P L D 1959 Supreme Court (Pak (PLP)

We then come to S. 14 whose provisions before and after the amendments may thus be juxtaposed:‑‑ Before 1939 After 1939 14. (1) The tax shall not be payable by an assessee in respect of any sum which he receives as a member of a Hindu undivided family. (2) The tax shall not be payable by an assessee in respect of

(a) any sum which he receives by way of dividend as a share‑holder in a company where the profits or gains of the company have been assessed to Income‑tax; or (b) Such an amount of the profits or gains of any firm which have been assessed to income‑tax as is proportionate to his share in the firm. S. 14 (I) The tax shall not be payable by an assessee in respect of any sum which he receives as a member of a Hindu undivided family where such sum has been paid out of the income of the family. (2) The tax shall not be pay able by an assessee -- (a) If a partner of an un registered firm, in respect of any portion of his share in the profits and gains of the firm .on which the tax has already been paid by the firm, or (b) If a member of an association of persons other than a Hindu undivided family, a company or a firm, in respect of any portion of the amount which he is entitled to receive from the association on which the tax has already been paid by the association. It is, here, necessary to understand the full import of the 1939 amendments. Under the un‑amended Act the incidence of double taxation was avoided in the following cases. (1) as a Hindu undivided family had already been taxed on its total income, tax was not to be payable on that part of the income of the family which had been received by each of its members; (2) a share‑holder was not liable to pay tax on any sum which he had received by way of dividends from a company, if the profits and gains of that company had already been assessed to income‑tax ; and (3) if the assessee was a partner in a firm and the profits and gains of the firm had been assessed to income‑tax, he was not to pay tax on his share of the gains or profits of the firm. The amendments have not affected the position of a member of a Hindu undivided family but in the case of a firm they have introduced a distinction between a registered firm and an unregistered firm. Subsection (2) of the amended section is applicable only to a partner of an unregistered firm, and in his case the Act exempts from tax, just as it did before the amend ment, his portion of the share in the profits or gains of the firm which have already been subjected to tax. In the case of a registered firm, the firm is not at all liable to tax; the shares of the partners in the income of the firm are separately determined, and these are added to the other incomes of the partners in their own assessments. Clause (b) of subsection (2) adds a new case where double taxation is to be avoided and clarifies the position by providing that a member of an association, if the association does not consist of a Hindu undivided family, a company or a firm, shall not be liable to pay tax on the amount which he receives from the association, provided tax has already been paid by the association. Thus in its present form the section, though in sub‑clause (b) to clause (2) it refers to a company does not, like clause (a) of subsection (2) of the original section, provide for the most familiar instance where double taxation is to be avoided, viz., the case of the dividend receivers of a company. And one may well ask, why? The answer is to be found` in the Privy Council decision in Commissioner of Income‑tax, Bengal v. Hungerford Investment Trust Ltd., (63 I A 359). In that case the assessee was the Hungerford Investment Trust Ltd., a company registered outside British India, which held the whole of the ordinary share capital in a company called Turner Morrison & Co. Ltd., which was registered in British India. During the relevant period the assessee had received by way of dividends large sums from the British Indian Company. The Income‑tax Commissioner had found that 3% of the British Indian Company's profits and gains consisted of interest on tax free securities, 12% of profits or gains which did not accrue or arise within and were not received in British India, and that the remaining 85% of the profits had been subjected to Indian income‑tax in the hands of the company. Applying this ratio he had found that out of the total sums received as dividends, a sum of Rs. 7,500 was referable to interest on .tax free securities, Rs. 76,500 to income derived from distributable profits of the company not taxable in the hands of the company within S. 4 (1) of the Act and Rs. 3,66,000 to income from profits and gains of the company chargeable with income‑tax. It was conceded by the Revenue that the first and the third of these sums were not liable to tax and the dispute related only to the liability to tax of the second item of Rs. 76,

500. The provision of the Act which governed the situation was S. 14 (a) before the 1939 amendments, which provided that the tax shall not be payable by an assessee in respect of any sum which he receives by way of dividends as a share‑holder in company where the profits or gains of the company have been assessed to income‑tax. Before the High Court it had been contended by the Advocate- General that clause (a) only applied where the whole of the profits of the company had been assessed to income‑tax, that is to say, where the total income within the meaning of the Act contained everything that was distributable as profits. In repelling the contention Panckridge, J. had observed in the High Court that if the provisions were given the meaning contended for it by the Advocate‑General, some startling results would follow, and in commenting upon those results Sir George Rankin speaking for the Board said: " In the first place, every shareholder in a bank, insurance company or other company whose profits and gains consist in part of interests from tax‑free securities, would be taxed again upon the whole of his dividend, and the same would apply in the case of a company with agricultural income. This is an impossible conclusion, as is sufficiently illustrated by the circumstance that the Commissioner in the present case does not claim to charge the assessee with tax upon the sum of Rs. 7,500, being the proportion of the assessee's dividend which he brings within the ambit of the second proviso of S. 8". The alternative argument on behalf of the Revenue put forward before the Board was that clause (a) should be read to mean that the tax shall not be payable by an assessee in respect of any sum which he receives by way of dividends to the extent to which the profits or gains of the company have been assessed to income tax. The Board rejected this construction on 'the ground that the Act contained no rule or direction as to the manner in which dividends were to be so disintegrated and further that such construction will lead to the practical difficulty of determining the period in which gains and profits had accrued to the company, which may be entirely different from the previous year in which the dividends were received by the share‑holder. Te High Court had given to the phrase "where the profits add gains of the company have been assessed to income tax" its ordinary and natural meaning and in accepting that construction their Lordships of the Privy Council were satisfied that any departure from the immediate and direct meaning of the phrase led to difficulties of interpretation and to results which could not be imputed to the legislature as within its intention. Thus, as construed by the High Court and the Privy Council, S. 14 (I) (a) had the effect of exempting from tax dividends which were received by a share holder from a company whose profits or gains had been assessed to income‑tax, irrespective of whether only a part of the dividends reflected the non‑taxable income of the company. The decision in the Hungerford's case was directly responsible for those of the 1939 amendments which relate to the liability or otherwise of dividends to tax. By the Income‑tax (Amendment) Act, VII of 1939, clause (a) of subsection (2) of S. 14 was omitted and the following provisions relating to dividends were introduced: Section 16 (2). "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) 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 a company (or, where a company has obtained double taxation relief, at the net Pakistan rate) "for the financial year in which the dividend is paid, were deducted therefrom, be equal to the amount of the dividend(and the provision of subsection (2) of section 49‑C shall apply accordingly)." Provided that when any portion of the profits and gains of the company out of which such dividend has been paid, was not liable to income‑tax in the hands of the company, (the increase to be made) under this section shall be calculated upon only such proportion of the dividend as the amount of the profits and gains of the company liable to income‑tax bears to the total profits and gains of the company). Section 18 (S). "Any deduction made (and paid to the account of the Central Government). In accordance with the provisions of this section (and any sum by which a dividend has been increased under subsection (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 and credit shall be given to him therefore (on the production of the Certificate furnished under subsection (9) of section 20, as the case may be) in the assessment, if any, made for the following year under this Act: Provided that, if such person or such owner obtains, in accordance with the provisions of this Act, a refund of any portion of the tax so deducted, no credit shall be given for the amount of such refund; Provided further that where such person or owner is a person whose income is included under the provisions of (clause (c) of subsection (1) or subsection (3) of section 16, section 44‑D or section 44‑E) in the total income of another person (such other person) shall be deemed to be the person or owner on whose behalf payment has been made and to whom credit shall be given in the assessment for the following year." (49‑B. Income‑tax on company's dividend deemed to have been pail by shareholder.‑Where any dividend has been paid, credited or distributed or is deemed to have been paid, credited or dis tributed to any of the persons specified in section 3 who is a shareholder of a company which is assessed to income‑tax in 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) at the rate applicable to the (total income of the company) for the financial year in which the dividend has been paid, credited or distributed or is deemed to have been paid, credited or dis tributed on so much of the dividend as bears to the whole the same proportion as the amount of income on which the company is liable to pay income‑tax bears to the whole income of the company). Now what is the meaning and effect of these provisions. As we look at them, they seem to lay down the principle that where dividends are liable to inclusion in the total income of an assessee; they shall be deemed to be the income of the previous year in which they were paid and shall be increased or, to use business terminology, "grossed up" in accordance with certain calculations; that the sum by which a dividend has been increased shall be treated as a payment of income‑tax on behalf of the shareholder and credit shall be given therefore to him in the following assess ment and that the shareholder shall be deemed in respect of such dividend himself to have paid a certain proportion of the tax paid by the company on its own income. It will, therefore, appear that these amendments were all intended to remove the difficulties which were mentioned by the Privy Council in the Hungerford case and to lay down the law more clearly and rationally, though in their actual application the new provisions constitute extremely intricate arithmetic. In the Statement of Objects and Reasons, the reasons for these amendments are stated to be as follows:‑ "Subsection (2) (a) exempts from taxation dividends of com panies whose profits have been assessed to tax. This provision needed amendment as a result of the Privy Council decision that it exempts the whole dividend even when only part of the company's profits have been taxed. Instead of amending it, it has been decided to delete it and amend S. 16 (2) and S. 18 (5). The result of these changes will be that a dividend will no longer be exempt. It will be on the same footing as interest on securities and credit for the appropriate amount of tax on it will be given in the assessment. Other sections affected are sections 48 and 49." Relying on these reasons, it has been contended by Mr. Abdul Haq on behalf of the Revenue that the amendments referred to have the effect of making all dividends including those which are paid out of the agricultural income of a company, liable to inclusion in the total income of the assessee and this appears to have been one of the points raised before, but not decided by the Supreme Court of India in Bacha F. Gazdar v. Commissioner of Income‑tax, Bombay ((1955) S C R 876). Observations are also to be found in some of the commen taries on the Indian Income‑tax Act published in India expressing the opinion that the effect of subsection (2) of S. 16 is to make all dividends liable to inclusion in the total incomes of their receivers. Having given our close consideration to this question, we find ourselves unable to agree that that is the effect of subsection (2) of S.

16. That subsection begins with the words. "For the purposes of inclusion in the total income of an assessee" and the proviso to it contemplates cases where only a portion of the profits and gains of the company out of which the dividend is paid has suffered income‑tax in the hands of the company. The subsection does not directly say that all dividends no matter what the sources of a company's income may be, must be included in the total income of the assessee. It employs the very carefully chosen words "For the purposes of inclusion in the total income of an assessee and merely provides for those cases where the assessee is liable to include dividends in his total income and thus removes one of the difficulties referred to by the Privy Council, by directing that the dividends shall be deemed to be the income of the previous year in which they are paid, etc. The provision seeks to determine the "previous year" in the total income of which dividends have to be included, if they are liable to such inclusion. Where, therefore, an assessee is not required by the Act to include certain dividends in his total income, the provision has no relevancy to that situation. If it be assumed that dividends paid out of the income of a company which is exclusively engaged in agriculture are themselves agricultural income, an. assessee will not be liable to include such dividends in his total income because of clause (viii) to subsection (3) of S. 4 which directs that agricultural income shall not be included in the total income of the person receiving it and in that case subsection (2) of S. 16 will not at all be in point. For these reasons, we are unable to hold that subsection (2) of S. 16 makes it incumbent on a shareholder to include in the return of his total income dividends which have been received from the agricultural income of a company unless it be held that the dividends are not themselves agricultural income. In this respect dividends stand on the same footing as the shares of A partners of a firm or the amounts received by the members of a Hindu undivided family or association of persons, and if a dividend, share or amount is distributed out of agricultural income, the Act, to use the words of the marginal note to S. 4, does not at all apply to it. We may now turn to the question whether dividends received by a shareholder out of the agricultural income of a company are themselves agricultural‑income and thus not liable to inclusion in his own total income. On this point the learned counsel for the Revenue has referred to two Indian cases in which the question has been answered in the negative and the arguments addressed to us are largely based on the ratio decidendi of those cases. The first of these is the Bombay case in Bacha F. Guzdar v. Commissioner of Income‑tax Bombay City (I L R 1953 Bom. 525) decided by Chagla, G. J., and Tendolkar, J. and affirmed by the Supreme Court of India in the case of the same name reported in 1955 S C R

876. The second is from Patna, reported as vishweshwar Singh v. Commissioner of income‑tax (A I R 1954 Pat. 580). The reasoning underlying these decisions is that a company is an entirely different entity from its shareholder; that a shareholder though entitled to share in the profits of the company has no interest in the property of the company; that his right to receive his share in the profits of the company is derived from the declaration of dividends by the company; that the income of the company is not the income of its shareholders; that the position of the partner of a firm materially differs from that of a shareholder; that the dividend which a shareholder receives is a return on his investment and not revenue from land and that his position is similar to that of a person who receives interest on a loan advanced by him to an agriculturist. Dividends are not specifically mentioned in any of the categories of income enumerated in S. 6, and whether they fall under clause (iv) or clause (v) of that section, and whether they are governed by S. it) or by S. 12, the essential question that presents itself for decision is whether, when they are received by a shareholder, irrespective of whether the shareholder is an individual, a company, a firm, a Hindu undivided family or an association of persons, out of the agricultural income of a company, they retain the character of agricultural income. Under the repealed subsection (2) (a) of S. 14 tax was not payable on any sum which a shareholder received as dividend from a company whose profits and gains had been assessed to income‑tax, but this provision was not applicable to a company whose profits had not been assessed to income‑tax and the contention that the Act intended to tax the dividends even where the company had not been assessed was emphatically repelled by the Privy Council, with the observation that on that construction dividends paid by a company which had derived profits from agricultural income or earned income from interest on tax‑free securities would be liable to tax. Subsection (2) has now been repealed, but the provision that has taken its place, namely, subsection (2) of section 16, does not in any way alter the position because as we have already pointed out it does not have the effect of declaring that all dividends, irres pective of the income out of which they are declared, have got to be included by an assessee in the return of his total income. Thus there being no specific provision in the Act, the question is whether a shareholder of a company whose business is exclusively agriculture is bound to include in his total income the dividends received by him from the company. In India the question has been approached from a standpoint which we say with respect, is different from what we consider to be the right approach. Put in a nutshell, the ratio decidendi in the Indian decisions is that since the receiver of a dividend, be it a company, an individual, a partner in a firm, a member of an undivided Hindu family or other association of persons receives it as a return on capital and since the receiver is itself or himself an assessable entity different from the dividend‑paying company the payment of dividends does not amount to receipt by him of "agricultural income" within the meaning of clause (viii) of subsection (3) of S. 4 and that such receipt is in the nature of an interest paid by a borrowing agriculturist out of his income from agriculture. We feel that the correct form in which the question arises is whether the agricultural income of a company is divested of its character of agricultural income, when what o happens is merely the distribution of that income by payment of dividends to the shareholders. Do the dividends so paid continue to be revenue from land or do they assume a different character and in the hands of the shareholders become exclusively returns on capital? Of course, the income‑earning company is a different assessable entity from the receiver of the dividend, but does the character of the income change merely by that circumstance? To this question we proceed to address ourselves now. In answering the question let us narrow down the controversy by conceding a few propositions in favour of the Revenue. Under section 3, Income‑tax as to be charged in respect of the total income of every individual, Hindu undivided family, company and local authority and of every firm and other association of persons or the partners of the film or members of the association individually. A shareholder of a company, whether a company or a firm or an association of persons or a Hindu undivided family or an individual, is a different assessee from the company of which he or it is the shareholder and from whom he or it receives the dividend. The dividends received are a part of the total income of each of these assessees within the meaning of subsection (15) of S

2. Unless, therefore, subse quent provisions of the Act declare to the contrary, the company pays tax on its own income and is not in that matter an agent of its shareholders who pay tax on their own income including any dividends from a company. As Lord Hanworth, M. R., pointed out in Hamilton v. Commissioners of Inland Revenue ((1931) 2 K B 495 at p. 517) "The company and the shareholder are two separate and different entities arid the shareholder is not merely paying an aliquot part of the taxation imposed upon the company." And Romer, L. J., at p. 521 said in the same case "That a company is one tax‑payer and that each individual shareholder is another and a separate tax‑payer, on whose behalf the company deducts the tax when it pays a dividend, but on whose behalf it is not paying the tax when it pays its own tax to the Crown." But though this be the position which also appears from our own Act, the question still remains whether a shareholder of a company is bound to include in his total income any dividends which he receives from a company which is exclusively carrying o n agricultural business and earning "agricultural income" within the meaning of clause (viii) of subsection (3) of S.

4. If such dividends are themselves agricultural income, it is clear that they cannot under the Act be included in the total income of the shareholder. The income earned by the company being admittedly agricultural income, does it cease to be so when it is distributed by way of dividends to the shareholders? Now what are the relations between a company and its shareholders. The constituents of a company are its share holders because its promoters must subscribe to its shares in order to bring it into existence. The company has a memorandum of association which controls its business activity. For the management of its affairs it has its own articles of associa tion and a board of directors. The assess of the company are owned by it and not by its shareholders but the company is constituted for the purpose of earning profits and the share holders are not only entitled to a rateable distribution of its assets on its being wound up, but also indirectly control the management of the company by appointing the directors. Thus the shareholders have ultimate control over the management of the company, though they do not directly manage its affairs. It is true that the directors derive their authority from the law, but as their own appointment rests with the shareholders, they are, in substance, the agents or delegates of the general body of the shareholders. What is of the vital importance, however, is that a company is brought into existence and exists for the sole purpose of earning profits and gains and it earns them not for itself but for the benefit of the shareholders. To earn profits for its shareholders being the raison d'etre of the company, a company would be defeating the object of its own existence if Croesus‑like it filled its coffers with gold and did not distribute it as dividends to its shareholders. A company cannot enjoy its own income, the ultimate beneficiaries of the income being the shareholders themselves who, on the recommendation of the directors, declare the dividends. If a company went on taking its profits to reserve every year and did not distribute it among shareholders, it would be acting contrary to all business principles and the shareholders would be compelled either to change its management or to dissolve it because they invest their capital for the purpose of enjoying the income and not for the purpose of the company accumulating such income. True, a company is person but it is only a juristic person, having no mouth to feed or person to shelter and sustain, and if it is taxed, it is taxed not on any general principle of law but because such is the policy of the statute that taxes it. Its own income is but notional and it is only on its distribution that it becomes the actual income of its shareholders. Rowlatt, J., a great authority on income‑tax law who has euphemistically been described by Kayani, J. as knowing "some income‑tax law", said in Hamilton v. Commissioners of Inland Revenue (16 T C 221) "* * * a dividend is not a taxable subject matter in itself. The operation of declaring a dividend is not an, operation which gives birth to a profit or gain; it is only the division of profits or gains earned by the trading operation, and the company is assessed in respect of the trading operation, which is the only source of profit or gain, and the declaration of the dividend is merely the division, without any income accruing, of the profits and gains realised". In making these observations the learned Judge was explaining his own earlier decision in Gimson v. The Commissioners of Inland Revenue ((1930) 2 K B 246 at pp. 252 to 254). In that case a company had paid a dividend on its ordinary shares described, and treated, as having been paid out of a specific fund. Part of this fund consisted of profits which it was agreed were of a capital nature, not liable to Income‑tax in the Company's hands The remainder of the fund was made up of accumulated items of income which, under the provisions of the law with reference to Cases III and V of Schedule D, Income tax Act, 1918, at the material times, had not been brought into any computation of liability to Income‑tax. The dividend was declared as 5 percent actual and was paid without any deduction. The appellant received 75 on his holding of 300 5 shares. Following the proportion of the capital and income portions of the fund, 35 was regarded as paid out of the income portion. The appellant was assessed to super‑tax in respect of this payment in the sum of 44, 35 plus 9 as the appropriate addition for Income‑tax. He appealed, contending that as the income out of which the payment was made was not liable to be assessed to Income‑tax there was no liability to Super‑tax. The Special Commissioners confirmed the assessment, holding that a dividend paid out of income assessable to Income tax was liable to Super‑tax notwithstanding that Income‑tax might not have been paid on the actual amount of the income by reason of the assessment to Income‑tax being based on some other measure than actual income. On these facts the learned Judge held that there was no liability to Super‑tax and in so holding made the following observations "That brings me to the point in the case, which is this. The Commissioners have held that the dividend received from a company is itself a tax bearing subject‑matter, and that it is not a subject‑matter which represents merely the division to the individual of a fund which has suffered tax so that the tax attaches in the hands of the company, and that the receiver of the dividend has nothing whatever to say to the income‑tax as regards that. The matter became of extreme importance in the first instance in cases where a subject having a small income was entitled to recover back tax. The rule which governs the method of estimating the income in such a case is exactly the same rule as that which governs the method of estimating income for the purposes of super‑tax, and if the Commissioners are right in this case in assessing the appellant to super‑tax in the sum of 441, we should arrive at this extraordinary result, that if the income of the appellant was a small one he could recover back income‑tax which the revenue authorities had never received, and which represented sums which did not exist which would be quite wrong. I have always regarded it as fundamental that an individual whose income comes to him straight and is small recover, the tax which he has suffered and no other, and that an individual who pays a super‑tax pays it in respect of a' fund which has suffered tax, and no other, so if the appellant had received this money not from the company but direct, by himself holding the source of income from which it was derived, and had not been liable to income‑tax in respect of that sum of money by reason of the rules relating to the measurement of income for the purposes of income‑tax, his income would not be subject-matter on which he could recover back tax in case his income was small or on which he would pay super‑tax in case his income was a large one. The case of a company is somewhat different, but in essence it is the same, and the Attorney -General very properly referred to what I said in Inland Revenue Commissioners v. Blott (1920) 1 K B 114, which is a material case. A shareholder can only recover back tax which the money he received has suffered, and he can only be liable to pay super‑tax in respect of a dividend which is taxable. The Attorney‑General says that although that may be so, still when a person receives a dividend which somehow or other comes to him from a fund which is not taxed, then it becomes, under rule 21 of the All Schedules Rules, `an annual payment charged with tax under Schedule D', and it is charged under Schedule D, by reference to Case VI, which is a sweeping in case. All I can say to that contention is that it is a theory which I think must be established by some Court superior to this Court. It is absolutely contrary to the idea one has always held, and it is in my experience entirely novel. I think the appellant is entitled to succeed in this case, and the appeal must therefore be allowed." The observations of Rowlatt, J. in the later case as rightly pointed out by Kayani, J. are not affected by the decision of the Court of Appeal in the same case. Chagla, C. J., had the same principle in mind when he made the following observations in Phaltan Sugar Works Ltd. v. Commissioner of Income‑tax Phaltan State (A I R 1950 Bom. 61 at p. 65):‑ "Now, Sir Jamshedji says that the dividend which came to the hands of the share‑holders was not liable to tax at all because the protits out of which dividends were paid were not liable to tax in the hands of the company, and Sir Jamshedji says that if an income bears a certain character, that character cannot be altered because it is transferred from the company to the share‑holders. The principle which Sir Jamshedji enunciates is unexceptional, and I entirely agree with him that if the income bore a character which exempted it from payment of tax, then the mere fact that that income was transferred to the share‑holders in the shape of dividends would not alter its nature or character and that income would still not be liable to tax. That principle has been recently enunciated or rather re‑enunciated by the Privy Council in the case of Premier Construction Co. Ltd. v. Commissioner of Income‑tax 75 I A 246." In the subsequent case, Bacha F. Guzdar v. Commissioner of Income‑tax, Bombay City (I L R 1953 Bom. 525), in which the question raised was identical with that raised in the present case, the learned Judge had some difficulty in not acting on the principle so clearly enunciated by him and distinguishing the circumstances in which these remarks were made, but we have little doubt that the observations made by him in the earlier case represent a funda mental as pect of joint stock companies qua their shareholders to which he himself twice refers as a principle. It is true that the Privy Council in the Premier Construction Co. v. Commissioner of Income‑tax, Bombay City (75 I A 246 at p. 251) did not go to the extent to which Chagla, C. J, went and probably the remarks were based on Sir John Beaumount's observation "but if the income received falls within the definition of agricultural income it earns exemption, in whatever character the assessee receives it", and the immediately preceding sentence "where an assessee receives income, not itself of a character to fall within the definition of agricultural income contained in the Act, such income does not assume the character of agricultural income by reason of the source from which it is derived or the method by which it is calculated" were not in the learned Judge's mind. The same principle was recognised in the Hungerford case by Sir George Rankin in the interpretation of S. 14 subsection (2), clause (a) which has now been repealed and which exempted from tax any sum received by an assessee by way of dividend as a share‑holder in a company whose profits and gains have been assessed to income‑tax. Explaining the extent to which the Act attempted to avoid double taxation Sir George referred to the usual cases of firms, Hindu undivided families and association of persons, and as regards a company he said "if a firm of three partners have been assessed to tax upon their profits the partner is not to pay again upon his share of the same profits. Clause (a) of subsection (2) is a more or less` similar provision. In the case of a company paying, its object is to ensure that tax shall not be paid more than once upon what the statute regards as the same thing. The company though a separate legal persona in the contemplation of law and liable to assessment as a subject chargeable with tax is not for all purposes to be regarded as entirely separate and distinct from the corporators. The underlying principle of the clause as the Commissioner in stating the present case has recognised is `that the dividend represents merely the shareholder's share in the income of the company' ". Though S. 14 (2) (a) has now been repealed, its subject- matter, as we have pointed' out, has been transposed elsewhere in a modified form, and the principle underlying it is still recognised in Sections 16 (2), 18 (5) and 49 B etc. In the judgment of the Federal Court in the Governor‑General in Council v. The Raleigh Investment Co. Ltd. (1944 F C R 229), which was followed by the Appellate Tribunal in the present case, there is undoubtedly discoverable a principle which applies to the present case. In that case the question was whether dividends paid in England by certain sterling companies incorporated there but carrying on business through local boards in India controlled by the Directors in England were within the legislative jurisdiction of the Indian Parliament. The Federal Court held that the circumstances of the business being carried on in British India gave to the Indian legislature power to legislate in respect of the dividends paid in England, the ratio decidendi being that the source of the dividend was the income earned by the companies in British India. Spens, C. J. who delivered the judgment of the Court said at p. 250 "The language used by Brett and Cotton, L. JJ. in Gilbertson v. Fergusson (1881) 7 Q B D 562 shows that dividends are paid out of profits and in that sense must have the same source and this is not affected by the remarks made on that case in Barnes v. Hely Hutchison 1 40 A C

81. It is true that the profits of a company may not materialise into a dividend for the shareholder till a dividend is declared, but that is different from saying that when the dividend is declared the "source" of the dividend is not the same as the source of the profits made by the company". And in Swedish Central Railway Company v. Thompson (1925 A C 495 at 504) Viscount Cave treated the income of the company and the dividend income of the shareholders as derived from an identical source when he remarked that in the case of both dividends and the income of the company the source is the same. In Barha F. Guzdar v. Commissioner of Income‑tax Bombay (1955 S C R 876), the Supreme Court of India itself differed from Chagla, C. J. in refusing to accept the proposition propounded by the learned Chief Justice that the declaration of dividends is the effective source of the dividend. Ghulam Hasan, J. who delivered the judgment of the Court said on this part of the case: "The High Court is expressly of the view that until a dividend is declared there is no right in a shareholder to participate in the profits and according to them the declaration of dividend by the company is the effective source of the dividend which is subject to tax. This statement of the law we are unable to accept. Indeed the learned Attorney- General conceded that he was not prepared to subscribe to that proposition. The declaration of the dividend is certainly not the source of the profit. The right to participation in the profits exists independently of any declaration by the company with the only difference that the enjoyment of profits is postponed until dividends are declared". Now if dividends are income from other sources under S. 12 and they come from the same source as the profits and gains of the company which in the present case amount to agricultural income, the dividends themselves must be held to be agricultural income. The three Privy Council cases, namely, Maharaj‑Kumar Gopal Saran Narain Singh v. Commissioner of Income‑tax Bihar and Orissa (62 I A 207), Nawab Habibullah v. Commissioner of Income‑tax (70 I A 14) and the Premier Construction Co. v. Commissioner of Income‑tax Bombay City (75 I A 246 : P L D 1948 P C 178), have been consistently referred to by the Courts both in India and Pakistan wherever the question of agricultural income has come up for consideration, but none of them affords any assistance on the point in question, namely, whether revenue from agricultural land on distribution changes its character in the hands of the dividend receivers when in the hands of the company it represented agricultural income. It can certainly not be said that once an income is proved to be agricultural income it continues to retain that character irrespective of how it is spent. A servant employed on an agricultural farm under a contract of service can no more claim his salary to be agricultural income on the ground that he is paid by his master out of his, agricultural income than a shopkeeper can claim exemption from tax because the price which he has received for his wares has come out of the agricultural income of the buyer. But if income lying in reserve with a person is agricultural income which he himself cannot enjoy and is meant to be distributed among its rightful claimants, it cannot be disputed that no change of character is implied in the distribution of that income because income is earned for expending and a person who is, precluded in law from expending it on his own enjoyment and holds it for the benefit of the others does not bring out any change in the nature of that income when he passes it on to the beneficiary. We are unable to see any fundamental distinction between the income of a firm or farming society exclusively engaged in agriculture or that of a landowner who manages his tracts and tracts of land by employing agents and who himself has not even seen the lands which he owns and that of a joint stock company, which exclusively engages itself in agriculture and whose share holders instead of directly cultivating or managing the land entrust its management to the company whose action they can in law control. And as put by Kayani, J., if two brothers can claim exemption from tax for their agricultural income, it is difficult to discover on what principle their income becomes liable to tax if for better management of the land they both constitute themselves into a private limited company and convert their land into shares, retaining its actual possession and use. For these reasons, we hold that income which is agricultural income in the hands of a joint stock company does not cease to be agricultural income when it is distributed to the shareholders by way of dividends. The extent of the shares held by each share holder merely determines his share in the income but the shares themselves are neither the source nor the producer of the income. To hold to the contrary would make the exemption of agricultural income of a company entirely illusory. On that finding these appeals must be dismissed with costs. A.H. Appeals dismissed.