently, it was very much an outlay on capital account.
58. In the view we have taken of the matter, we reject all the related arguments of Shri Vaidyanathan as invalid.
59. This brings us on to the issue relating to the aggregation of dividends. It is a matter of record that the 30th, 31st and 32nd Annual General Meetings could not be held within the time allowed by and under Section 166 of the Companies Act, 1956, by reason of the Board of Directors having been superseded by the orders of the Madras High Court. It was only after the Supreme Court delivered its judgment on May 7, 1981 that the said Annual General Meetings were held respectively on 29-6-1981, 14-9-1981 and 27-11-1981 - all the dates falling in the previous year ending on 31 -3-1982 relevant to the assessment year 1982-83 now before us. And it was in the said Annual General Meetings that the dividends relating to the Calendar Years 1978, 1979 and 1980 were declared.
The assessee's case is that it was due to the intervention of the Madras High Court that the said Annual General Meetings could not be held in time and that consequently, the dividends declared must be spread over the relevant assessment years. In this regard, the assessee's case is that the decision of the Calcutta High Court in the case of Vernon Milward Bason (supra) is not applicable. It is also the assessee's case that the ruling in the Madras case of Sree Meenakshi Mills Co. Ltd. (supra) would avail the assessee.
60. We have carefully perused the aforesaid two reported cases. We agree with the assessee's counsel that the Calcutta case of Vernon Milward Bason (supra) turned on the peculiar facts of that case. We are, however, unable to see how the Madras case of Sree Meenakshi Mills Co. Ltd. (supra) would avail the assessee. There; the General Meeting called on December 30, 1934 was adjourned to March 31. 1935 and was held on that date. On a complaint filed by the Assistant Registrar of Joint Stock Companies, Madurai, the company was convicted on the ground that it failed to hold a General Meeting in 1935, thereby violating the provisions of Section 76(1) of the Indian Companies Act, 1913. The assessee's case was that the General Meeting held on March 31, 1935 should be regarded as the meeting which it was obligated to hold in 1935. The High Court negatived the assessee's contention and pointed out that the meeting held on March 31, 1935 was not a different meeting from the one which began on December 30, 1934, it was the same meeting.
The company did not hold a separate and distinct meeting in 1935, as required by Section 76. Consequently, the conviction of the company was correct.
The facts of the case before us, however, are different. Here, it is a matter of record that no meetings were held within the time allowed by and under Section 166 of the Companies Act, 1956 to consider the Annual Report of NIIL for the years 1978, 1979 and 1980. The relevant Annual General Meetings were in fact held only on 29-6-1981, 14-9-1981 and27-11-1981 respectively. Therefore, there is no question of treating the said meetings as adjourned meetings.
61. Yet, it is argued on behalf of the assessee that the said rule is applicable to meetings held during the period June-November, 1981 because these meetings were really delayed meetings. The said ruling of the Madras High Court, we fear, cannot be extended to delayed meetings.
First, the said meetings are styled 'delayed meetings', because they could not be held earlier, owing to the Board of Directors being superseded by Court's order. Secondly, this is also not a case where notices of the respective Annual General Meetings had been issued earlier intimating the shareholders that the Annual General Meetings were being called on date(s) within the time allowed under Section 166 of the Companies Act, 1956 and where the proposed Annual General Meetings could not be held due to Court orders. Had that been the case, the assessees could perhaps have had an arguable case. In the case before us, even the notice relating to the holding of the Annual General Meetings was issued only in June/August, 1981, that is to say, during the previous year relevant to the assessment year 1982-83 which is now before us. It is, therefore, difficult to accept the contention of the counsel for the assessee that the dividends declared in the delayed meetings held during the previous year relevant to the assessment year 1982-83 must be related back to the earlier previous years on the footing that the delayed Annual General Meetings themselves related to those years.
True, the Annual General Meetings in question could not be held within the time allowed under Section 166 of the Companies Act, 1956, owing to circumstances beyond the control of the Board of Directors and even of the shareholders. All that would follow from the said situation is that NHL could successfully set up a case that because it was prevented by reasonable cause from holding the Annual General Meetings in time, it could not be visited with penalty for the failure to hold the Annual General Meetings in time. If any authority is needed for this proposition, it is to be found in the Kerala case of Bank of Deccan Ltd.. In re AIR 1960 Ker. 15.
The presence of reasonable cause might even save the Company from the legal consequences of the bar of limitation that might have become operative during the interregnum between the due date of holding the meeting and the date on which the delayed meeting was actually held.But we know of no justification, in authority or law, for the proposition that the proceedings of the delayed meetings will relate back to the dates on which the meetings could have been held (and within the time allowed under Section 166 of the Companies Act, 1956) had not the litigation interfered with the functioning of the Board of Directors of the company.
62. Under the scheme of the Act, it is will-settled, the income of the assessee could be brought to charge either on accrual basis or on receipt basis. Conceptually speaking, receipt of income cannot precede the accrual of income. The receipt of income will normally come after the accrual of income. In some cases, both accrual and receipt of income may be simultaneous.
In the case before us, we are dealing with dividend. It is well-settled that the liability of a company to pay any amount by way of dividend arises only when the shareholders accept the recommendations of the Board of Directors and dividend is declared at the Annual General Meeting of the company. It is open to the Directors to modify or withdraw the recommendation with regard to the payment of dividend before the said recommendation is accepted by the shareholders. It is also open to the shareholders either to accept the recommendation of the Directors in its entirety or to modify it. The legal liability to pay and the concomitant right to receive any dividend arises only after the shareholders at the Annual General Meeting have decided to declare a dividend on the basis of the recommendations of the Directors or on the basis of any modification thereof. In this connection, it may be noted with interest that in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559, the Supreme Court observed: 'The liability for the payment of dividend arises only after the dividend has been declared by the shareholders at the Annual General Meeting and this liability does not relate back to any earlier date on the basis of the recommendations of the Directors, as the Directors do not enjoy any power of declaring the dividend". It should, therefore, follow that the assessees before us can properly be said to have acquired a right to receive dividends only on the aforesaid three dates on which the three Annual General Meetings were held. There is no question of holding that somehow the right of the assessees to receive the said dividends gets related back to earlier assessment years. We, therefore, hold that the lower authorities were, in law, justified in bringing to charge, in the assessment for the assessment year 1982-83, the aggregate of the dividends declared during the relevant previous year ending on 31-3-1982.
63. But, as we see it, the matter should not be permitted to rest there. In the case before us, had the respective Annual General Meetings been held in time, the dividends in question would have been brought to tax only in the related assessment years. And it is a matter of record that the normal course of holding Annual General Meetings and declaring dividends in those meetings, was rendered impossible owing to the intervention of the Madras High Court. The result is that the application of the normal rule of accrual has resulted in an unintended hardship, in that all the three years' dividends are brought to tax in one assessment year. Clearly, this is one of those situations which Parliament has not envisaged. And, as we see it, in such rare instances, it will be only fair to hope that the Income-tax authorities concerned will look into the matter sympathetically and redress the unintended hardship which the assessees before us had been subjected to. In expressing this hope, we are merely following the Madras case of Seth Lunidwcun Tikamdas v. CIT [1980] 121 ITR 824.