1968 PLP 478 (PTD)

Section 18‑A which was inserted in 1944 deals with advance payment of tax. It was introduced as a war measure probably to combat inflation, but, like many other innovations in taxation legislation it has outlived the exigency which necessitated it. The section applies to those assessees whose total income in the latest assessment, and also to those hitherto un-assessed whose total income of the previous year, exceeded by a certain sum the maximum amount not chargeable to tax. The section attempts to reconcile the principle of advance payment of tax with the scheme of the Act which is to tax the income of the previous year. The basis of the section is the principle of "pay as you earn", that is, paying tax by instalments in respect of‑the income of the very year in which the tax is paid. Subsection (1) provides for the payment of tax in respect of the income of "the latest previous year" while under subsection (11) the tax so paid is treated as having been paid in respect of the income of the year of payment and credit therefore is given to the assessee in the regular assess ment made in the next financial year. The advance payment of tax is only provisional, and if after the regular assessment is made the tax paid in advance is found to be in excess of the tax payable; the assessee would be entitled to a refund of such excess. Further, it is worthy of note that the provision for advance payment of tax under section 18‑A is only in respect of income from which the tax is not deductible at the source under section 18. Where the tax is deductible at the source, that in itself amounts to advance payment of tax and, therefore, such income is left out of the put view of the section. Subsection (2) of section 18‑A enables an assessee to make his own estimate if, in his opinion, the income of the year is likely to be less than that on which he has been asked, to make advance payment of tax in accordance with the provisions contained in subsection (1). Sub section (6) of section 18‑A so far as it is material for our purpose is in these terms ; "Where in any year an assessee has paid tax under sub section (2) or subsection (3) on the basis of his own estimate, and the tax so paid is less than eighty percent. of the tax determined on the basis of the regular assessment, so far as such tax relates to income to which the provisions of section 18 do not apply and so far as it is not due to variations in the rates of tax made by the Finance Act enacted for the year for which the regular assessment is made, simple interest at the rate of six per cent, per annum from the 1st day of January in the financial year in which the tax was paid up to the date of the said regular assessment shall be payable by the assessee upon the amount by which the tax so paid falls short of the said eighty percent." It provides for cases where the assessee's estimate turns out to be too low and it lays down inter alia that where an assessee has paid advance tax under subsection (2) and the amount so paid is less than eighty percent. of the final assessment of his income for the particular year, he is liable to pay interest at six percent. There is, however, the necessary qualification that this is in the context of "income to which the provisions of sec tion 18 do not apply". Having regard to the scheme of sections 18 and 18‑A explained above, the first question before us is this can it be said that subsection (5) of section 18 in its true scope and effect treats dividend income as income from which a deduction of Income-tax has been made at the time of payment of the dividend? The contention on behalf of the assessee is that, subsection (5) of section 18 read with subsection (2) of section 16 and section 49‑B has that effect. The argument on behalf of the respondent is that it has not that effect. In our opinion, the contention urged on behalf of the assessee is correct. Subsection (2) of section 16 declares in the first part thereof that any dividend shall be deemed to be income of the year in which it is paid, etc., regardless of the question as` to when the profits out of which the dividend is paid were earned. A shareholder's right to dividend arises upon its declaration. Under the second part of the subsection, the net dividend paid to the shareholder is to be "grossed up" before inclusion in the shareholder's total income, by adding thereto the amount of income‑tax paid by the company. In general law the company is chargeable to tax on its profits as a distinct taxable entity and it pays the tax in discharge of its own liability and not on behalf of or as agent for its shareholders. This aspect of the matter has been rightly emphasised by learned counsel for the respondent in his reply. While it is true that the company pays its own tax, a legal fiction is introduced by 'section 49‑B of the Act. Under that section when a dividend is paid to a share holder by a company which is assessed to tax, the income‑tax (but not super tax) in respect of such dividend is deemed to have been paid by the shareholder himself. Since the income‑tax in respect of the dividend is deemed under section 49‑B to have been paid by the shareholder himself on his own income; though in reality it was tax paid by' the company in discharge of its own liability, credit is given therefore to the shareholder in the assessment under subsection (5) of section 18. He is not liable to pay income‑tax again in respect of the dividend and may claim a refund under section 48, if the maximum rate of Income-tax, which is applicable to companies, is not applicable to him. The combined effect of subsection (2) of section 16, section 49‑B and subsection (5) of section 18 is that the tax‑free dividend is not really a dividend of the amount received, but a dividend of a larger sum less the tax thereon, and as in the case 'of tax‑free salaries and tax‑free securities, it is the gross amount which is included in the shareholder's total income, because the income‑tax paid by the company remains part of the income derived from the shareholding. If this be the true effect of the sections referred to above, then section 18 in subsection (5) does provide "for deduc tion of income‑tax at the time of payment" within the meaning of that clause in subsection (1) of section 18‑A. Learned counsel for the respondent has, however, drawn our attention to that part of subsection (5) of section 18 which refers to "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." His argument is that the subsection talks of two different matters: one is deduction of tax referred to in the earlier subsections, and the other is addition of a sum to the dividend. These two according to learned counsel, stand on a different footing ; one is in reality "deduction of income‑tax at the time of payment" and the other, namely, the sum added to dividend income under subsection (2) of section 16, is not really "deduction of income‑tax at the time of payment" but is included in the subsection merely for the purpose of giving credit to the shareholder for the amount which has been added to his dividend. We are of opinion that this line of argument does not give full effect to the legal fiction created by section 49‑B under which the tax paid by the company is deemed to have been paid by the shareholder himself in respect of his dividend income grossed up under subsection (2) of section 16. If the shareholder is deemed to have paid the tax himself at the time when the company paid the dividend, we do not see why this payment is not "deduction of income‑tax at the time of payment" within the meaning of that clause in subsection (1) of section 18‑A. Deduction at the source is only a mode of collecting tax from the person from whose income the deduction is made. The tax paid by the company at the time of payment of the dividend is treated as part of the income of the shareholder and the gross amount has to be included in his total income ; on the same principle, the tax deducted at the source and paid to the Govern ment is treated as having been paid by the shareholder himself. In this view of the matter, subsection (5) merely works out the principle of subsection (4) of section 18, namely, that all sums deducted in accordance with the provisions of the section shall, for the purpose of computing the income of an assessee, be deemed to be income received. There was some argument before us as to the omission of the word "shareholder" in the first proviso to subsection (5) of section 18. The Amending‑ Act of 1939 which added the reference to the "shareholder" in the substantive part of the subsection did not make a similar addition to the first two provisos ; whether this was an oversight, as one commentator has said, or not, is not a matter which need be decided in this case. We have rested our conclusion on the substantive part of subsection (5). In the view which we have taken on the main argument urged on behalf of the appellant, section l8‑A is not attracted to the dividend income of the assessee in this case. The assessee was not therefore liable to penal interest under subsection (6) of section 18‑A. It becomes unnecessary, therefore, to decide this case on the alternative argument presented on behalf of the appellant which is based on the phraseology of subsection (6). We need only point out that subsection (6) uses the phraseology "income to which the provisions of section 18 do not apply". It is difficult to see how it can be said that subsection (5) of section 18 does not "apply" to dividend income. It refers to dividend income in express terms. The argument on behalf of the respondent is that subsection (6) of section 18‑A will be unworkable in the matter of dividend income, unless it has the same meaning as in subsection (1). Learned counsel has relied on two decisions of this court : Commissioner of Income‑tax v. Teja Singh ((1959) 35 I T R 408) and Gursahai Saigal v. Commissioner of Income-tax ((1963) 48 I T R 1 (S C)). The first decision lays down that in construing the scope of a legal fiction it would be proper and even necessary to assume all those facts on which the fiction can operate‑a decision which is really against the respondent on the main argument. The second decision related to subsection (8) of section 18‑A and, proceeded on the rule that it is proper to give a machinery provision an interpretation which makes it workable. We do not think that subsection (6) of section 18‑A will be unworkable, even if it refers to an income wider in category than that referred to in subsection (1). It is unnecessary, however, to go into this point more elaborately. Our conclusion is that subsection (5) of section 18 read with subsection (2) of section 16 and section 49‑B provides for "deduction of income‑tax at the time of payment" in respect of dividend income ; therefore, section 18‑A does not apply to such income. We would accordingly allow this appeal, set aside the judg ment of the High Court, and answer the question referred to the High Court in the negative and in favour of the assessee. The appellants will be entitled to their costs of this court and in the High Court. SARKAR, J.‑Under the Income‑tax Act, 1922, the usual rule is to charge tax for a year on the income of the previous year. Section 18‑A of the Act makes a departure from this usual rule and provides for advance payment of tax, that is payment of tax on income 'during the year in which the income is earned. The question in this appeal is as to the interpretation of certain provisions in section 18‑A and of a few other sections of the Act. The contention advanced in this case can be appreciated only after these provisions have been referred to. Subsection (1) of section 18‑A states : "In the case of income in respect of which provision is not made under section 18 for deduction of income‑tax at the time of payment, the Income‑tax Officer may . . . require am assessee to pay quarterly . . . an amount equal to one quarter of the income‑tax and super tax payable on so much of such income as is included in his total income of the latest previous year in respect of which he has been assessed..." This liability to pay arises only however if the total income of the latest previous year exceeds a certain amount mentioned in the subsection. Under this subsection, therefore, the amount demanded as payment of tax in advance is calculated on income found in a previous assessment. Now it may so happen that the assessee thinks that his income for the period for which the demand had been made would be less than his income in that previous assessment. Subsection (2) provides that in such a case the assessee may "'send to the Income‑tax Officer an estimate of the tax payable by him . . . and shall pay such amount as accords with his estimate in equal instalments . . . " So under subsection (2) the, assessee is given the liberty to make his own estimate of the tax payable in advance instead of paying according to a previous regular assessment by the revenue authorities. As in the case of subsection (1), in making the estimate of the tax under subsection (2), the assessee is only to take into account income in respect of which provision is not made under section 18 for deduction of income‑tax at the time of payment. Subsection (3) provides for the case of an assessee who has never been assessed before but whose total income is likely to exceed the amount upon which tax is payable in advance under subsection (1). It requires such an assessee to "send to the Income‑tax Officer an estimate of the tax payable by him on that part of his income to which the provisions of section 18 do not apply", and to pay that amount on certain specified dates. Here also the assessee makes his own assessment. Payment of tax in advance under subsection (1), (2) or (3) is only provisional and the assessee would be entitled to a refund if on regular assessment after the year it is found that he had paid more than he is liable to pay, or he may be called upon to pay more if he had paid less than what is due from him. As the responsibility for making the assessments under sub sections (2) and (3) is on the assessee, subsection (6) is intended to provide a machinery whereby the assessee is put under a certain disadvantage if it is found that his estimate is erroneous beyond a certain limit. This appeal turns largely on this sub section and, so far as relevant, it is in these terms: "Where in any year an assessee has paid tax under subsec tion (2) or subsection (3) on the basis of his own estimate, and the tax so paid is less than eighty per cent, of the tax determined on the basis of the regular assessment, so far as such tax relates to income to which the provisions of section 18 do not apply . . . simple interest at the rate of six percent. per annum . . . shall be payable by the assessee upon the amount by which the tax so paid falls short of the said, eighty percent." This subsection also prescribed the period for which the interest payable under it is to be calculated but it is not necessary to trouble ourselves with such period in this appeal. Now, Purshottamdas Thakurdas, the assessee in this case, sent an estimate under subsection (2) of section 18‑A of the tax payable by him in advance in the year 1947‑48. In that estimate he (kid not include the dividends received on shares held by him. Upon regular assessment it was found that the tax estimated by him was less than eighty percent. of the regular assessment and on this shortfall he was held liable to pay interest under subsection (6) of section 18‑A. The shortfall would not have arisen if the assessee had taken dividends into account in making the estimate of the tax payable by him. Against this decision the assessee appealed to the Appellate Assistant Commis sioner but his appeal failed. He then appealed to the Income‑tax Appellate Tribunal and was successful there. Thereafter, at the instance of the respondent, the Commissioner of Income‑tax, the Tribunal referred under section 66(1) of the Act the following question for the decision of the High Court :‑ "Whether on the facts and circumstances of the case the assessee is liable to pay interest in respect of dividend income as provided under section 18‑A(6) of the Income‑tax Act ?" The High Court answered the question in the affirmative though the reasons upon which the learned Judges constituting the Bench deciding the case based themselves were somewhat different. The assessee has now come to this Court in further appeal. Pending the appeal here, the assessee died and his legal representatives have been substituted in his place and are the appellants now. The real question in this appeal is whether in making an estimate under s9ction 18‑A(2) of the tax payable by him, the assessee should have taken into account the dividends received by him. Now, it is not in dispute that in making this estimate only that income "in respect of which provision is not made under section 18 for deduction of income‑tax at the time of payment" is to be taken into account. Learned counsel for the appellants contends that dividend is income in respect of which provision is made under section 18 for deduction of income‑tax at the time of payment. If this contention is sound, then of course no interest is payable under section 18‑A(6). Now, the appellant's contention was based on subsection (2) of section 16, subsection (5) of section 18 and section 49‑B of the Act. The first of these, that is, subsection (2) of section 16, says that for the purpose of inclusion in the total income of an assessee a dividend shall be deemed to be income of the previous year in which it is paid and shall be increased in a certain manner, and, without going into, the question of the increase in great detail, which would be unnecessary for the purposes of this case, it would perhaps be right to say that the increase is to be substantially by such amount as would be payable by the company as income‑tax on the amount of the dividend at the rate applicable to it in the financial year in, which the dividend is paid. Subsection (5) of section 18 provides: "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 be, 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." Lastly, section 49‑B states that "where any dividend has been 'paid ...or is deemed to Have been paid ...to any of the persons specified in section 3 who is a shareholder ...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." Now, the contention of the learned counsel for the appellants is that, as a result of the two provisions last referred to, there is a fictional deduction of tax on dividends which fiction must be given effect to and, therefore, in making an estimate of income under section 18‑A(2) dividends have to be excluded and they have to be treated in view, of the fiction, as income in respect of which tax has been deducted at the time of payment. We are wholly unable to accept this argument. All that the provisions, on which the learned counsel for the appellants relies, show is that a shareholder who received dividends on his shares is entitled in his assessment to have a certain sum, paid or payable as tax by the company, treated as paid as tax on his behalf and to require that sum to be deemed to have been paid as tax by himself. We are not concerned with payment of tax by or on behalf of the assessee. We are concerned with income, income-tax on which has been deducted at the time of, payment by the payer of it under section 18. Payment of tax by the assessee or on his behalf is not deduction of tax on the income by the payer of that income. We are wholly unable to agree that payment of tax by the assessee, fictional or otherwise, on income received by him is in any sense a deduction of tax under section 18 by the person who pays the income to the assessee. Clearly there is no deduction as contemplated by section 18. We do not see that sections 16(2), 18(5) and 49‑B require any fiction of a deduction under section 18 to be raised. Indeed sec tion 18(5) by mentioning expressly and separately "any deduction made in accordance with this section" and "any sum by which a dividend has been increased under subsection (2) of sec tion 16" shows that these two are different, or, in other words, that the increased amount is not a deduction under section 18. It is important also to remember that for section 18‑A(1), (2) and (3) (here has to be a deduction under section 18 to exclude a part of the income ; deduction under other provisions will not do. Then again, under section 18(5) an assessee is entitled to credit for the amount to be added to the dividend under sec tion 16(2) as tax paid on his behalf but this only at the time of the assessment, if any, for the following year. Obviously, there is no question of giving any credit till assessment later, that is to say, later than the time of payment of the dividend to the assessee. This again shows that dividends are not income in respect of which tax is deducted under section 18 at the time of payment. We would also point out that if there is no assessment of the assessee, then no tax can be treated as having been paid by him. The position under section 49‑B is the same. If tax is deducted at the source under section 18, it would be deducted in all cases and the deduction would not depend on any assess ment. This is a further reason for saying that dividends are not income on which taxis deducted at the time of payment under section 18. The appellants then contend that even if dividends are not income from which tax is deducted at the time of payment, still no interest is chargeable in this case under section 18‑A(6) for another reason, It was said that in finding out the shortfall under subsection (6) of section 18‑A you have to compare the amount of tax paid by an assessee on his own estimate with the amount of tax ascertained on the regular assessment taking into account only that part of the income "to which the provisions of section 18 do not apply." Hence it is contended that in ascertaining for the purpose of this subsection the tax payable on regular assessment that part of the assessee's income should be kept out of consideration to which the provisions of section 18 apply. Then it is pointed out that subsection (5) of that section applies to income received in the shape of dividends. Therefore, in finding out the amount of tax payable on regular assessment under subsection (6) of section 18‑A, dividends have to be kept out of account and if that is done, then the shortfall would disappear. It is true that if the dividends were excluded from the regular assessment as also the estimate, then there would be no shortfall. Now, it seems to us that this argument is fallacious. The words are "tax determined on the basis of the regular assessment, so far as such tax relates to income to which the provisions of section 18 do not apply." Obviously, these words refer to tax on income of a certain type, namely, income of any one of the different varieties mentioned in any of the provisions in section 18. Only income of such types is to be left out of consideration for the purpose of making the regular assessment under sec tion 18‑A(6). Let us turn to section 18. It consists of a very large number of subsections. Subsection (1) has been omitted. We may also leave out of consideration subsections (2‑A), (2‑B), (4) and (6) to (9), for they do not deal with any particular kind of income which has not been dealt with in the other sections. Each of the rest of the subsections, excepting subsection (5), deals with deduction of tax at the source from one particular kind of income. In some of the case's, both income‑tax and super tax are deducted while in others, only income‑tax is deducted. It is not necessary to discuss this distinction for the purpose of this judgment. We will now have to refer to the various subsections dealing with deductions from different kinds of income. Sub section (2) deals with deduction from salaries, subsection (3) from interest on securities in the case of residents, subsection (3‑A) from interest on securities in the case of non‑residents, sub section (3‑B) from interest not being interest on securities or any other sum chargeable under the provisions of this Act in the case' of non‑residents, subsection (3‑C) from any sum chargeable under this Act other than interest payable to a non‑resident and sub section (3‑D) from dividends payable to non‑residents. As the section stood at the relevant time, there was no provision in it for deduction of income-tax from dividends paid to a resident shareholder. Indeed, it is because of this that all this argument has arisen. Subsection (5), it would have been noticed, docs not deal with any particular or individual type of income but it deals with all the various' kinds of income mentioned earlier as also with dividends payable to a resident. Therefore, it seems to us that this subsection is not one of those provisions in section 18 which is contemplated in section 18‑A(6). It does not particularise any kind of income which has to be kept out of account in considering the amount due on regular assessment under subsection (6) of section 18‑A. It seems to us, therefore, that the words in that subsection now under discussion refer to the provisions of section 18 which specify particular kinds of income and provide for deduction of tax from them. It is clear that any other view of the matter would produce anomalous results which could not have been intended. In the view that we have taken on the first contention of the appellants, it is obvious that under subsection (1) of section 18‑A dividend income cannot be left out of account for the purpose of calculat ing tax payable in advance. Under subsection (2) the position is the same. Now if subsection (2) requires dividend income to be taken into account in making an estimate, then how is that requirement to be enforced if interest under subsection (6) is not made payable on the failure to take dividends into account. Question of interest under subsection (6) arises only on regular assessment. The amount found due on regular assessment can be realised in the usual way but that would not enable the obliga tion imposed by subsection (2), namely, payment in advance, to be enforced. On such a reading, there would be no effective provision for payment of tax in advance in a case where the assessee makes his own estimate. That could not have been intended. It is of interest to note that subsection (3) contains the same words "income to which the provisions of section 18 do not apply." 'Now if these words are interpreted in the way suggested by the appellants then in a case under this subsection dividends need not be included in the income for the purpose of computa tion of tax payable in advance. But clearly dividends would be liable to be included in cases where subsection (1) or (2) applies. It is impossible to imagine that the Legislature could have intended to provide differently for a case coming under subsection (3). As we have already said, the main purpose of section 18 is to provide for deduction of tax at the source. Therefore, it is correct to interpret the words "income to which the provisions of section 18 do not apply" as referring to that type of income in respect of which section 18 provides for deduction of tax at the source. That fits in also with the scheme of section 18‑A. If once tax has been deducted, then no question of paying tax on it again in advance or otherwise would arise. For .all these reasons it seems to us that income contemplated in the words "income to which the provisions of section 18 do not apply" does not include dividends payable to a resident assessee. For these reasons we would dismiss the appeal with costs. In accordance with the opinion of the majority, this appeal is allowed with costs. Appeal allowed.