Provat Kumar Mitter Vs. Commissioner of
Income Tax, West Bengal [1960] INSC 279 (8 December 1960)
DAS, S.K.
HIDAYATULLAH, M.
SHAH, J.C.
CITATION: 1961 AIR 1019 1961 SCR (3) 37
CITATOR INFO :
D 1961 SC1023 (7) RF 1961 SC1059 (6) D 1967
SC 383 (10)
ACT:
Income Tax-Assignment by shareholder of right
to dividend Liability to tax of such share-holder-Indian Income-tax Act, 1922
(11 of 1922), ss. 16(1)(c), 16(3).
HEADNOTE:
The appellant who was the registered holder
of 500 shares of a company executed a deed dated January 19, 1953, by which he
assigned to his wife the right, title and interest to all dividends and sums of
money which might be declared or might become due on account or in respect of
those shares for the term of her natural life. During the accounting year which
ended on March 31, 1953, the dividend declared on the shares amounted to Rs.
12,000, and in assessing the appellant for the assessment year 1953-54 the
Income-tax Officer included the said sum in his income under s. 16(i)(c) and s.
16(3) of the Indian Income-tax Act, 1922. The appellant claimed that since the
settlement was for the lifetime of his wife, the third proviso to s. 16(i)(c)
applied and the dividend which his wife received could not be deemed to be his
income under s. 16(i)(c), and that s. 16(3) was not applicable because there
was no transfer of the shares to his wife.
Held, that on its true construction the deed
dated January 19, 1953, was not a transfer of any existing property of the
appellant namely, the shares held by him, but only a contract to transfer or
make over in future every dividend and sum of money which may be declared or
become due and payable on account or in respect of the shares, to his wife
during her lifetime. Since the company could pay the dividend only to the
registered shareholder or under his orders, the income continued to accrue to
the appellant though applied subsequently towards payment to the wife under the
terms of the contract. The income, therefore, was assessable in the hands of
the appellant.
Howrah Trading Co. Ltd. v. Commissioner of
Income-tax, Cal- cutta, [1959] SUPP. 2 S.C.R. 448, relied on.
Bacha F. Guzday v. Commissioner of
Income-tax, Bombay, [1955] 1 S.C.R. 876, held not applicable.
Bejoy Singh Dhudhuria v. Commissioner of
Income-tax, (1933) L.R. 60 I.A. 196, distinguished.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 366 of 1959.
38 Appeal from the judgment and order dated
September 18, 1958, of the Calcutta High Court in Income Tax Reference No. 9 of
1955.
S. Mitra and S. N. Mukherjee, for the
appellant.
K. N. Rajagopal Sastri and D. Gupta, for the
respondent.
1960. December 8. The Judgment of the Court
was delivered by.
S. K. DAS, J.-This is an appeal on a
certificate of fitness granted by the High Court of Calcutta under s.
66A(2) of the Indian Income-tax Act, 1922.
The assessee, Provat Kumar Mitter, is the appellant before us. He was a
registered holder of 500 Ordinary shares. of the Calcutta Agency Ltd. By a
written instrument, dated January 19, 1953, he assigned to his wife, Ena
Mitter, the right, title and interest to all dividends and sums of money which
might be declared or might become due on account or in respect of those shares
for the term of her natural life. We may read here the material portion of the
instrument:
"This Deed Witnesseth that for effecting
the said desire and in consideration of the natural love and affection of the
Settlor for the Beneficiary the Settlor as the beneficial owner assigns unto
the Beneficiary the right, title and interest to every dividend and sum of
money which may be declared or become due and payable on account of or in
respect of the said shares (not being the price or value thereof) and further
hereby covenants with the Beneficiary to hand over and/or endorse over to the
Beneficiary any dividend Warrant or any other document of title to such
dividend or sum of money as aforesaid and to instruct the said Company to pay
any such dividend or such sum of money to the Beneficiary To Hold the same unto
the Beneficiary absolutely during the term of her natural life.
And It Is Hereby Agreed And Declared that the
Beneficiary shall remain entitled to and shall receive and stand possessed
absolutely of every dividend and sum of money which she may receive on 39 account
of the said shares during the term of her natural life and that the Settlor
shall have no right, title or interest therein or derive any benefit there from
during the said period." It is to be noticed that under the terms quoted
above the shares themselves remained the property of the assessee, and it was
only the income arising there from which was sought to be settled or assigned
to his wife. During the accounting year which ended on March 31, 1953, the
dividend declared on the shares amounted to Rs. 12,000. In assessing the as-
sessee for the assessment year 1953-54 the Income-tax Officer included the said
sum of Rs. 12,000 in his income under the provisions of s. 16(1)(c) and s.
16(3) of the Act, as he said in his assessment order. The contention of the
assessee was that since the settlement was for the lifetime of his wife, the
third proviso to s. 16(1)(c) applied and the dividend which his wife received
could not be deemed to be his income under s. 16(1)(c); as to s. 16(3) of the
Act the assessee contended that it did not apply, because there was no transfer
of the shares to his wife. The assessee, accordingly, appealed to the Appellate
Assistant Com- missioner. Before that authority a somewhat unusual contention
was put forward on behalf of the Department, viz., that the third proviso to s.
16(1)(c) should be ignored inasmuch as it was repugnant to the main provisions
contained in s. 16(1)(c) and the general scheme of the Act.
A further contention urged on behalf of the
Department was that since the shares continued to stand in the name of the
assessee and the dividends had been declared in his name, the transfer of the
dividend to the beneficiary was only an application of the dividend income and,
therefore,, the assessee could not claim exemption from being taxed on it as a
part of his own income. The Appellate Assistant Commissioner accepted both the
aforesaid contentions and dismissed the appeal.
In a further appeal to the Income-tax
Appellate Tribunal, the assessee again relied on the third proviso to s.
16(1)(c) of the Act and the Departmental
Representative urged the same two contentions plus 40 a new one to the effect
that the deed by which the dividend had been transferred was altogether invalid
inasmuch as it was an unregistered instrument and, therefore, no valid transfer
of the dividend income had been effected by it.
The Tribunal rejected the Department's
contention that the third proviso was in conflict with the main provisions of
s.
16(1)(c) or the scheme of the Act. As to the
second contention that the transfer of the dividend income was a mere
application of it by the assessee after it had accrued to him, the Tribunal
apparently expressed no opinion. It gave effect, however, to the third
contention of the Department, namely, that the deed being an unregistered
instrument did not operate as a valid transfer of the dividend income in favour
of the assessee's wife.
Both the assessee and the Commissioner then
moved the Tribunal to refer to the High Court the questions which had
respectively been decided adversely to them. The Tribunal acceded to the
request and referred three questions to the High Court, two at the instance of
the Commissioner and one at the instance of the assessee. The questions
referred were as follows :
"(1) Whether the deed dated January 19,
1953, assigning the dividends to accrue, merely on account of natural love and
affection, is void as it is not registered? (2) Whether the third proviso to
section 16(1)(c) is repugnant to the main clause 16(1)(c) and the general scheme
of the Act, and should not be given effect to? (3) Whether, on the facts and in
the circum- stances of the case, the payment of dividend income to the
assessee's wife, Ena Mitter, under the covenant in the deed of assignment dated
January 19, 1953, was merely a case of application of the assessee's
income?" The High Court answered the first two questions in favour of the
assessee. It answered the third question, however, against the assessee and in
favour of the Department. The High Court expressed its conclusion on the third
question in the following words:
41 "............... the conclusion must
be that there being only a voluntary covenant entered into by the settler to
pay over the dividends received by him to the wife or to instruct the company
to pay them to her and the income not having been made the wife's income from
the beginning, what the settlement provides for is only an application of the
income and therefore the income is assessable in the hands of the settlor,
irrespective of whether the wife is also assessable on her receipts.
The case is outside the main clause of
section 16(1)(c) and, therefore, the third proviso to the section is also not
relevant." The appeal before us is limited to the question of the
correctness or otherwise of the answer given by the High Court to the third
question. The first two questions having been answered in favour of the
assessee and the Department not having filed any appeal with regard to them, we
are not concerned with the correctness or otherwise of the answers given by the
High Court to those questions and we express no opinion as respects those
answers.
On behalf of the appellant it has been argued
that the High Court should not have answered the third question, because it did
not arise out of the order of the Tribunal. The argument is that under s. 66 of
the Income-tax Act, the Tribunal could refer to the High Court any question of
law which arose out of its order, but it was not open to the Tribunal to refer
a question which did not so arise. We are unable to accept the contention that
the question did not arise out of the Tribunal's order. Indeed, it is true as
we have stated earlier, that the Tribunal did not state its specific finding on
this question; but in the statement of the case drawn up by the Tribunal under
s. 66 it has stated that though no specific finding was given the question was
raised by the Department and by implication was decided against the respondent.
In its application to the Tribunal for a reference, the present respondent specifically
mentioned the question as one decided adversely to it and though the appellant
42 submitted that the question did not arise, the Tribunal held that the
question did arise out of its order. No objection appears to have been taken in
the High Court to the reference made by the Tribunal on the three questions
including the one now under consideration before us. In these circumstances it
is not open to the appellant to contend now that the question did not arise out
of the Tribunal's order. We must, therefore, overrule this contention. - Now,
as to the correctness of the answer given by the High Court. Learned counsel
for the appellant has contended that the High Court did not correctly construe
the instrument of January 19, 1953, and on a proper construction, the High
Court should have held that a right of property in present was assigned in
favour of the wife. Learned counsel has submitted that the assessee as a
registered holder of 500 Ordinary shares of the Calcutta Agency Ltd., had a
bundle of rights in the Company: (1) a right to vote; (2) a right to
participate in the distribution of assets on dissolution or liquidation of the
Company; and (3) a right to participate in the profits, e.g., dividends which
might be declared. It is contended that the aforesaid third right was assigned
to the wife by the assessee, and that the High Court ignored the said
assignment while it emphasised the other covenants for endorsing or handing
over the dividend warrants, etc.
In support of his contention learned counsel
has relied on certain observations made by this Court in Bacha F. Guzdar v.
Commissioner of Income-tax, Bombay (1) at p. 883. , That was a case in which
the question that arose for decision was whether dividend declared by a,
company growing and manufacturing tea was agricultural income within the
meaning of s. 2(1) of the Income-tax Act and hence exempt from income-tax under
s. 4(3)(viii) of the said Act. It was held that the dividend of a shareholder
was 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 the observations on which learned counsel has relied were to
the effect (1) [1955] 1 S.C.R. 876.
43 that "the right to participate 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." We do not think that those observations are of any assistance
to the appellant in the solution of the question before us, which is really one
of construction of the instrument of January 19, 1953. A transfer of property
may take place not only in the present, but also in future; but the property
must be in existence. It is clear to us that the instrument of January 19,
1953, was not a transfer of any existing property of the assessee. It was in
its true nature a contract to transfer or make over in future every dividend
and sum of money which may be declared or become due and payable on account or
in respect of the shares held by the assessee, to his wife during her lifetime;
the other covenants are ancillary in nature and subserve this main object of
the contract. The assessee did not assign the shares and, therefore, retained
the right to participate in the profits of the company; he did not part with
that right.
What the contract provided for was merely
this: the beneficiary was given the right to receive from the assessee every
dividend and other sum of money which may be declared or become due and payable
in respect of the shares. If this is the true construction of the document,
then it is clear to us that the answer given by the High Court to the question
referred to it is correct. The High Court rightly pointed out that the Company
paying the dividend can pay.
it only to the registered shareholder or
under his orders (see Howrah Trading Co. Ltd. v. Commissioner of Income-tax,
Central, Calcutta) (1); therefore, s. 16(1)(c) of the Income-tax Act was not
attracted nor the third proviso thereto, and the income continued to accrue to
the assessee but was thereafter paid over to his wife under the terms of the
contract. The income was, therefore, assessable in the hands of the assessee,
because it was part of his income though applied subsequently towards payment
to the wife under the terms of the contract.
(1) [1959] Supp. 2 S.C.R. 448.
44 In this view of the matter, it is not
necessary to decide the further question if a contract of this nature operates
only as a contract to be performed in future which may be specifically enforced
as soon as the property comes into existence or is a contract which fastens
upon the property as soon as the settlor acquires it. In either view, the
income from the shares will first accrue to the settlor before the beneficiary
can get it. Such income will undoubtedly be assessable in the hands of the
settlor despite the contract. We think that the true position is that if a
person has alienated or assigned the source of his income so that it is no
longer his, he may not be taxed upon the income arising after the assignment of
the source, apart from special statutory provisions like s. 16(1)(c) or s. 16(3)
which artificially deem it to be the assignor's income. But if the assessee
merely applies the income so that it passes through him and goes on to an
ultimate purpose, even though he may have entered into a legal obligation to
apply it in that way, it remains his income.
This is exactly what has happened in the
present case. We need only add that the principle laid down by the Privy
Council in Bejoy Singh Dudhuria v. Commissioner of Income- tax (3), does not
apply to this case; because this is not a case of an allocation of a sum out of
revenue before it becomes income in the hands of the assessee. In other words,
this is not a case of diversion of income before it accrues but of application
of income after it accrues.
We have, therefore, come to the conclusion
that the High Court correctly answered the question referred to it. The appeal
fails and is dismissed with costs.
Appeal dismissed.
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