Bacha F. Guzdar Vs. Commissioner of
Income-Tax, Bombay  INSC 101 (28 October 1954)
MAHAJAN, MEHAR CHAND (CJ) DAS, SUDHI RANJAN
HASAN, GHULAM BHAGWATI, NATWARLAL H.
AIYYAR, T.L. VENKATARAMA
CITATION: 1955 AIR 740 1955 SCR (1) 876
CITATOR INFO :
RF 1961 SC1019 (7) R 1963 SC1185 (9) R 1965
SC1836 (11) RF 1967 SC 81 (11) RF 1970 SC1578 (9) F 1976 SC1790 (14) F 1988
Indian Income-tax Act (XI of 1922), ss. 2(1),
4(3)(viii), 69 and rule 24-Agricultural Income, Meaning of-Growing and
manufacturing tea company's dividend, Nature of-Dividend how arises
-Distinction between shareholder and partner--Difference between company and
firm-Decided cases on English Tax Law, Use of.
Agricultural income as defined in a. 2(1) of
the Indian Income. tat Act, 1922, signifies income proximately derived from
direct association with land by a person who actually tills the land or 877
gets it cultivated by others. Agricultural income does not mean income which
can be ultimately or indirectly traced to have connection with agricultural
Even though a tea company growing and
manufacturing top gets an exemption of 60 per cent. of the profits as
agricultural income in accordance with rule 24 framed under s. 59 of the Act,
it must be held that the dividend of such company is not derived by the
shareholder owing to his direct connection with the land in which be% is grown
and such dividend is not agricultural income within the meaning of s. 2(1) of
the Act and hence is not exempted from income-tax under s. 4(3)(viii) of the
The dividend of a shareholder is the outcome
of his right to participate in the profits of the company arising out of the
contractual relation between the company and the shareholder and this right
exists independently of any declaration of the dividend though until such
declaration the enjoyment of the profits is postponed.
The shareholder by purchase of the share does
not acquire any interest in the assets 'of the company till after the company
is wound up. The position of a shareholder of a company is altogether different
from that of a partner of a firm. A company is a juristic entity distinct from
the shareholders but the firm is a collective name or an alias for all the partners.
Decisions based on the peculiarities of
Income-tax law of England are hardly safe guides for determining the true
meaning of the term "agricultural income" Under the Indian Income-tax
Chiranjit Lal Chowdhuri v. The Union of India
 S.C.R. 869) followed.
Commissioners of Inland Revenue v. Forrest
(1924) 8 T.C. 704, Borland's Trustee v. Steel Brothers & Co. Ltd. L.R. 
1 Ch. 279, Commissioner of Income-tax, Bihar and Orissa v. Baia Bahadur
Kamakshya Narayan Singh and Others  16 I.T.R. 325, Premier Construction
Co. Ltd. v.
Commissioner of lncome-tax, Bombay City
 16 I.T.R. 380 and Maharaj kumar Gopal Saran Narain Singh v. Commissioner
of Income-tax, Bihar and Orissa  3 I.T.R. 237 referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 104 of 1953.
Appeal from the Judgment and Order dated the
28th day of March, 1952, of the High Court of Judicature at Bombay in
Income-tax Reference No. 39 of 1951 arising out of the Order dated the 23rd day
of April, 1951, of the Income-tax Appellate Tribunal in Income-tax Appeal No.
5228 of 1950-51. 112 878 Jamshedji Kanga, (R. J. Kolah, M. M. Jhaveri and
Rajinder Narain, with him) for the appellant.
M.C. Setalvad, Attorney-General. for India,
(G. N. Joshi, with him) for the respondent.
1954. October 28. The Judgment of the Court
was delivered by GHULAM HASAN J.-This appeal raises an interesting point of law
under the Indian Income-tax Act.
The question referred by the Tribunal to the
High Court of Judicature at Bombay was stated thus:
" Whether 60% of the dividend amounting
to Rs. 2,750received by the assessee from the two Tea companies is agricultural
income and as such exempt under section 4(3) (viii) of the Act." Chagla
C.J. and Tendolkar J., who heard the reference, answered the question in the
negative by two separate but concurring judgments dated March 28, 1952.
The facts lie within a narrow compass. The
appellant, Mrs. Bacha F. Guzdar, was, in the accounting year 1949-50, a
shareholder in two Tea: companies, Patrakola Tea Company Ltd., and Bishnath Tea
Company Ltd., and received from the aforesaid companies dividends aggregating
to Rs. 2,750. The two companies carried on business of growing and manufacturing
tea. By rule 21 of the Indian Income-tax Rules, 1922, made in exercise of the
powers conferred by section 59 of the Indian Income-tax Act, it is provided
that "income derived from the sale of tea grown and manufactured by the
seller in the taxable territories shall be computed as if it were income derived
from business and 40% of such income shall be deemed to be income, profits and
gains, liable to tax." It is common ground that 40% of the income of the
Tea companies was taxed as income from the manufacture and sale of tea and 60%
of such income was exempt from tax as agricultural income. According to the
appellant, the dividend income received by her in respect of the shares held by
her in the said Tea companies is to the extent of 60% agricultural income in
her hands and therefore pro tanto exempt from tax while the Revenue contends
that dividend income is 879 not agricultural income and therefore the whole of
the income is liable to tax. The Income-tax Officer and on appeal, the
Appellate Assistant Commissioner both concurred in holding the whole of the said
income to be liable to tax.
The Income-tax Appellate Tribunal confirmed
the view that the dividend income could not be treated as agricultural income
in the hands of the shareholder and decided in favour of the Revenue, but'
agreed that its order gave rise to a question of law and formulated the same as
set out above and referred it to the High Court. The High Court upheld the
order of the Tribunal but granted leave to appeal to this Court.
The question, we comprehend, is capable of an
easy solution and can best be answered by reference to the material provisions
of the Income-tax Act. Under section 2(1) 'agricultural income' means:
(a) any rent or revenue derived from land
which is used for agricultural purposes, and is either assessed to land revenue
in the taxable territories or subject to a, local rate assessed and collected
by officers of the Government as such;
Sub-section (15) of section 2 defines " total income" as total amount
of income, profits and gains, referred to in sub-section (1) of section 4
computed in the manner laid down in this Act, Section 3 authorises income-tax
to be charged upon a person in respect of the total income of the previous
year. Section 4 lays down that the total income of any previous year of any
person to be charged must include all income, profits and gains, from whatever
source derived and defines the scope of its application for purposes of tax.
Sub-section (3) of the same section enacts certain exemptions upon the
chargeability of -the income and clause (iii) includes agricultural income in
the category of exemptions. Section 6 mentions the various heads of income,
profits and gains, chargeable. to income,-tax 880 including in that category
clause (v) 'income from other sources.' It is common ground that dividend falls
under this category.
In order, however, that dividend may be held
to be Agricultural income it will be incumbent upon the appellant to show that,
within the terms of the definition, it is rent or revenue derived from land
which is used for agricultural 'purposes. Mr. Kolah, for the appellant,
contends that it is revenue derived from land because 60% of the profits of the
company out of which dividends are payable are referable to the pursuit of
agricultural operations on the part of the company. It is true that the
agricultural process renders 60% of the profits exempt from tax in the hands of
the company from land which is used for agricultural purposes but can it be
said that when 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 shareholders also partake of the character of
revenue derived from land which is -used for agricultural purposes ? Such a
position if accepted would extend the scope of the vital words I 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 which is used for agricultural purposes and not by
indirectly extending it to cases where that revenue or part thereof changes
hands either by way of distribution of dividends or otherwise. 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 shareholder. Dividend is not derived by a shareholder by his direct
relationship with the land. There can be no doubt that the I 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.
For example, the proposition that a creditor advancing money on interest to an
agriculturist 881 and receiving interest out of the produce of the lands in the
hands of the agriculturist can claim exemption of tax upon the ground that it
is agricultural income within the meaning of section 4, sub-section (3) (viii),
is hardly statable. 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 Income tax Act. 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, but to say that the
benefit intended to be conferred upon this class of persons should extend to
those into whosoever hands that revenue falls, however remote the receiver of
such revenue may be, is hardly warranted.
It was argued by Mr. Kolah on the strength of
an observation made by Lord Anderson in Commissioners of Inland Revenue v.
Forrest(1), that an investor buys in the
first place a share of the assets of the industrial concern proportionate to
the number of shares he has purchased and also buys the right to participate in
any profits which the company may make in the future. That a shareholder
acquires a right to participate in the profits of the company may be readily
conceded but it is not possible to accept the contention that the shareholder
acquires any interest in the assets of the company. The use of the word
'assets' in the passage quoted above cannot be exploited to warrant the
inference that a shareholder, on investing money in the purchase of shares,
becomes entitled to the assets of the company and has any share in the property
of the company. A shareholder has got no interest in the property of the
company though he has undoubtedly a right to participate in the profits if and
when the company decides to divide them. The interest of a shareholder vis-a-vis
the company was explained in the case of Chiranjitlal Chowdhuri v. The Union of
India and Others(1). That judgment negatives the position taken up on behalf of
the appellant that a shareholder has got a right in the property of the
company. It is true that the shareholders of the company have (1) (1924) 8 T.C.
704,710., (2)  S.C.R. 869, 904.
882 the, sole determining voice in
administering the affairs of the company and are entitled, as provided by the
Articles of Association to declare that dividends should be distributed out of
the profits of the company to the shareholders but the interest of the
shareholder either individually or collectively does not amount to more than a
right to participate in the profits of the company. The company is a juristic
person and is distinct from the shareholders. It is the company which owns the
property and not the shareholders. The dividend is a share of the profits
declared by the company as liable to be distributed among the shareholders.
Reliance is placed on behalf of the appellant on a passage in Buckley's
Companies Act, 12th Ed., page 894, where the etymological meaning of dividend
is given as 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. This statement does not justify the
contention that shareholders are owners of a divisible sum or that they are
owners of the property of the company. The proper approach to the solution of
the question is to concentrate on the plain words of the definition of
agricultural income which connects in no uncertain language revenue with the
land from which it directly springs and a stray observation in a case which has
no bearing upon the present question does not advance the solution of the
question. There is nothing in the Indian law to warrant the assumption that a
shareholder who buys shares buys any interest in the property of the company
which is a juristic person entirely distinct from the shareholders. The true
position of a shareholder is that on buying shares an investor becomes entitled
to participate in the profits of the company in which he holds the shares if
and when the company declares, subject to the Articles of Association, that the
profits or any portion thereof should be distributed by way of dividends among
the shareholders. He has undoubtedly a further right to participate in the
assets of the company which would be left over after winding up, but not in the
assets as a whole as Lord Anderson puts it.
883 The High Court expressed the view that
until a dividend is declared there is no -right in a shareholder to participate
in the profits and according to them the declaration of dividend by the company
is the effective source of the dividend which is subject to tax. This statement
of the law we are unable to accept. Indeed the learned Attorney General
conceded that he was not prepared to subscribe to that proposition. The'
declaration of -dividend is certainly not the source of the profit. The right
to participation in the profits exists independently of any declaration by the
company with the only difference that the enjoyment of profits is postponed
until dividends are declared.
It was argued that the position of
shareholders in a company is analogous to that of partners inter se. This
analogy is wholly inaccurate. Partnership is -merely an association of persons
for carrying on the business of partnership and in law the firm name is a
compendious method of describing the partners. Such is, however, not the case
of a company which stands as a separate juristic entity distinct from the
shareholders. In Halsbury's Laws of England, Volume 6 (3rd Ed.), page 234, the
law regarding the attributes of shares is thus stated :
" A share is a right to a specified
amount of the share capital of a company carrying with it certain rights and
liabilities while the company is a going concern and in its winding up. The
shares or other interest of any member in a company are personal estate
transferable in the manner provided by its articles, and are not of the, nature
of real estate. " In Borland's Trustee v. Steel Brothers &,Co.
Ltd.(1), Farwell J. held that "a share in a company cannot properly be
likened to a sum of money settled upon and subject to executory limitations to
arise in the future ; it is rather to be regarded as the interest of the
shareholder in the company, measured, for the purposes of liability and
dividend, by a sum of money ..............................." It was
suggested that the dividend arises out of the profits accruing from land and is
impressed with the same character as the profits (1) L.R.  1 Ch. 279.
884 and that it does not change its character
merely because of the incident that it reaches the hands of the shareholder.
This argument runs counter to. the definition
of agricultural income which emphasizes the necessity of the recipient of
income having a direct and an immediate rather than an indirect and remote
relation with land. To accept this argument will be tantamount to saying that
the creditor recovering interest on money debt due from the agriculturist who
pays out of the produce of the land is equally entitled to the exemption. In
fairness to Mr. Kolah it must, however, be stated that the contention was not
so broadly put but there is no reason why one should stop at a particular stage
and not pursue the analogy to its logical limits.
English decisions resting upon the
peculiarities of the English Income-tax law can hardly be a safe guide ,in
determining upon the language of the Indian Income-tax Act the true meaning of
the words 'agricultural income.' A few cases of the Privy Council decided with
reference to the provisions of the Indian Income-tax Act, however, deserve
notice. The first case, -viz., Commissioner of Income-tax, Bihar and Orissa v.
Raja Bahadur Kamakshya Narayan Singh and Others(1), dealt with the question
whether interest on arrears of rent payable in respect of land used for
agricultural purposes is agricultural income and therefore exempt from
income-tax. It was held that it was neither rent nor revenue derived from land
within the meaning of section 2(1) of the Income-tax Act. Lord Uthwatt who
delivered the judgment of the Privy Council used the following piquant language
in coming to that conclusion :
"The word derived' is not a term of art.
Its use in the definition indeed demands an enquiry into the genealogy of the
product. But the enquiry should stop as soon as the effective source is
discovered. In the genealogical 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 (1)  16 I.T.R. 325. 885 non-payment. And rent is
not land within the meaning of the definition. " The second case, viz.,
Premier Construction Co. Ltd. V.
Commissioner of Income-tax, Bombay City(1),
dealt, with the nature of the commission of a managing agent of the company a
part of whose income was agricultural income. The assessee claimed exemption
from tax on the ground that his remuneration at 10 per cent. of the profits was
calculated with reference to the income of the company part of which was
agricultural income. It was held that the assessee received no agricultural
income as defined by the Act but that he received a 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, and that the remuneration
therefore was not agricultural income and was not exempt from tax.
Sir John Beaumont in the above case observed
" In their Lordships' view the principle
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. " In the third case, viz., Maharajkumar Gopal Saran Narain
Singh v. Commissioner of Income-tax, Bihar and Orissa(1), an annual payment for
life to the assessee was not held to be agricultural income and therefore not
exempt from tax where the annuity arose out of a transfer made by the assessee
of a portion of his estate for discharging his debts and for obtaining an
adequate income for his life it being held that it was not rent or revenue
derived from land --but. money paid under a contract imposing personal
liability on the covenantor the discharge of which was secured by a charge on
(1)  16 I.T.R. 380.
(2)  3 I.T.R. 237.
886 land. But reliance was placed uponanother
judgment of the Privy Council in the same volume at page 305 'in Commissioner
of Income-tax, Bihar and Orissa v. Sir Kameshwar Singh(1). That was a case of a
usufructuary mortgagee the profits received by whom were exempt from income-tax
on the ground that they were agricultural income in his hands. Lord Macmillan,
after referring to certain sections of the Act, observed that "the result
of those sections is to exclude agricultural income altogether from the scope
of the Act howsoever or by whomsoever it may be received." These
observations must be held to be confined to the facts of that particular case
which was a case of usufructuary mortgagee who had received profits directly
from the land. The obvious implication of the words used by Lord Macmillan was
that whosoever receives profit from the land directly is entitled to the
Reference was also made to some English
decisions but they have no bearing upon the present case as they were founded
on the English Income-tax law and the provisions of the particular statute.
The learned Attorney-General also contended
that the conclusion that dividend is not agricultural income also follows from
the provisions of section 16, subsection (2) and the proviso to the Act.
According to him, this section compels the assessee to show in his return the
whole dividend including the portion which is excluded on the ground of
agricultural income. We do not consider it necessary to express any opinion
upon this contention as our conclusion reached as a result of the foregoing
discussion is sufficient to dispose of the appeal. We accordingly dismiss the
appeal with costs.
(1)  3 I.T.R. 305.