The
company incorporated under the Companies Act is formed by the promoters
who are also the shareholders of the company. The number of
shareholders may differ according to the nature of the
company. The
private company has prescribed number of members (200 members as on now)
and the public limited company has no maximum limit. The company is a
separate legal entity and separate from its shareholders. The company is
having perpetual succession. Members may come and may go but the
company will survive until it is wound up. The equity shareholders are
the owners of the company. The affairs of the company are run by the
Board of Directors. But certain powers are given only to the
shareholders that can be executed in the general meetings. The shares of
the shareholders may be transferred and may be traded if such shares
are listed in the stock exchange. The liability of the shareholder is
limited to the extent of the value of shares held by him. Beyond that
the shareholder is not having liability. If the company is wound up the
equity shareholders is having the last in the queue. The employees,
secured credits, taxes etc., are given priority for settlement. If there
is no excess after full settlement the equity shareholders may not get
anything.
The author came across on interesting Supreme
Court judgment on the right of the shareholder on the property of the
company which has been decided in the year 1954. The said judgment is
discussed in this article.
In ‘Bacha F. Guzdar V.
Commissioner of Income Tax’ – 1954 (10) TMI 2 - SUPREME Court the
appellant as a shareholder in two tea companies received dividends
totaling to ₹ 2750/-. The two companies carried on business of growing,
manufacturing and sale of tea. 40% of the income of the tea companies
was taxed as income from the manufacture and sale of tea and 60% of the
income was exempt from Income Tax as agricultural income.
The
Income tax Department claimed tax on the total dividend received. The
appellant contended that the income of the tea companies to the extent
of 60% agricultural income which is exempted from income tax. As such
the tax proportionate to the exempted income is also to be exempted. The
Department contended that the dividend is not an agricultural income
and therefore the whole of income is liable to be taxed.
The
Supreme Court held that agricultural income as defined in the Act is
obviously intended to refer to the revenue received by direct
association with the land which is used for agricultural purposes and
not by directly extending it to cases where that revenue or part thereof
changes hands either by way of distribution of dividends or otherwise.
The
Supreme Court explained the nature of dividend payment. The dividend is
derived from the investment made in the shares of the company. The
foundation of paying dividend rests on the contractual relations made
between the company and the shareholders. The dividend is payable only
if the company acquires profit. The dividend is not derived by a
shareholder by his direct relationship with the land. Initial source
which has produced the revenue is land used for agricultural purposes.
The Supreme Court held that to give the words ‘revenue derived from
land’ the unrestricted meaning, apart from its direct association or
relation with the land, would be quite unwarranted.
The
Supreme Court further held that a shareholder acquires a right to
participate in the profits of the company may be readily conceded but it
is not possible to accept the contention that the shareholder acquires
any interest in the assets of the company. The use of the word ‘assets’
cannot be exploited to warrant the inference that a shareholder, on
investing money in the purchase of shares becomes entitled to the assets
of the company and has any share in the property of the company. A
shareholder has got no interest in the property of the company though he
has undoubtedly a right to participate in the profits if and when the
company decides to divide them.
The Supreme Court
further analyzed the role of the shareholders. The shareholders of the
company have the sole determining voice in administering the affairs of
the company. The shareholders are having the right by the provisions of
the Company Law and Articles of association to participate in the profit
of the company by means of dividend. The interest of the shareholder
either individually or collectively does not amount to more than a right
to participate in the profits of the company. The Supreme Court held
that the company is a juristic person and is distinct from the
shareholders. It is the company which owns the property and not the
shareholders. There is nothing in the Indian law to warrant the
assumption that a shareholder who buys shares buys any interest in the
property of the company which is a juristic person entirely distinct
from the shareholders.
The appellant contended that the
position of shareholders in a company is analogous to that of partners
in the partnership. The Supreme Court rejected this contention as
inaccurate. Partnership is merely an association of person for carrying
on the business of partnership and in law the firm name is a compendious
method of describing the partners. Such is not the case of a company
which stands as a separate juristic entity distinct from the
shareholders.
The Supreme Court relied on the law
regarding the attributes of shares as stated in Halsbury’s Laws of
England. According to this a share is a right to a specified amount of
the share capital of a company carrying with it certain rights and
liabilities while the company is a going concern and in its winding up.
The shares or other interest of any member in a company are personal
estate transferable in the manner provided by its articles and are not
of the nature of real estate.
The Supreme Court further
held that if the contention of the appellant is accepted will be
tantamount to saying that the creditor recovering interest on money debt
due from the agriculturists who pays out of the produce of the land is
equally entitled to the exemption.
The
above discussion of the Supreme Court clearly lays that a shareholder
has no vested interest in the properties of the company.