1973 PLP 5 (PTD)

On 26,83,262 partly paid ordinary shares at Rs. 12'5 n.p. per share (without deduction of income‑tax). On‑338 ordinary shares to be issued in exchange of fractional share coupons at 3 per cent. (without deduction of income‑tax) and that fraction of less than 1 n.p. in respect of amount payable to a shareholder‑be ignored. Further resolved that holders of ordinary shares be given option (which should be received by the company in writing from the shareholders not later, than the 15th day of November 1958, with liberty to the directors to extend the time) to receive payment of the aforesaid dividend in the form of old ordinary shares (cum‑dividend) of Rs. 10 each in New Central Jute Mills Co. Ltd., at per value, i.e., one ordinary .share in New Central Jute Mills Co. Ltd. as dividend for every 20 fully paid or' 80 partly paid ordinary shares in the company, provided, however, that if the dividend on ordinary shares whether fully paid and/or partly paid or any portion thereof amounts to less than he equivalent of one ordinary share in New Central Jute Mills Co. Ltd. on the basis aforesaid, cash only shall tie paid for such dividend or portion thereof. Also resolved that the deficit arising but of distribution of ordinary shares in New Central Jute Mills Co. Ltd., value at par as aforesaid, be debited to investment reserve account." It was admitted that the cost price to the Bharat Nidhi Ltd. of the ordinary shares of the, New Central Jute Mills 'Co. Ltd. was Rs. 12`05 per share (per value Rs. 10) and the market value was Rs. 14 56 per share. The Tribunal was of opinion that it appeared from the resolution passed at the general meeting that the option to take dividend in specie had resulted in payment to the shareholders of the Bharat Nidhi Ltd., in excess of 5%. The Tribunal' relied on the Supreme Court decision in Kantilal Manilal v. Commissioner of Income tax ((1961) 41 I T R 275 (S C)), and held that the market value of the shares received by the assessee would 'be the amount of dividend it ‑had received as a shareholder. In the Tribunal's view the net amount of dividend should, therefore, be taken to be Rs. 1,71,

080. On the question of grossing up, the Tribunal observed that the Bharat Nidhi Ltd. held the shares of the New Central Jute Mills Co. Ltd. at cost which amounted to Rs. 12.05 per share. In these premises, the distribution of dividend in specie entailed a further release of Rs. 2'02 per share by debit to the investment reserve account. In the directors' report it was stated that : "The deficit arising out of distribution of ordinary shares in New Central Jute Mills Co. Ltd. valued at par as aforesaid be debited to investment reserve account. The Tribunal did not express any opini6n as to whether the Bharat Nidhi Ltd. could be regarded as having realised the market value of the shares by reason of release thereof for the benefit of the shareholders. The Tribunal held that the assessee received dividends in money's worth amounting to Rs. 1,71,080 and that sum had to be grossed up with reference to the percentage of taxable profits to the total profits of the Bharat Nidhi Ltd. The dividend warrant of the Bharat Nidhi Ltd. showed that this percentage amounted to 95%. That is why, the Tribunal said that the sum of Rs. 1,71,080 had to be grossed. up on the footing that it was paid out of profits which had borne tax to, the extent of 95 % The following question of law has been referred to this Court : "Whether for the purpose .of inclusion in the total income of the assessee, the entire sum of Rs. 1,71,080 (and not merely Rs. 1,17,500) was liable to be 'grossed up' as to 95 % thereof under section 16(2) of the Indian Income‑tax Act, 1922 ?" Mr. Debi Pal, learned counsel for the assessee, contends that the Appellate Assistant Commissioner has found that the declaration of dividend, in the instant case, was declaration in specie and not .a cash declaration (vide page 8 of the paper book). The Appellate Assistant Commissioner has further found, says Mr. Debi Pal, that there is no material on which it can be suggested that dividend has been ‑declared out of the unassessed and undisclosed income of the dividend paying company (see page 8, paragraph 4). On these findings the Appellate Assistant Commissioner's conclusion, according, to Mr. Debi Pal, is that if the dividend declared is a declaration in specie, the entire dividend is to ‑be grossed up (see page 8, paragraph 5). Mr. Debi Pal has then urged that in its appeal to the Tribunal the department did not contest the Appellate Assistant Commissioner's view that this was a case of declaration of dividend in specie. The Tribunal reading the company's resolu tion as a whole, also independently came to the same conclusion (page 33, lines 6 and 7). The Tribunal has said further that the Income‑tax Officer's remarks that the difference between Rs. 1,17,500 and Rs. 1,71,080 has come out of unassessed and undisclosed income of the dividend paying company .is unjustified and uncalled for (page 33, lines 18 to 20). On these observations of the Appellate Assistant commis sioner and. the Tribunal, the assessee'g counsel submits that, if there has been a declaration of dividend in specie and if no part of this dividend has come out of unassessed and undisclosed income of the dividend paying company, the necessary inference is that the entire sum which the assessee actually received is to, lie grossed rip, . Tie taxable profit of the company is Rs. 18,15,183 (page 29, line 12) ; the dividend declared in specie can only come out of the company's profits (section 205 of the Companies Act, 1956) ; and if such a dividend has not coma out of unassessed profits, the grossing up has to be made in respect of the amount actually received as dividend at the rate applicable to the dividend paying company, i.e., 95 %. Now, in this reference the sections, of the Indian Income tax Act, 1922, which need consideration, are section 16(2), 18(5) and 49‑B. Section 16(2), inter alia, provides that for the purposes of inclusion in the total income of an assessee any dividend shall be deemed to be income of the previous year in which it is paid, credited or distributed or deemed to have been paid, credited or distributed to him and shall be increased to such amount as would, if income‑tax (but not super tax) at the rate applicable to the total income of the company (without taking into account any, rebate allowed or additional income tax charged) for the financial year in. which the dividend is paid, credited or distributed, or deemed to have been paid, credited or distributed, were deducted therefrom, be equal to the amount of dividend. It appears ,that this subsection speaks not of the value of money's worth of the dividend to the shareholder but .of the actual dividend, that is, either paid` by the company or credited in the books of the company , or distributed by the company or is deemed to have been paid. or credited or, distributed. The juxtaposition of words "paid, credited or distributed." is not without significance. In the company's books only the sum which is declared at the general meeting would be credited and if the words "paid" or "distributed" are to be understood in, the same sense (from the point of view of quantum), as the word "credited" should be understood, then one has obviously to restrict oneself only to the amount declared at the general meeting. We next come to section 18(5). It says, inter alia, that deduction made and paid to the account of the Central Govern ment in accordance with the provisions of this section and any sum by which a dividend, has been increased under subsec tion (2) of section 16 shall be treated as a payment of income‑tax or super tax on behalf of the person from whose income the deduction was made, or of the owner of the security, or of the shareholder as ‑the case may be, and credit shall be given to him therefor on the production of the certificate furnished under sub section (9) of section 20 as the case may be, in the assessment, if any, made fog the following year under the Act. Here gain, the clear indication is that the deduction that is allowed, would be of the sum mentioned in the certificate that is furnished and not of any higher sum: And the certificate that is furnished shows the actual amount that has been paid to the Central Government .or is proposed to be paid to the Central Government: Lastly, we come to section 49‑B. This section lays down, inter alia, that where a dividend has been paid, credited or distributed or is deemed to have been paid, credited or distributed to any of the persons specified in section 3 who is a shareholder of a company which is assessed to income‑tax on the taxable territories or elsewhere such person shall, if the dividend is included in his total income be deemed in respect of such dividend himself, to have paid income‑tax (exclusive of super tax) of an amount equal to the sum by which the dividend has been increased under subsection (2) of section

16. We have already discussed, while dealing with section 16(2), What is meant by the expression "paid, credited or distributed" with reference to the quantum of dividend. We now find that the same expression has been used in section 49‑B in relation to income‑tax on the company's dividend that is deemed to have been paid by the shareholder. In other words, it is the actual amount paid to the Central Government as tax that is deemed to have been paid by the shareholder. The Bombay High Court, in explaining these provisions in Accountant‑General, Baroda State v. Commissioner of income tax ((1948) 16 I T R 78), has observed that "a company is taxed in its capacity as a company ; it can never be said that a shareholder is taxed through the company ; and it is only for the purposes of avoiding double taxation that sections 49‑.B and 48 have been enacted. The Calcutta High Court also has observed in Angus Co. Ltd. v. Commissioner of Income‑tax ((1954) 25 I T R 431), that the funds of the company are affected, in the case of a declaration of dividend, only to the extent of the sum which the company has to pay because of the declaration and which it would not have to pay otherwise and that sum obviously is the sum which it actually distributes as dividend. The facts in the present reference have in our view, to be approached in the fight of the relevant provisions contained in sections 16(2), 18(5) and 49‑B. It seems to us that the amount of dividend paid to a particular shareholder has to be ascertain ed from the relevant facts and figures appearing in the directors' report submitted to the shareholders at the general meeting and the resolution passed thereon authorising declaration and payment of dividend. Secondly, the amount of dividend declared by the company and mentioned in the dividend warrant is the exact sum of money on which the company is entitled to deduct tax. When dividend is declared in specie, the share holder may actually get a sum larger than the declared amount by virtue of a higher market rate of the specie prevailing on the date of the declaration but that is only money's worth which the shareholder receives for which the shareholder may be assessed: Weight v. Salmon ((1935) 19 T C 174). The dividend‑paying company cannot be assessed in respect of this money's worth. It necessarily follows that the grossing up is to be confined to the actual money portion out of the money's worth the shareholder receives. And w1ien the shareholder claims the benefit of tax deducted at the source he is entitled to the benefit of what was actually deducted from his dividend income and paid by the dividend paying company to the Central Government. If any refund is o be made to the shareholder, the refund would be naturally limited to the amount which the Central Government has actually received and cannot be extended to an amount which the Government has not received. The dictum of Rowlatt, J. in Gimson v. Inland Revenue Commissioners ((1930) 2 K B 246), that a shareholder can only recover back tax which the money he received has suffered is, in our view, attracted to these cases. In the premises, the answer to the question in this reference is in., the negative. The assessee will pay to the Commissioner his costs of the reference. P. CHATTERJEE, J.‑

I agree.