Commissioner Of Income-Tax, Bombaycity
II Vs. Shakuntala & Ors  INSC 226 (18 July 1961)
CITATION: 1966 AIR 719 1966 SCR (2) 871
CITATOR INFO :
RF 1966 SC1583 (7)
Income-Tax--Shares registered in names of
members of Hindu undivided family-Undistributed income deemed to be distributed
dividend--Whether assessable in hands of familyIndian Income-tax Act, 1922 (11
of 1922), s. 23A.
A Hindu undivided family was the beneficiary
of 1842 shares in a company; but the shares were held in the names of different
members of the family. For the assessment year 1949-50 the Income-tax Officer
applied the provisions of s. 23A of the Income-tax Act, 1922 (as it stood at
that time) and ordered that the undistributed portion of the assessable income
of the company in the previous year shall be deemed to have been distributed as
dividend among the shareholders.
The proportionate amount of dividend in
respect of the 1842 shares after being grossed up was added to the income of
the joint family. The assessee-family contended that the dividend deemed to
have been distributed under s.23A should be assessed in the hands of the
shareholders and not in the hands of the family.
Held, that the dividend deemed to have been
distributed under s. 23A of the Act could not be assessed in the hands of the
Hindu undivided family but could be assessed only in the hands of the members
of the family who were registered shareholders of the company. Under the
express words of the section the artificial or notional income bad to be
included in the total income of the shareholder. The expression
"shareholder" in s.23A meant the person who was shown as a
shareholder in the register of the company. The section did not talk of the
beneficial owner of the share. The Hindu undivided family was not a shareholder
of the Company. The fiction enacted by the legislature must be restricted to
the plain terms of the statute.
S. C. Cambatta v. Commissioner of Income-tax,
Bombay, (1946) 14 I. T. R. 748 and Shree Shakti Mills Ltd., v. Commissioner of
Income-tax, Bombay, (1948) 16 1. T. R. 187, approved.
Howrah Trading Co. Ltd., v. Commissioner of
Income-tax, Central Calcutta, (1959) 36 I.T.R. 215 and Oharandas Haridas v. Commissioner
of Income-tax, Bombay, (1960) 39 1. T. R. 202, applied.
CIVIL APPELLATE JURISDICTION : Civil Appeals
Nos. 125, 231 and 447 of 1960.
Appeals from the judgment and order dated
September 25, 1957, of the Bombay High Court of Income-tax References Nos. 30,
29 & 37/57, respectively.
K. N. Rajagopal Sastri and D. Gupta, for the
A. V. Viswanatha Sastri and J. B. Dadachanji,
for the respondents.
1961. July, 18. The Judgment of the Court was
delivered by S. K. DAS, J. These three appeals, with special leave of this
Court.. have been heard together. They arise out of three Income-tax References
made to the High Court of Bombay, namely, Income-tax Reference No. 29 of 1957,
Incometax Reference No. 30 of 1957 and Income-tax Reference No. 37 of 1957. The
facts are similar in the three cases and the question of law which the High
Court had to answer was the same in each of the cases. The High Court gave its
answer in its leading judgment in. Income-tax Reference No. 29 of 1957, and the
other two References were disposed of in accordance with. that answer. For the
purposes of these appeals, it would be enough if we state the facts of
Reference No. 29 and then indicate the question which arose for decision and
the answer which the High Court gave to it.
One Nanalal Haridas was the karta of a Hindu
undivided family which admittedly was the beneficiary of 1842 shares in a
company called the Cotton Export and Import Limited (hereinafter referred to as
the Company). The shares were held in the names of different members of the
family as given below.
873 No. of shares Name or names in which they
stand 877 Tribhuvandas Haridas 815 Nanalal Haridas 150 Nanalal Haridas and
Tribhuvandas Haridas The Company was one in which the public were not
substantially interested. For the assessment year 1949-50 the Income-tax
Officer concerned applied the provisions of s. 23A of the Indian Income-tax
Act, 1922 (as it stood previous to :the amendment of 1955) and ordered that the
undistributed portion of the assessable income of the Company of the relevant
previous year, as computed for income-tax purposes and reduced by the amount of
income-tax and supper-tax payable by it in respect thereof, shall be deemed to
have been distributed as dividend among the shareholders as at the date of the
relevant General Meeting of the-Company. The: proportionate; amount of dividend
of the 1842 shares, after being grossed up, came to Rs. 54,30,7/-.
This amount the Income-tax Officer added to
the income of the joint family. The assessee family claimed that the dividend
deemed to have been distributed under s. 23A should be assessed in the hands of
the shareholders, that is, the persons in whose names the, shares stood
registered in the books of the Company, and not in the hands of the Hindu
undivided family though ;admittedly it was the beneficiary of the shares. The
Income-tax Officer and the Appellate Assistant, Commissioner rejected ,this
contention. The matter them went in appeal to the Income-tax Appellate
Tribunal. The Department contended before the Tribunal that having regard to
the scheme of s.23 A and the ordinary dictionary meaning of the word
"share holder, there was no reason why the joint family should not be held
to be the shareholder within the meaning of s 23 A. The Tribunal by its order
dated February 15, 1957, expressed the view that 874 the interpretation of s.
23A for which the assessee contended would defeat the very purpose of that
section, but held that it was bound by the decision of the Bombay High Court in
S. C. Cambatta V. Commissioner of Income,-tax, Bombay (1). Accordingly, the
Tribunal allowed the appeal and directed the Income-tax Officer concerned to
delete the deemed dividend income from the income of the Hindu undivided
family. The Commissioner of Income-tax, Bombay, then moved the Tribunal to
refer the following question of law to the High Court of Bombay:
"Whether the dividend income of Rs.
54,307/is to be assessed in the hands of the assessee, the Hindu undivided
family? The Tribunal was of the view that the question did arise out of its
order and made a reference to the High Court accordingly.
The High Court by its order dated September
25, 1957, answered the question in favour of the assessee. It held that in
respect of an income which was deemed to be distributed under the provisions of
s. 23A, the section in terms provided that the proportionate share of the
shareholders in such distribution should be included in their income; and as
the Hindu undivided family was not and could not be a registered shareholder of
the Company, the amount in question could not be treated as the income of the
Hindu undivided family under the provisions of that section.
The High Court re-affirmed the view it had
expressed in its earlier decision in S. C. Cambatta v. Commissioner of
Income-tax, Bombay (1).
The High Court having refused leave to appeal
to this Court from its decision in question, the Commissioner of Incometax,
Bombay, applied to this Court for special leave and having obtained (1) (1946)
14 I.T.R. 748.
875 such leave has brought these appeals to
It is necessary now to read the relevant
portion of s. 23A as it stood prior to its amendment by the Finance Act, 1955.
"23A: Power to assess individual members
of certain companies.
(1) where the Income-tax Officer is satisfied
that in respect of any previous year the profits and gains distributed as
dividends by any company up to the end of the sixth month after its accounts
for that previous year are laid before the company in general meeting are less
than sixty per cent of the assessable income of the company of that previous
year, as reduced by the amount of income-tax and super-tax payable by the
company in respect thereof he shall, unless he is satisfied that having regard
to losses incurred by the company in earlier years or to the smallness of the
profits made, the payment of a dividend or a larger dividend than that declared
would be unreasonable, make with the previous approval of the Inspecting
Assistant Commissioner an order in writing that the undistributed portion of
the assessable income of the company of that previous year as computed for
income-tax purposes and reduced by the amount of income-tax and super-tax
payable by the company in respect thereof shall be deemed to have been distributed
as dividend amongst the shareholders as at the date of the general meeting
aforesaid, and thereupon the proportionate share thereof of each shareholder
shall be included in the total income of such shareholder for the purpose of
assessing his total income x x x 876 Provided further that this sub-section
shall not apply to any company in which the public are substantially interested
or to a subsidiary company of such a company if the whole of the share capital
of-' such subsidiary company is held by the parent company or by the nominees
thereof." The section in effect creates a fictional or notional
dividend-income which is not in fact received by the shareholder. The notional
dividend is deemed to have been distributed' as on the date on which the
accounts of the previous year were laid before then. company in a general
meeting. It is clear from the section that an order made under it is not in
itself an order of assessment-, it has to be followed by an assessment on the
shareholder either under s. 23 or under s.34. Under the express terms of the
section, the artificial or notional income has to be included in the total
income of the shareholders for the purpose of assessing his total income. The
High Court has referred to its earlier decision in S.C. Cambatta. The
Commissioner of Income tax, Bombay(1). That decision laid down that where a
share, stood registered in two or more names, the registered holders treated as
an association of persons must be regarded I as the ,shareholder' under s.23A
and' they must be assessed accordingly. It further laid down that's. 23A did
notsay anything about equities or beneficial ownership; it was a procedural
section not a charging section.
It created a notional incomes which was
wholly artificial and did not in fact exist in the pocket of any shareholder.
In a later provision in Shree-Shakti Mills
Ltd. v. Commissioner of,' Income-tax, Bombay, City(2) the. same High Co-art
held that the, expression "shareholder" mentioned in a. 18(5) of the
Act meant the person who was shown as 'a shareholder in the, register of the
company and it was only, the shareholder of a company who was entitled to the
procedure (1) (1946) 14 I.T.R. 748. (2) (1948) 16 I.T.R.
877 of processing permissible under ss. 16
(2) and 18(5 of the Act. This view was accepted by this Court in Howrah Trading
Co., Ltd. Commissioner of Income-tax, Central Calcutta (1) where it said that
no valid reason existed as to why the expression 'shareholder' as used in s.
18(5) should mean a person other than the one denoted by the same expression in
the Indian Companies Act, 1913. A reference was made to the decision of the
Bombay High Court in Shree Shakti Mills Ltd. v. Commissioner of Income-tax,
Bombay City(2) and other decisions bearing on the subject. Similarly, we see no
reason why the expression 'shareholder' in s. 23A should not have the same
meaning, namely, a shareholder registered in the books of the company. It would
be anomalous if the expression "shareholder' has one meaning in S. 18(5)
and a different meaning in s. 23A of the Act ; for that would mean that a Hindu
undivided family treated as a shareholder for the purpose of s. 23A would not
be entitled to the benefit of s. 18(5) of the Act.
The learned counsel for the appellant has
urged two points in support of his contention that the expression
"shareholder' in s. 23A means the person who owns the share, irrespective
of the circumstance whether that person is registered in. the books of the
company as a shareholder or not. His first point is that the very object of the
section is to prevent avoidance of super-tax by the shareholders of a company,
and if the beneficial owner of the shares is a Hindu undivided family, that
family will not come within the purview of s. 23A, because a Hindu undivided
family as such cannot be a shareholder in a company. The argument is that the
narrow interpretation put on s.23 A will defeat the very purpose of the
section. The second point urged is that the principle that a (1) (1959) 36
I.T.R. 215. (2) (1948) 16 I.T.R. 187, 878 legal fiction must be carried to its
logical conclusion cannot be overlooked in construing s. 23A. The legal fiction
enjoined by the section is that the profits must be 'deemed to have been
distributed as dividend amongst the shareholders as at the date of the general
meeting". This legal fiction must be carried to its logical conclusion by
holding that the dividend had been actually distributed and received by the
Hindu undivided family. It is pointed out that if the same dividend were actually
distributed by the company, it would certainly be income in the hands of the
Hindu undivided family which would be liable to pay all taxes on its income,
whether actual or artificial.
We do not think that either of the two points
urged by the appellant is really decisive of the question. The question is
really one of interpretation of s. 23A, and we must interpret s. 23A with
reference to its own terms. The section in express terms says that "the
proportionate share of each shareholder shall be included in the total income
of the shareholder for the purpose of assessing his total income". The
section does not talk of the beneficial owner of the share. It talks of the
shareholder only. Section 18(5) of the Act deals with grossing up of dividend
and two expressions occur therein "owner of the security" and the
','shareholder". So far as the expression "'owner of the
security" is concerned it may perhaps include a beneficial owner ; but it
has been decided by this Court that the expression "shareholder" in
s.18 (5) means the shareholder registered in the books of the company. As we
have earlier said, no good reason exists as to why the expression
"shareholder" in s. 23A shall not have the same meaning.
Sub-sections (3) and (4) of s. 23A also make
the position clear: they talk of members of the company and a Hindu undivided
family as such is not a member of the company.
879 The position of a Hindu undivided family
vis-a-vis a partnership was considered by this Court in Charandas Haridas v.
Commissioner of Income-tax Bombay (1) and Commissioner of Income-tax, Bombay v.
Nandlal Gandalal (?).
It is not disputed that the Hindu undivided
family as such was not a shareholder of the company in the present case.
Therefore, so far as the notional income is
concerned, we must go by the terms of s.23A and if there is any lacuna in the
wording of the section, we cannot cure it in the guise of interpretation. The
question here is not one of deciding the matter from the point of view of
partnership law, or Hindu law, as was the question in Commissioner of Income tax,
Bombay v. Nandlal Gandalal (2) which led to a difference of opinion. The
question here is one of interpretation only and that interpretation must, be
based on the terms of the section. The fiction enacted by the Legislature must
be restricted by the plain terms of' the statute. Nor do we see flow it can be
said that the interpretation put on s.23A that it is confined to a shareholder
registered in the books of' the company defeats the very purpose of the section.
The section will still apply to shareholders of the company and to their income
will be added the notional income determined under s. 23A.
We are unable to accept the argument that the
principle that a legal fiction must be carried to its logical conclusion
requires us to travel beyond the terms of the section or give the expression
"shareholder" a meaning which it does not obviously bear.
For these reasons we are of the view that the
High Court correctly answered the question which was referred to it.
In view of that answer the High Court rightly
held that the second question referred to it did not fall for (1) (1960) 39 1.
T. R. 202, (2) (1960) 40 I. T. R 1 880 consideration. The result, therefore, is
that all these three appeals fail and must be dismissed with costs ; one