P L D 1956 Lahore 45 (PLP)

KAYANI, A. C. J.‑These four references involve a common question of law, namely, whether the dividends distributed by a company to its shareholders out of "agri cultural income" can themselves be treated as, agricultural income within the meaning of the Income‑tax Act. It is admitted that the only income which the companies have is agricultural income and that, as such, it is exempt from tax iii the hands of the companies themselves. Upon a reading of the relevant provisions of the Act, we should have had no difficulty in returning an affirmative answer, but two recent decisions of Indian High Courts and one of the Supreme Court of India, to the contrary, have given us considerable food for thought; and having examined them again and again, we have ventured to differ from them. We had to be very clear in our mind before we could differ from decisions of such weight and authority, and at the very outset I should state that I am clear about two matters. Firstly, in emphasizing the distinction between the company and its shareholders, the Indian Courts have been carried away more by the outward form than by the substance of the distinction. Secondly, they have not considered the effect of certain provisions of the Act, particularly section 18 (5) and section 49‑B, according to which the payment of income‑tax by the company shall be deemed to be payment by the shareholders. It is necessary to reproduce the relevant parts of the Act here, and also, in some places, to bring out the difference between the provisions of the Act of 1922 before and after the very substantial amendments of 1939. Under section 3, tax is charged in respect of the "total income" of the previous year of every individual, company and other bodies at a rate fixed every year by the Central Legislature. The total income of a person means, under section 4 (1), all income, profits and gains "which are received or are deemed to be received" in the country "by or on behalf of such person" or accrue or arise to him, etc. Under subsection (3) of section 4, "any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them", and of these classes "agricultural income" occurs in the eighth clause. "Agricultural income" has been defined in section 2 (1) as meaning, among other things, "any rent or revenue derived from land which is used for agricultural purposes, and is assessed to land revenue". Now since one of the Indian decisions has built an argument on "the person receiving them" occurring in sub section (3) of section 4, it would be profitable at this stage to see how sections 3 and 4 stood before the amendment. Section 3 then required the charge of tax to be made, not on "total income", but "in respect of all income, profits and gains", and section 4, instead of defining "total income", stated that "this Act shall apply to all income, profits and gains . . . . accruing, or arising, or received in British India . . . ." Subsection (3) of section 4 stood in this form "This Act shall not apply to the following classes of income" and one of these classes then, as now, was "agricultural income". Whether this has made any difference to the intention of the Act will be seen later. Next, I shall reproduce section 14 of both Acts, since it has a direct bearing on dividend: Before amendment. After amendment. Section 14 (1) The tax shall Section 14 (1) The tax shall not be payable by an asses‑ not be payable by an see in respect of any sum assessee in respect of any which he receives as a member sum which he receives of a Hindu undivided as a member of Hindu un family of undivided family (2) The tax shall not be (2) the tax shall not be payable by an assessee in payable by an assessee respect, of (a) any sum which he re‑ ( a) if a partner of an un ceives by way of dividend as registered firm, in respect a shareholder in a company of any portion of his share where the profits and gains in the profits or gains of of the company have been the firm . . . on which assessed to income‑tax or the tax has already been paid by the firm ; or (b) Such an amount of the (b) if a member of an association profits or gains of any firm of persons other which have been assessed to than a Hindu undivided income‑tax as is proportionate family, a company or a to his share in the firm. For a proper appreciation of the amendments, certain parts of sections 16 and 18 should also be examined : Before amendment. After amendment. Section 16 (1) In computing Section 16 (2) "For the the total income of an asses purposes of inclusion in see, sums exempted under the total income of an Subsection (2) of assessee any dividend section 14 . . . , shall be shall be deemed to be included. income of the previous year in which it is paid (2) For the purposes of sub‑ . section (1), any sum . . to him and shall mentioned in clause (a) of be increased" by the subsection (2) of section 14 proportionate amount of the shall be increased by the tax paid by the company. amount of income‑tax pay‑ Provided that if any able by the company in portion of the company's respect of the dividend income was not liable to received. tax in the hands of the company, the above increase shall be calculated only on such proportion of the dividend as arises out of the income liable to tax. (I have not followed the verbose phraseology of the section itself, as it was apparently not intended to be in telligible without effort.) Section 18 (5) . . . . "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 . . . . shareholder, . . and credit shall be given to him there for in the assessment, if any, made for the following year . . . . . Before the amendment, section 14 exempted from tax (1) a member of a Hindu undivided family in respect of its income whether or not the family had been assessed to tax; (2) the share which a partner in a firm received, if the firm had been assessed to tax in respect of that share; and (3) the dividends received by a shareholder where "the profits or gains of a company have been assessed to income- tax" not necessarily all the profits or gains. Next, under section 16, these exemptions were to be included in the total income of the partner or the shareholder (but not of the member of the Hindu family) so as to swell the income for the purposes of increasing the rate of tax. And on the shareholder was conferred the further distinction of including in his total income the tax paid for him by the company on his dividend. Thus the member of a Hindu family, the partner in a firm and the shareholder; in a company were treated differentially and with progressive attention. But the differentiation, be it noted, was not carried a step further. Did the amendment make any difference? Superficially it did, by excluding dividend from the exemption of section 14; but the amendment achieves the same result in section 18 (5), only by a different process. If the Hungerford case Commissioner of Income‑tax v. Hungerford Investment Trust (1936 P C 219) were not known, from the language employed it could be legitimately argued that whereas before the amendment dividend was merely exempt from tax, after the amendment the tax on dividend paid by the company was to be treated as having been paid on behalf of the shareholder. The identity of interest between the company and the shareholder in respect of payment of tax became more pronounced; Unintentionally, it may be, but nevertheless unmistakably. There was also another result, arising out of the Hungerford case. In that case, the Hungerford Trust, the assessee, was a company registered outside British India and held the whole of the ordinary share capital of Turner, Morrison & Co. (hereinafter called the company), which was registered in India. The assessee received two kinds of dividend, one derived from the distributable profits of the company not taxable in the hands of the company within section 4 (1), not having accrued or been received in British India the other in respect of the profits or gains to which the Act applied and in respect of which the company had been assessed. The assessee claimed exemption in respect of both kinds of dividend, as, under section 14 (2) (a) the tax was not payable in respect of a dividend if the profits or gains of the company distributing it had been "assessed to income tax", whether wholly or partially. The Privy Council upheld this view, holding that the words "profits or gains of the company" do not mean "all profits or gains, whether assessable or not". The effect of the amendment is that the shareholder gets credit only for the proportionate share of the tax which has been actually paid by the company. But even with the history of the Hungerford case behind it, the amendment has been so worded as to give an impression that, for the purposes of tax, the shareholder and the company are identical persons. Then there are two other sections‑sections 23‑A and 49‑B‑which bring together the company and its shareholders closer still. The former was inserted by the Amendment Act, XXI of 1930, and it enables the Income‑tax Officer, certain circumstances, where the profits and gains distributes by a company as dividends are less than sixty per cent of the assessable income of the company, to order that the undistributed portion shall be deemed to have been distri buted as dividends, "and thereupon the proportionate share thereof of each shareholders shall be included in the total income of such shareholder for the purpose of assessing his total income" This could be done only on the assumption that the profits and gains of the company are the profits and gains of the shareholders. The latter‑section 49‑B‑was inserted in 1939 and substituted in 1941. It says that where any dividend had been paid to a shareholder who is assessable under the charging section, "such person shall be deemed in respect of such dividend himself to have paid income‑tax at the rate appli cable to the total income of a company " It has the same effect as section 18 (5), but with the additional advantage that, by the operation of section 48, it enables the assessee to claim a refund. A similar provision is contained, in section 49‑C, where any relief granted to a company under section 49‑A in respect of Dominion income‑tax, is "deemed" to be relief to the share holder receiving a dividend from such company. We can pause here and look back. The Income‑tax Act charges every person who earns more than "two acres and a cow" would yield‑individuals, partnerships, companies and all conceivable associations. And so it happens that we hear some people argue‑the learned counsel for the Department to begin with‑that since a company is assessed separately and a shareholder separately, the Act obviously draws a distinction between them. Obviously enough, but the distinction is between a company and an individual, not between a company and its shareholders. When the shareholder is assessed, he is not assessed because he is a shareholder, but because in his individual capacity he enjoys other taxable income apart from the gains and profits of the company. His income as a shareholder is tax‑free, and it is included in his total income merely because you cannot arrive at a correct estimate of an individual's income without computing what in fact he earns from all sources. This is no hardship. This is no double taxation. This is' no creation of a chasm between a company and its shareholders. There is no question of a shareholder involved in the case. You can forget him altogether up to this stage. But while computing an individual's income, the moment you come across a dividend, you are, asked to bear it firmly in your mind that the company has paid tax on it on behalf of the individual, and if the company has paid it at a higher rate than would apply to the individuals' total income, the individual will get a refund. This fact in itself‑that the rate of tax is ultimately reduced to the level of the individual's income‑suggests in no uncertain terms that in the long run it is only the individual who has been taxed, not the company. If each shareholder is a person of less income than the company, the tax which would be ultimately left in the hands of Government after proportionate refunds have been made to the shareholders under section 49‑B would be equal to the total of the tax assessed on each shareholder in respect of his dividend, and would be considerably less than the tax which the company had originally paid on the entire dividend. Can it, therefore, not be said with good reason that the person effectively taxed is the shareholder not the company The company's taxation is merely a case of taxation at the source, that it may be recovered more expeditiously, and that there may be fewer chances of evasion. Therefore, when the company is taxed in respect of dividends, the subject‑matter of taxation is the shareholder's income in the hands of the company; when the individual is taxed in respect of the same dividend‑or, to be accurate, when the individual's total income is taxed‑what is taxed is the shareholder's income in the hands of the individual. And what is common to both is not taxed again. The argument that because the company and the share holder are assessed separately, the company s income is not the income of the shareholder thus narrows down only to cases where the only income of the shareholder is from dividends, and since he is not taxed again in respect of dividends, he is not, in such cases, taxed at all. The argument thus covers no conceivable case. Now put it in a converse form, and it will read thus: If the income of the company could be treated as the income of the shareholder, the share holder would not be separately assessed. Suppose the Act intended to treat the two incomes as identical. Will not then the shareholder's income from other sources escape assessment? It would then be a simple device to buy a share of ten rupees in a company and evade the tax over ten thousand rupees worth of other profits and gains. Even, therefore, if the Act intended the result, which the assessee is contending for, it would separately assess the shareholder's income from other sources. To make myself clear, I shall go backward. Assume that the income of the company is the income of the shareholder, and that the effect of the assumption is, that the shareholder is not assessed separately. Then he will not be assessed in respect of any income, whether it is from dividend or any other source. This would be absurd, and it is to avoid this absurdity that the share holder's other income has been made liable to assessment. This is the only reason why the two are assessed separately. In fact, it would be preposterous not to assess them separately. And let me hope I have made myself clear, because I cannot chase the absurdity of the situation any further. This is my view of the provisions of the Act. But apart from the Act, as the argument proceeded, the absurdity of another situation was perplexing me, and the perplexity was not relieved by any feature of the argument. If my brother and I have a joint agricultural estate from which we derive profits and gains, our income is exempt from tax, apparently because we are paying land revenue, and perhaps agricultural tax also; but if we decide to make ourselves into a limited company‑because my brother sometimes thinks there must be a limit to everything‑then we pay land revenue, agri cultural tax, income‑tax, super‑tax, additional tax and other fraternal taxes. That is because we have exalted ourselves into a company, having become a registered body, that is to say, having got our name on an official register; having elected directors, that is to say, my brother has elected me and I have elected him; having made one of us the managing director, that is to say, my brother, because he can manage the income‑tax department better; having performed another remarkable miracle, to which so much importance has been attached‑the miracle of declaring a dividend, that is to say, deciding to spend eighty per cent of the income individually and setting apart the balance, to provide against hailstorms, locusts and income‑tax litigation. But before declaring dividend, we do another interesting thing: we decide‑my brother and I to recommend eighty percent dividend to the shareholders. This decision we take in a small room. Then we fix a day for the general meeting of the shareholders, and assemble in a hall, my brother and I being the only share holders. While in that hall, we cannot decide that dividend should exceed eighty per cent, though we can reduce it to seventy-nine. Well, we are not amused by this achievement, and would rather carry on as individuals., to earn an exemption which is legitimately ours. Perhaps, while forming ourselves into a company, we had envisaged certain advantages by way of perpetuating the estate in the hands of our descendants we should forget them now. Perhaps we had in mind a remark in Lord Phillimore's speech in Bradbury v. English Sewing Cotton Co. (1923 A C 744) that the taxation of shareholders "would seem to be logical, but it would be destructive of joint stock company enterprise". We should forget that also. This is so unreasonable a position that I can hardly conceive it to have been intended by the Act. The view based on it does not pay attention to this aspect of the matter‑that two honest individuals, upon associating themselves into a company, lose the benefit of exemption. It is influenced principally by the consideration that investors in a company may not be interested in its operations. They may, in fact, know nothing of what the company does or how it earns its income. They merely buy shares and get a return for their money. On first sight, it does appear that such investors have a very remote connection with agricultural income, and that it could not have been such people whom the Act intended to protect. But this is an illusory perspective. It is not any particular class of persons that the Act intends to exempt; it is a particular class of income to which the exemption applies. It is agricultural income, not the income of an agriculturist, not the income of an investor, not the income of a share holder. Lord Macmillan noted the difference in expression between ' agricultural income" in clause (viii) of section 4 (3) and "the income of local authorities" in clause (iii). When he made the following remark in Commissioner of Income‑tax, Bihar and Orissa v. Sir Kameshwar Singh (1935) 3 I T R 305):"The exemption is conferred, and conferred indelibly, on a particular kind of income and does not depend on the character of the recipient, contrasting thus with the exemption conferred by the same subsection on 'the income of local authorities'." In that case, the assessee, doing a money‑lending business, received the greater portion of the rent of agricultural land in considera tion of making a loan to the land‑owner, and Lord Macmillan, in holding that rent in the hands of the money‑lender was "agricultural income", relied also on the following remark of Ashworth J. in Makund Sarup v. Commissioner of Income tax. U. P. (1928) 1 L R 50 All. 495)"The business of money‑lending may bring in an income which is exempt from income‑tax on the ground that it is derived from agricultural land." So also may the investment of money in a company produce agricultural income. Now, going back to the definition, we have simply to ascertain whether the dividend received in these four cases is revenue derived from land. In the hands of the companies themselves it is admitted to be derived from land. If dividend were taxable matter itself, if it were something different from the profits and gains of the companies, if it were not the profits and gains of the shareholders themselves, then, quite clearly, it would not be agricultural income. But I have no doubt that not one of these suppositions is tenable. Consider able argument was devoted to the now accepted view in England that a company is neither an agent of the shareholder nor pays the tax on his behalf. The latest case is the Canadian Eagle Oil Co. v. The King (1946AC119), where the Lord Chancellor Viscount Simon, approved these observations of Lord Cave in Blott's case (1921) 2AC171): "plainly, a company paying income‑tax on its profits does not pay it as agent for its share holders. It pays as a tax‑payer, and if no dividend is declared, he shareholders have no direct concern in the payment"; and of Lord Atkins in Cull's case (1940 A C 51) "At one time 'it was thought that the company is paying tax paid on behalf of the shareholder, but this theory is now exploded by decisions in this House". So be it exploded, but there is no fear of any explosion here, because we have no such theory. We have only statute law that payment of tax by the company "shall be treated as payment of income‑tax or super tax on behalf of" the shareholder (section 18 (5) and that the shareholder receiving dividend "shall be deemed in respect of such dividend himself to have paid income‑tax". (Section 49‑B). Whether that establishes an agency or not is no matter for anxiety. If it does, then our law is different; if it does not, then the Lord Chancellor's view makes no contribution to the opposite view. As a matter of fact, the Lord Chancellor's observation was made in an entirely different context. The Canadian Eagle Oil Co. was incorporated in Canada and was not a person resident in the United Kingdom, though many of its share holders were, receiving dividend through the Midland Bank. These dividends were assessed to tax in the hands of the Bank, who deducted it at the appropriate rate from so much of the dividends as were paid to persons resident in the United Kingdom, after adjusting Dominion tax relief allowance. The company claimed a refund of tax in proportion to the income, which was the subject of the United Kingdom income‑tax, and the claim was under Rule twenty of All Schedules Rules. By rule seven of the Miscellaneous Rules of Schedule to the Act of 1918, however, a charge is imposed on dividends payable in respect of the shares of any foreign company, without reference to the sources of that company's income, and the House of Lords held that the case fell under rule seven and not rule twenty. The observation that the company does not pay tax as agent of the shareholder was made in reply to the contention that when duty is charged against a person in one part of the Act, he is not to be charged again. I said that dividend was not a taxably matter itself, and that it was nothing different from the profits and gains of the company. "Etymologically, a dividend is the 'dividendum', the total divisible sum. But in its ordinary sense it means the sum paid and received as the quotient forming the share of the divisible sum payable to the recipient." (Buckley's Companies Act, 12th edition, page 894, quoted in (1952) 22 I T R 158). But whether it is the total divisible sum or only a share of it, the total divisible sum itself is the sum of profits and gains, and the Income‑tax Act has added no wings to it. I do not, there fore, understand why the profits of a Company, when they are divided and called by a name which is merely descriptive of the process of dividing, alter their derivation. This seems to be too artificial a view of dividend. In England they took a more realistic view. "The thing to be taxed", said Lord Halsbury s, L. C., in Gresham Life Assurance Society v. Styles(1892) A C 309) "is the amount of profits and gains. The word 'profits', I think, is to be understood in its natural and proper sense, which no commercial man would misunderstand. But when once an individual or a company has in that proper sense ascertained what pre the profits of his business or his trade, the destination of those profits . . . . . is perfectly immaterial." Rowlatt J. went quite far in F. H. Hamilton v. Commis sioners of Inland Revenue (16 T C 213) and Rowlatt J. knew some income tax law. This was acknowledged by Viscount Simon L. C. in the Canadian Eagle Oil Co. v. The King (1946) A C 119). "A dividend", said Rowlatt J., "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 . . . "I always said, and it is quite clear, that the tax is a tax of the company, and' that the dividend is not taxable of itself as profits or gains, but the tax is handed on by deduction". These remarks in respect of the true character of dividends are not affected by the observations of the Court of appeal in the same case. Thus Lord Hans worth, M. R. said, that "the share‑holder is to be treated as a separate entity for the payment of tax" and that "the shareholder is not merely paying an aliquot part of the taxation imposed upon the company"; while Romer L. J noticed how frequently, in recent days, the Courts had pointed out "that the company is one tax‑payer, and that each individual shareholder is another, and a separate tax‑payer, on whose behalf the company deducts a 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". The Lords of Appeal were pointing out the difference between the company and the shareholder as two separate tax‑payers, while Rowlatt J. was explaining the real nature of dividends. And to the extent to which the observations of Romer L. J., go against sections 18 (5) and 49‑B, that is not our law. Our law in respect of dividends has been sufficiently explained by the Privy Council in the Hungerford case (1936 P C 219) to which reference has already been made. While examining section 14 (2) (a) of the Act as it stood before the amend ment of 1939‑exemption of dividends from tax‑their Lordships observed that the object of clause (a) was "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 corporations. The underlying principle of the clause, as the Commissioner in stating the present case has recognized, is `that the dividend represents merely the shareholders' share in the income of the company' ". Nothing has been said to us to make us doubt this authoritative exposition of our law except that the Bombay and the Patna High Courts have not accepted this view. In Bombay, Mrs. Bacha F. Guzdar v. Commissioner of Income‑tax (1952) 22 I T R 158) Chagla, C. J., said in reply "But again, what is overlooked is that, if there was no distinction between dividend income of the shareholder and the income of the company, there would have been no necessity for the Legislature to enact section 14 (1952) 22 I T R 158) (a). The very fact that this section was enacted clearly shows that but for that enactment the share holder would have been liable to pay tax on dividend although the company had already been assessed to tax". I may entirely agree, without losing anything. For it is exactly by this enactment that the Legislature wants to make it clear that the two persons are to be regarded as identical for‑the purpose of what is their common income. To resume the quotation "The provision in the present Act also emphasizes that principle. Therefore, the taxing statute has always made a distinction between the income of the company and the income of the share‑holder. These incomes are separate and distinct, and but for special provisions . . . the assessee would be liable to pay tax on the dividend". With great respect, the statute has distinguished between the two incomes because what the company earns is more than one share‑holder's income and what the share‑holder earns may have other sources than dividends. And for the purposes of super tax and the rate of taxation to be applied, the shareholder would clearly be differently assessable than the company. Does the Act show anywhere that the separate assessment of the two has any result other than that of reducing the share holder's rate of taxation and providing a total for the assess ment of super tax? After all, a shareholder has to be assessed on the income he derives from sources other than the The argument that but for special provisions in the taxing statute the assessee would be liable to pay tax on the dividend record on itself. For the very statute which made these special provisions also provided for separate assessability, and the reason for separate assessability has already been made manifest. Then there is the income of a partner from a firm, exempted by section

14. Can it not be similarly said that but for this special provision, the income of a partner from the firm would have been taxable both in his own hands and in the hands of the firm? If it can be said, then is the income of the partner different from that of the firm? It should be, if this argument has any force, but it is admittedly not. In Patna, Ramaswami J., said in 1Jishweshwar Singh v. Income‑tax Commissioner (A I R 1954 Pat. 581), that the passage from the Privy Council judgment must be read subject to the context, where Sir George Rankin was merely attempting to explain the principle underlying section 14 (2) (a) and "in any case it is clear that if there is no distinction between the dividend income of the shareholder and the income of the company, there would have been no need on the part of the Legislature to enact section 14 (2)". The first argument is merely a mode of expressing disagreement, and the second is the argument of Chagla C. J., without any additional force. There is another paragraph in the Privy Council judgment, which has a direct bearing on the present case. "Before the High Court of Calcutta the contention put forward by the Advocate‑General was that the clause 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 distri butable as profit. If this view is accepted, it is true, as Panckridge J., observed, that some startling results would follow. In the first place, every shareholder in a bank, insu rance company or other company, whose profits and gains consist in part of interest 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 assessed dividend which he brings within the ambit of the second proviso of section 8". The reference is to the tax‑free securities of the Central Government. If I have understood this passage correctly, it means that the contention of the Advocate‑General was untenable because it would lead to the result that a shareholder whose profits and gains consist partly of agricultural income would be taxed again upon the whole of his dividend. In other words, he should not be taxed upon that part of the dividend which arises out of agricultural income, and the only reason can be that dividend arising out of agricultural income is itself agricultural income. There is another apt case decided by the Federal Court of India which is likely to contribute materially to the present decision. This is Governor‑General v. Raleigh Investment CO. (1944 I T R 265), plaintiff in the case. It was a joint stock company incorporated in England, holding the bulk of shares in eleven companies in India carrying on the business of manufacturing and selling tobacco and cigarettes. Nine of these eleven, with whom are concerned, were called sterling companies, whose profits were assessed in India. They declared dividends in England, which were paid to the plaintiff, who was assessed to income‑tax and super‑tax in India in respect of these dividends under section 4 (1944 I T R 265) (c) and Explanation 3 to section 4 (1944 I T R 265) as amended in 1939. According to the Explanation, dividend paid without British India shall be deemed to be income accruing and arising in British India to the extent to which it has been paid out of profits subjected to income‑tax in British India. The plaintiff contended that these dividends were debts accruing to a non‑resident out of British India and that the amendment was ultra wires, as it gave the law of India extra territorial operation. The Federal Court repelled this conten tion and approved of the view that "dividends are paid out of profits‑and in that sense must have the same source. 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 a company." Their Lordships added "True, when a dividend is declared, it becomes a debt for which the shareholder can sue the company, but that is not a picture of the whole transac tion. The company can declare dividends only when it has earned profits the real question, therefore, is, where has the money out of which the dividends are declared been earned? How exactly this question is to be answered when the dividends have passed through more than one company will depend upon the circumstances of each case." This case also was brought to the notice of the Indian Courts. Chagla C. J., adverted only to the first passage cited by me‑that the source of the dividend is the same as the source of the company's profits‑and observed "But . . .. What is necessary for us to decide is not that the ultimate source of the dividend is the same as the source of the profits made by the company. What we have to decide is whether land used for agricultural purposes is the effective and immediate source of the dividend received by the assessee". Now when you speak about the source of anything, whether it is a river or a dividend, you are thinking only of one source, not of an immediate and an ultimate source, and if you are thinking of two sources, you are confusing your mind. And the Federal Court was undoubtedly thinking of one source. In the case of dividends, it could hardly occur to anybody that the declaration of dividend also was a source‑to say nothing of being the effective source‑if the learned judges of the Bombay High Court had not discovered it. In that particular discovery even the Supreme Court of India did not support them. Mrs. Bacha F. Guzdar v. Com missioner of Income‑tax (1) "The Declaration of dividends", said their Lordships, "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." Chagla, C. J., did not attend to the other passage in the Federal Court judgment "The real question, therefore, is where has the money out of which the dividends are declared been earned?" In the Patna High Court, Ramaswami, J., observed that the real question before the Federal Court was whether section 4 (1955) 27 I T R 1) (c) and Explanation 3 had extra‑territorial operation and that "the passage from the judgment of the Chief Justice of India must be read subject to the qualifying effect of its context. For the purpose of testing the extra territorial character of a taxing provision, the source of the dividends may be the same as the source of the company's profits. But that is not equivalent to saying that the same test must be applied in examining whether the quality of the income is agricultural . . ." It is unnecessary for me to comment, but this argument also assumes the existence of 'two sources, not an immediate and an ultimate source, but one source for testing the extra‑territorial character of a taxing provision and another for testing the quality of the income. Neither this case nor the Hungerford case appears to have been noticed by the Supreme Court of India in the appeal by the assessee against the judgment of the Bombay High Court. It is true that the phrase "immediate and effective source" was used by the Privy Council in a certain context. That was in Income‑tax Commissioner, Bihar and Orissa v. Kamakhaya Narayana Singh (AI R1949PC1 PI,D1948 P 0224), where the question was whether interest on arrears of rent from agricultural land, made payable by statute is "rent or revenue derived from land". Their Lord ships answered the question in the negative, and for the following reason "Rent is a technical conception, its leading characteristic being that it is a payment in money or in kind by one person to another in respect of the grant of a right to use land. Interest payable by statute on rent in arrear is not such a payment. It is not part of the rent, nor is it an accretion to, it, though it is received in respect of it. "Equally clearly the interest on rent is revenue, but in their Lordship's opinion it is not revenue derived from land. It is no doubt true that without the obligation to pay rent‑and rent is obviously derived from land 'there could be no arrears of rent and without arrears of rent there would be no interest. But the affirmative proposition that interest is derived from land does not emerge from this series of facts. All that emerges is that as regards interest, land, rent and non‑payment of rent stand together as causae sine quibus non. The source from which the interest is derived has not thereby been ascertained. "The word 'dividend' is not a term of art. Its use in the definition indeed demands an inquiry into the geneology of the product. But the inquiry should stop as soon as the effective source is discovered. In the geneological tree of the interest, land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non‑payment. And rent is not land within the meaning of the definition." Chagla C. J. observed that " if we were to draw a geneo logical tree with regard to the income of the assessee, then undoubtedly land would appear in that tree, but it would appear in the second degree. What would appear in the first degree would be the declaration of the dividend which entitled him to receive the dividend which constituted a debt due to him by the company and which cast an obligation upon the company to pay him the dividend. Therefore, in the language of Lord Uthwatt the immediate and effective source of the assessee's income is not land . . . The immediate and effective source of the assessee's income is the declaration of dividend." This argument has already been disposed of by the Supreme Court of India, according to which the declaration of dividends is no source at all. What I wish to point out here is that the Privy Council itself is not contemplating two sources of anything, and that when Lord Uthwatt speaks of the immediate and effective source, he merely means the source, just as you say for the sake of emphasis " the real source," and when you say that, you do not mean that there is an unreal source also. " In the geneological tree of interest", said the Privy Council "land indeed appears in the second degree", but not as a source. "All that emerges is that as regards interest, land rent and non‑payment of rent stand together as causae sine quibus non. The source from which the interest is derived has not thereby been ascertained". That is because " rent is a technical conception, its leading characteristic being that it is a payment in money or in kind by one person to another in respect of the grant of a right to use land. Interest payable by statute on rent in arrear is not such a payment "There is no thought of two sources. There are three other cases, all from the Privy Council, which have been relied upon by both parties, and which have been mentioned repeatedly in the Indian decisions, and I shall notice each of them shortly. In Maharaj kumar Gopal Saran Narain Singh v. C. I. T. Bihar Orissa (1935I T R 237) the assessee, who owned nine annas in an estate conveyed the greater portion of it to the other co‑sharer in consideration of the discharge of a debt exceeding ten lakh, a cash. Payment of five lakh and annual payments of Rs. Two lakh and forty thousand. The question being whether the annual payments were agricultural income, the Privy Council answered it negatively, on the ground that it was "not rent or revenue from land it is money payable under a contract imposing a personal liability on the covenanter the discharge of which is secured by a charge on the land. The covenanter is at liberty to make the payments out of any of her moneys, and is bound to make them whether the land is sufficiently productive or not". It is obvious that the last sentence indicates that if the money were to be paid out of the produce of the land only, their Lordships would have held it to be agricultural income and in any case, the assessee had severed his connection with the land. In Nawab Habibulla v. C.

1. T. (1943 I T R 295) a wakf had been created by an ancestor of Nawab Habibulla, the assessee, and the post of mutawalli was made hereditary without remuneration. In 1928, however, pursuant to a suit for the mutawalli's removal, a compromise was effected, fixing Rs.2500 as his remuneration, "payable from the wakf". The Privy Council held that this was not agricultural income and referred by way of contrast to the Maharaj Adhiraj of Darbhanga's case (14 Pat. 623), where the mortgagee collected rents in his own right and the amount of his income depended upon the exercise of these rights. In the present case, it was observed, the, recovery depended on the rights of the wakf estate and on the assessee's performance of his duties of management as mutawalli, and the amount of his remuneration did not depend either on the nature of the properties or assets which con stitute the wakf estate, or on the amount of the income derived there from by the wakf estate. Even if the wakf property ceased to be agricultural, the assessee would get his remuneration. Quite an obvious distinction‑between the income of the estate and the income of the mutawalli by way of remunera tion for management. Even then their Lordships added that "a different question might have arisen if the 'remuneration had been by way of a fractional part of the income of the wakf estate or by a percentage commission." That is to say, if the mutawalli's remuneration had been fixed as one‑tenth of the income of the wakf estate, whatever the amount of that income, it would have been of the same character as the income of the estate. The last case is The Premier Construction Co. v. C.I. T. Bombay City (A I R 1949 P G 20: P I, D 1948 P C 178,). The assessee there, the Premier Construc tion Company, was the managing agent of the Principal company (Marsland Price & Co.) receiving a commission at the rate of ten percent of the profits of the principal company, provided that it was not to be less than ten thousand rupees in any year. One of the sources of the principal company's income was the manufacture of sugar from cane grown on its own farms and other cane brought from outside. Such income was admittedly agricultural income. On facts their Lordships held that the effect of the managing company agreement was that the assessee was entitled to a minimum of ten thousand rupees which was payable irrespec tive of whether or not the company made a profit. If in any year the ten percent exceeded ten thousand, the agent got remuneration calculated as a percentage upon the profits of the principal company, without regard to the sources from which those profits were derived. Then there comes the following paragraph "In their Lordships' view the principal to be derived from a consideration of the terms of the Income‑tax Act and the authorities referred to is that 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. But if the income received falls within the definition of agricultural income it earns this description, in whatever character the assessee received it. In this case, he received remuneration under a contract for personal service calculated on the amount of profits earned by the employer, payable, not in specie out of any item of such profits, but out of any moneys of the employer available for the purpose." Now this paragraph has been reproduced in three Indian. decisions (two of Bombay and one of the Supreme Court) at various lengths, but the last sentence has been reproduced only in one of them. And the last sentence explains the nature of the income: It is " remuneration under a contract for personal service payable, not in specie out of any item of such profits, but out of any moneys of the employer . . ., " which means, if turns of phrases and artistic negatives convey anything beyond the beauty of diction, that if payment were to be made to the managing agency in specie out of an item of the employer's profits, which were admittedly agricultural income, and perhaps, if the contract for personal service had not intervened, the income would be agricultural. Earlier in the judgment, it had been pointedly brought out that the contract secured for the managing agent a minimum of ten thousand a year, irrespective of the emp loyer's profits. The Privy Council also pointed out that the source was of no importance if the income itself was not of the character of the source income. But if it possessed that character, then it did not matter in what character the assessee received it, that is to say, whether he received it as shareholder or managing agent or mortgagee, or even as a cast‑iron money lender who peeled off agriculturists like Newton apples, it would be agricultural income if it is derived from land of a certain type. Chagla C. J. remarked in respect of this case that the Privy Council surely could not have meant that " when income is earned by a company and that income is transferred by the company to the shareholder in the shape of dividend, and that shareholder becomes entitled to that part of the profit only when the dividend is declared and it comes in the hands of the shareholder, the income received maintains the same character and continues to be an agricultural income". I feel that the difficulty lies in the fact that the chain of transference between the company and the corporator has "breathless" links‑if I may be permitted to be free with a transferred epithet. And if they are not breathless, they are endless. First, the company earns the income next the company declares a dividend next it declares what each particular shareholder is entitled to; next the shareholder becomes entitled to it; next the company transfers. it to the shareholder ; next it comes ‑ into the shareholder's hands. One does feel like doing an obstacle race. Tendulkar, J. in the same case, remarked that their Lord ships had emphasized two points. "The first is that there must be a receipt of agricultural income by the assessee, and the second is that if what is received by the assessee is not agricultural income, then you cannot go back to its source and from that say that the income was agricultural income". This is plain enough. The Supreme Court merely quoted a passage from this judgment after stating generally that certain cases of the Privy Council deserved notice. I have so far referred to the Indian decisions only with reference to the decisions of the Privy Council. The argument advanced by the parties will be incomplete without examining some further details of these cases. The first in order of time is Mrs. Bacha F. Guzdar v. C.I. T . Bombay (1952) 22 I T R 158). The assessee there was a shareholder in certain tea companies, sixty percent of whose income was exempt from tax as agricultural income. The assessee claimed that sixty percent of the dividend income received by her was similarly exempt, but the claim was rejected. Chagla C. J., in his leading judgment, dwelt principally or the argument that a company is a separate entity from its shareholders, that the two incomes are not identical that the company pays its own income‑tax, that "it does not pay income‑tax on behalf of the shareholders". That is why I ,said at the outset that the learned judges of the Indian Courts had not considered the provisions of the Act section 18 (5) .treats the tax paid by the company on the proportionate part of the shareholder's dividend "as payment of income‑tax or super tax on behalf of the . . . shareholder". Chagla C. J. observed it was true that the shareholder was entitled to a refund if the tax had been paid by the company, " but this is merely as a legal fiction that it is recognized that the tax has been paid by the company on behalf of the shareholder". But is not a company itself a creature of legal fiction? Is it not legal fiction that when two or more persons choose to associate themselves in a business, register their names and agree to observe certain formalities, they give birth to a person distinct from themselves? Has it a tangible existence except in the eye of law? If in dealing with a fiction the law creates another fiction, let us accept it as a fact ; if it vests a part of the original fiction with the atmos phere of reality, let us accept it as real. But let us not carry a legal fiction into the realm of pure fiction. Then the learned Chief Justice takes supertax as parallel case: On the same income both the company and the shareholder pay it therefore, the two are different entities. I shall not rely on the argument of some commenta tors that supertax has been made payable twice over, once by the company and once by the shareholder, because it is a "corporation tax"; but if the logic of the learned Chief justice is applied to income tax, then, since it is paid only once, it should be arguable that this is so because the share holder is not a separate entity from the company. Secondly, the Act applies two different rules to income‑tax and supertax, and since we are dealing here with a case of income- tax, we should argue from the rule applicable to income‑tax. The next argument in the judgment is that although it is true that a shareholder is entitled to participate in the profits of the company, he participates only when profits are distributed and a dividend declared. And when that happens, the shareholder becomes the creditor of the company. But can the time of payment, which is only a matter of convenience and administration, alter the character of the profits? And as to the shareholder becoming a creditor, apart from how the Federal Court of India has viewed this matter in the Raleigh Investment Co. case, if he becomes a creditor that also is by a legal fiction. After all, there is a method of doing everything, and if you have left the manage ment in the hands of a Director and he makes no payment to you, you ‑ cannot conveniently go to his house and bring away his carpet. You must sue him as a representative of the company. It was argued before the Bombay High Court by Sir Jamshedji Mehta that dividend was nothing more than the very income which the companies derived and which was ultimately distributed between the shareholders. Sir Jam shedji drew an analogy between a company and a partnership. The learned Chief justice agreed that the argument would have considerable force if the shareholder had the same right to the profits of the company as the partner has to the profits made by the partnership. But the analogy between a company and a partnership, according to him, was unsustain able because the law did not recognize a partnership as a separate entity, having an existence apart from the partners. " It is true", conceded the learned Chief Justice, " that when a partnership has agricultural income and the partner ship is registered under the Indian Income‑tax Act, in the assessment of individual partners the agricultural income would be exempted", but that was " because there is no distinc tion in law between the income of the partners and the income of the partnership. Entirely different is the position with regard to a company . . . Not only is a company and a shareholder separate and independent entity under the general law, but even under the Indian Income‑tax Act a company is a separate entity for the purpose of assessment from a shareholder. . "This leads one to think that a partnership is not a separate entity from its partners for the purpose of taxation and that only one of the two is taxed. I do not know whether I have misunderstood either these remarks or the provisions of the Act, but section 3 charges with tax every individual, company, partnership or associa tion, and section 14 (a) merely exempts a partner in respect of any portion of his share in the profits of the firm on which the tax has already been paid by the firm. But if that is so " because there is no distinction in law between the income of the partners and the income of the partner ship", then, on the language of section 14 as it stood before the amendment of 1939 (exempting dividends from tax) it could be argued that dividends were exempted from tax "because there is no distinction in law between the income of the shareholders and the income of the company." Was the Company Law different before 1939? And as I have already pointed out, the reason why dividend was taken out of the exemption of section 14 and provided for elsewhere lies in the Hungerford case. The remarkable thing is that in none of the Indian judgments had it been asserted that on this particular point the law has become different. But if it has become different, the difference lies in the fact that whereas in the exemption granted to the partner under section 14 he continues to be regarded as separate from the partnership, the shareholder has been placed nearer the company in so far as payment of tax by the company is deemed to be payment on behalf of the shareholder. The judgment of Tendolkar J. in the same case contains a fresh argument based on the language of section 4 (3) after it was amended in 1939. I have already shown. how that section originally provided that the Act shall not apply to . . .agricultural income" and how it has. been altered now to read : " Any income, profits organs falling within the following classes shall not be included in the total income of the person receiving them, agricultural income" falling within the eighth class. While commenting on Lord Macmil lan's remarks in C. I. T. Bihar & Orissa v. Sir Kameshwar Singh, that "the exemption is conferred, and conferred indelibly, on a particular kind of income and does not depend on the character of the recipient, contrasting thus with the exemption conferred by the same subsection on 'the income of local authorities' "Tendolkar J., remarked that " this decision was given at a time when the opening words of section 4 were different . . . the emphasis in the amendment being on the receipt of income by the assessee, while under the old Act agricultural income by itself was exempted from the operation of the Act." This means that Lord Macmillan would not have used the words " the exemp tion. Does not depend on the character of the recipient" If I had been deciding the case under the amended act. But in the very next sentence, This really emphasizes what was even laid down by their Lordships under the old Act that receipt by the assessee is the main test and in the hands of the assessee the income must be received as agricultural income". I must point out, with respect, that their Lordships did not say that receipt by the assessee was the main test what they said was that the character of the recipient was no test at all. And the amended section also does not refer to the character of the recipient; it refers to " the total income of the person receiving" the profits. And I do not see how the use of these words alters the character of " agricultural income", which continues to remain income derived from land, not the income of any person possessing a certain character, as opposed to "income of local authorities "which means any sort of income, so long as it falls into the coffers of the local authority. These words in the amendment were used, not with any conscious intention to alter the character of agricultural income, but to make the sentence complete and intelligible. Without them, the section would read thus: "Any income, profits or gains falling within the following classes shall not be included in the total income", and as "total income" would be the income of some person, the person in question had to be indicated. One might as well argue, equally without effect, that the emphasis was on the word receiving as opposed to "accruing" or " arising " used in section

4. And granting everything, if " the person receiving it " receives it on behalf of another, then the company receives it for the shareholders. Surely it cannot be argued that if manager receives agricultural income on behalf of his employer, in the hands of the employer the receipt is not agricultural income. On appeal from the judgment of the Bombay High Court, the Supreme Court (1955) 27 I T R 1 did not accept. The view of the High Court that the declaration of dividend vas the effective source of profit. The right to participat ion in the profits, it was held, existed independently of any declaration only the enjoyment of profits was postponed till dividends were declared. But their Lordships maintained hat when a company decides to distribute its profits and declare dividends such dividends in the hands of shareholders o not "partake of the character of revenue derived from and which is used for agricultural purposes. Such a position, accepted, would extend the scope of the vital words revenue derived from land' beyond its legitimate limits agricultural income as defined in the Act is obviously intended to refer to the revenue received by direct association with the land . . . In fact and truth dividend is derived the investment made in the shares of the company and foundation of it rests on the contractual relations between company and the shareholder . . . The object appears be not to subject to tax either the actual tiller of the soil or any other person getting land cultivated by others for the deriving benefit therefrom . The keynote of the judgment is " direct association " of the assessee with the land, and permissible limits of such association extend to the landlord who employs tenant or labourers to cultivate for him. Whatever I say in reply to this will be a repetition of previous arguments but I repeat, with great respect, that the fundamental error in this concept lies in seeking an association with land, not with agricul tural income. It is not the income of an agriculturist that is exempt, but income which itself bears the stamp of agriculture. I have already tried to point out, on good authority, that a money‑lender may have occasion to handle agricultural income. There is also something improper in the question whether dividend proceeding from agricultural income " partakes " of the character of agricultural income. The question should be whether income, originally agricultural, when it passes through the process of a declaration of dividends, loses that character or fails to retain that character; and I find it difficult to visualise any loss or failure by virtue of that meeting of the shareholders in the hall, declaring to themselves that they would distribute only eighty per centum of the profits. If the declaration of dividend is not " an operation which gives birth to a profit or gain", as Rowlatt J. said, it does not alter the pristine character of the income. There is now left Vishweshwar Singh v. Commissioner of Income‑tax (1954) Pat. 580), which contains nothing that has not been already said. In that case the assessee claimed exemption on agricultural income which he had received in the shape of dividends, but it was held that income from dividend was not identical in quality with the profits made by a company Firstly, a company was a different juristic entity from its shareholders; secondly, it cannot be treated in law as an agent; thirdly, a dividend becomes a debt when declared; fourthly, if the directors do not recommend dividends, the shareholders cannot declare them. All these matters have received ample consideration already. They create an atmosphere of artificiality where I do not recognize my brother because he is wearing a wig and gown, even though I have myself made a gift of them to him. We answer the question affirmatively. AKHLAQUE HUSSAIN J.‑Since we are differing with well‑considered rulings of two High Courts in India, namely, those of Bombay and Patna, and of the Supreme Court of that country, the occasion demands that I should add a few observa tions of my own‑though not with the fulness and felicity with which my learned brother has written his judgment. The piquancy of the situation is further heightened by the fact that the learned judges of the Bombay High Court in arriving at their decision in Mrs. Bacha F. Guzdar v. The Commis sioner of Income‑tax, Bombay City (A I R 1953 Bom.1),(with which I respect fully disagree) overrules certain observations of their own (with which I equally respectfully agree), made in the earlier case of Phaltan Sugar Works, Limited v. Commissioner of Income‑tax, Phaltan State (A I R 1950 Bom. 61). I would like, at the very outset, to state what I take to be well‑settled principles in interpreting Taxing statutes, a disregard of which leads to confusion and, sometimes, to error. Taxation laws are principally based upon fiscal needs and policy of a country and, therefore, need not, and quite often do not, accord with notions of equity and general legal principles. It is, therefore, incumbent upon the Courts to construe them exclusively upon the language employed in them, without any reference to any law and equity outside them. In delivering the judgment of the House of Lordsan Canadian Eagle Oil Company Ltd. v. The King (L R 1946 A C 119), Viscount Simon expressed himself thus on the subject "But the opinions delivered by Lord Macnaghten and Lord Davey in that well known case London County Council v. Attorney General in (1901 A C 26), proceed upon a meticulous cons truction of those particular provisions and not upon the supposition of any general principle underlying them, and remaining unexpressed. No such supposition is legitimate. In the words of the late Rowlatt J. whose outstanding knowledge of this subject was coupled with a happy con ciseness of phrase, ` in a taxing Act one has to look merely at what is clearly said. There is no room for any intend ment. There is no equity about a tag. There is no presumption as to a tax. Nothing is to be read in, nothing is to be employed. One can only look fairly at the language used.' It is equally important to bear in mind that the liability bf the citizen to any tax must be clearly and fairly spelled out from the statute itself, either from the express language or by necessary implication; it cannot be fastened upon his inferentially. It is admitted that the entire income of the companies in question was, and is, "agricultural" in nature within the meaning of the Income‑tax Act (hereinafter referred to as the Act'). It was further stated before us from both sides of the Bar that these companies did not, and under their Articles of Association could not, have any non agricultural income. The short question to be answered by us is whether the dividends paid to their shareholders by such companies are, within the meaning of the Act, "agricultural income" or not. Before, however, answering the question I shall briefly refer to certain relevant provisions of the Act. The 3rd and the 4th sections of the Act are the charging sections. The 3rd lays down that, subject to the provisions of this Act", the income tax shall be charged in respect of the total income of every individual etc. Subsection (A I R 1950 Bom. 61) of section 4 provides: "4 (1) Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived, which ‑(a) are received or are deemed to be received in British India in such year by or on behalf of such person ; or . . . . (b) (i) accrue or arise or are deemed to accrue . ' . . ." It will be observed that for the purpose of including any item in the total income of any person its source is immaterial. Similarly the character of the recipient is equally immaterial so long as the income can be properly said to be his. Accord ing to the amplification in section 4 (1), the test is the receipt and not the character in which it is received. The general rule, therefore, laid down, at the very outset, by the Act is that all income, regardless of its nature or character or the character of its recipient, is to be included in the total income of the person receiving it and, therefore, is liable to income tax. This rule, however, could not be allowed to remain in its unqualified and unmitigated form for obvious reasons. For instance, the process of earning an income may entail some expenditure on the part of the earner and, therefore, some allowance had to be made to the recipient on this account. Again, the general rule, as contained in these two sections, obviously leads to double taxation. Section 3 makes the total income" of every individual, Hindu undivided family, company or local authority, and of every firm and other association of persons or the partners of the firm or members of the association individually" taxable. Thus not only the income of every Hindu undivided family, company, firm and other association of persons is taxable but it becomes again liable to income tax when handed over to, or divided between, their members. Therefore, it became necessary to give relief in one form or other against double taxation (e.g., sections 14 and 16 (2) of the Act.) Similarly for one reason or other all kinds of incomes and incomes of all persons were not intended to be taxed; and necessary provisions were made for exempting them. The general rule being that every income is taxable, it was quite unnecessary to take into account either its own character or the character of its recipient but when it came to exempting certain incomes from the liability to tax, or excluding them from the operation of the Act, they could be specified only with reference to either their nature or the character of their recipients. Subsection (3) of section 4 provides:‑ "Any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them . . . Clause (iii) of this subsection mentions the income of local authorities, specifying the income with reference to the character of its recipient. An exception, however, is made in this clause in favour of "income from a trade or business carried on by the authority so far as the income is not income arising from the supply of a commodity or service within its own jurisdictional area". Here the income had to be defined with reference to its nature or source. Clause (viii) of this sub section mentions an income which is specified with reference to its source or character, namely, agricultural income. It is not to be included in the total income of the person receiving it. According to the head‑note of section 4 and the definition of "total world income" in subsection (15) of section 2 of the Act, the Act does not apply to this kind of income‑wherever and in whomsoever's hand it may be found, whether in the hands of a company or of a shareholder. It is true that according to' the definition of "income" in subsection (6C) of section 2, income includes anything included in dividend, but by the operation of the provisions of subsection of section 4 agricultural income" even when it is included in dividend cannot be included in the total income of any person and is, therefore, not liable to income tax. As has been already pointed out the Act does not apply to such income. The defi nitions in section 2 hold good only so long as there is nothing repugnant in the subject or context. Once it has been conceded that the income of a company is agricultural income, it necessarily follows that a portion of it received by a shareholder is also agricultural income, as the nature of a part must be the same as that of the whole unless of course it can be shown that by being thus transmitted the part has suffered a legal accident which, according to the pro visions of the Act, has altered its original nature or character. The last stated proposition can be substantiated by only showing that the agricultural income of the company has not been received as such by the share holder, that is to say, he has not received it under a right to receive it in specie. There is nothing in the Act to support this proposition ; on the other hand, there are very clear and definite indications to the contrary. The definition of "dividend" in subsection (6A) of section 2 clearly indicates that it is the profits of the company which are distributed amongst its shareholders, that is to say, it is agricultural income itself which, in part whole, is distributed amongst its shareholders. Provisions in the Act entitling a shareholder benefit, or refund, of the income tax paid by the company also unmistakably point to the conclusion that the Act treats the income of a shareholder received by way of a dividend the same as the income of the company. Moreover, when a person purchases shares in a company carry ing on agricultural business he obviously intends to acquire a right to participate in the agricultural income of the company. That this distribution is made in pursuance of the right of the shareholders to participate in the profits of the company is a proposition which was admitted by the learned judges of the Supreme Court of India in Mrs. Bacha F. Guzdar, Bombay v. Commissioner of Income‑tax, Bombay (1955 I T R I). In overruling the Bombay High Court's view that there was no right in a share holder to participate in the profits of the company and that it is the declaration of dividend by the company which is the effective source of the dividend they observed :- "The right to participation in the profits exists inde pendently of any declaration by the company with the only difference that the enjoyment of profits is postponed until dividends are declared". Section 23A authorise the Income‑tax Officer, in certain cases, to assess the shareholders of a company even in respect of the undistributed portion of the income, or profits, of the company. Clause (ii) of subsection (3) of this section provides:‑ "Where the proportionate share of any member of a company in the undistributed profits and gains of the com pany has been included in his total income under the provisions of subsection (AIR 1935 P C 143) the tax payable in respect thereof shall be recoverable from the company, if it cannot be recovered from such member." Subsection (4) lays down :‑ "Where tax has been paid in respect of any undistributed profits and gains of a company under this section, and such profits and gains are subsequently distributed in any year the proportionate share therein of any member of the company shall be excluded in computing his total income of that year." The expression "the proportionate share of any member" in the undistributed income, or the profits or gains, of the company in these provisions clearly indicates the right of a shareholder to receive a portion of the income of the company and, where the income is agricultural, to a share in the agricultural income. It is, therefore, clear that the dividend out of the agricultural income of a company is agricultural income in the hands of a shareholder because the latter receives it in recognition of his right to it. Confusion arises only when all persons receiving payments from a company, be they share holders or not, are assumed to be in the same category for the purpose of determining the nature of their income from the company. The real test in all cases is whether the recipient has received the income of the company in pursuance of a right to receive it as such. It is wholly immaterial for the, purposes of the Act whether the agricultural income has been received directly or indirectly, mediately or immediately, it is enough that it has been received as of right. I now, proceed to examine the validity of the conclusions stated in the preceding paragraph in the light of such decisions of the Privy Council as have a bearing on the question in issue. In Gopal Saran. Narain Singh v. Commissioner of Income‑tax Bihar and Orissa (AIR1935PC143) an absolute owner of an estate transferred the estate to another and obtained from the transferee in exchange a covenant to pay the debts, a sum of cash to meet the expenses of his daughter's marriage, and a covenant to pay him a life annuity. Their Lordships rejected the contention that the annual payment was agricultural income with the remarks:‑ "It is not rent or revenue derived from land; it is money payable under a contract imposing personal liability on the covenanter the discharge of which is secured by a charge on land. The covenanter is at liberty to make the payments out of any of her moneys and is bound to make them whether the land was sufficiently productive or not". The assessee in this case had no right to receive the agri cultural income as such. He was entitled to a definite annual payment whether he was or was not receiving any income from the land. In the present case the shareholders could claim only a share in the agricultural income if any. Practically to the same effect is the ruling in Raja Mustafa Ali Khan v. Com missioner of Income‑tax, U. P.,( 19481 TR330PC) in which Gopal Saran Narain Singh's case was cited with approval. In Commissioner of Income‑tax Bihar and Orissa v. Kameshwar Singh (AIR1935PC172) a money lender was a usufructuary mortgagee of certain land and it was held that the income received by him from the land was agricultural income within the meaning of the Act. It will be observed that the money‑lender had, in pursuance of his contract with the landlord, obtained the right to receive the income of the land. In Commissioner of Income‑tax Bihar and Orissa v. Kama khaya Narayan Singh and others (AIR1949PC1 PLD1948PC224) their Lordships held that the interest payable under a statute on arrears of rent payable in respect of land was not agricultural income. The right to receive interest was obviously not the right to receive income of the land and it was open to the tenant to pay it out of any income of his, agricultural or non‑agricultural. The assessee, in the Premier Construction Company Ltd. v. Commissioner of Income‑tax, Bombay City (AIR 1949PC20:PLD1948PC178) who was a managing agent of the company was entitled under the managing agency agreement, in consideration of services rendered, to a minimum annual salary of Rs.10,000 which was payable irrespective of whether or not the company had made ,any profits. But if in any year ten per cent of the profits made by the company exceeded Rs.10,000, then he was to get remuneration calculated as a percentage upon the profits of the company, without regard to the source from which those profits were derived. Their Lordships held that no part of the income received by the managing agent could be considered as agricultural income for the obvious reason that the managing agent had no right to receive the agricultural income of the company as such. Nawab Habibullah v. Commissioner of Income‑tax, Bengal (AIR1943PC20) was a case of the salary of a Mutawalli of a wakf estate. It was held by their Lordships that the fact that the income of the wakf was derived from agricultural land did not make the remuneration paid to the mutawalli "agricultural income" since the remuneration did not depend either on the nature of the properties or assets, which constitute the wakf estate, nor on the amount of the income derived therefrom by the wakf estate. The mutawalli had no right to receive the agricultural income of the wakf as such. "A different question", their Lordships added, "might have arisen if the appellant's remuneration had been by way of a fractional part of the income of the wakf of estate. In Mrs. Bacha F. Guzdar v. Commissioner of Income‑tax Bombay (1955 I T R 11955 I T R 1) their Lordships of the Supreme Court of India posed the question for their decision thus :‑ " It is true that the agricultural process renders . . profits from land which is used for agricultural purposes exempt from tax in the hands of the company, but can it be said that when any such company decides to distribute its profits to the shareholders and declares the dividends to be allocated to them, such dividends in the hands of the share holders also partake of the character of the revenue derived from land which is used for agricultural purposes ?" As I have already attempted to show there is nothing in the Income‑Tax Act, or for the matter of that, in reason, to suppose that income derived from land changes its character when it reaches the hands of the shareholders of a company. In this question itself it is quite clearly admitted that it is the agricultural profits which are distributed amongst the share holders. The only question therefore was whether the share holders had the right to the division of these profits‑and in the passage, cited earlier by me, their Lordships themselves admitted the shareholder's " right to participation in the profits." Their Lordships, however, answered the question by observing:‑ " Such a position if accepted would extend the scope of the vital words 'revenue derived from land' beyond its legitimate limits." These limits were discovered by their Lordships in "the policy of the Act" and in the 'intention and object' of the definition of the 'agricultural income' in the Act; and they proceeded to build up certain propositions upon them. The first of these is :‑ " In fact and truth dividend is derived from the investment made in the shares of the company and the foundation of it rests on the contractual relations between the company and the shareholders." Adopting this reasoning their Lordships of the Privy Council in Commissioner of Income‑tax, Bihar and Orissa v. Kameshwar Singh have said:‑ " In fact and truth income of the money‑lender is derived from the investment made by him in the business of money lending (or in the debt advanced to the land) and the foundation of it rests on the contractual relation between him and the landlord." But what is the contract between a company formed to carry on agricultural operations and its shareholders? Surely that the shareholders will divide amongst themselves the agricultu ral income made by the company. The company only earns the income and the shareholders enjoy it as of right. The fact that the right springs from a contract and not statute is immaterial when a person purchases a land or takes a usufructuary mortgage of it is by virtue of a contract a lone that he become entitled to agricultural income. when a person purchases land or takes a usufructuary mortgage of it, it is by virtue of a contract alone that he becomes entitled to agricultural income. Then again :‑ " There can be no doubt that the initial source which has produced the revenue is land used for agricultural purposes, but to give to the words 'revenue derived from land' the unrestricted meaning, apart from its direct association or relation with the land, would be quite unwarranted." As regards the first part of the statement it would have been truer to say that the only, and not only the initial source of the income was revenue from the land. The meaning of the second statement in the sentence is not easy to follow. Perhaps what was meant is clearly stated in the previous sentence, namely, "dividend is not derived by a shareholder by his direct relationship with land". There is nothing in sec tion 2 (1) of the Act to warrant this notion of direct relation ship with land. A landlord may lease out his land and the lessee may employ a manager who, in his turn, may engage certain persons as collectors of rent from the tenants. Mere remoteness from, or indirect relationship with, the land will not take away the agricultural character of the income. Another proposition runs thus " The policy of the Act as gathered from the various sub -clauses of section 2‑(1) appears to be to exempt agricultural income from the purview of the Income‑tax Act." This policy of the Act is expressly declared by subsection (3) of section 4, and if accepted leads to the logical conclusion that to such income the Act does not apply in whatever hands it may be found, regardless of the fact whether it has been received directly or indirectly. The final conclusion is stated in the following words:‑ " The object appears to be not to subject to tax either the actual tiller of the soil or any other person getting land cultivated by others for deriving benefit therefrom . . . ." This may have been the object but it has not been anywhere expressly declared, or necessarily implied, in the Act. On the other hand, it is with reference to its own character alone that agricultural income has been expressly exempted from the operation of the Act by section 4 (3). The true position, as I have already stated, appears to be that agricultural income in everyone's hands is exempt from tax provided the recipient received it, directly or indirectly, by virtue of a right to receive it in specie. Here in this case the shareholders had the right to participate in the incomes of the companies and as the incomes of the companies were entirely and wholly agricultural, there can be no manner of doubt that the income of the share holders through the dividends was agricultural income. I, therefore, respectfully agree in the answer proposed by my learned brother. A H. Reference answered.