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Judgment
Banerjee, J.—Nine members of the Memani family constituted the Assessee firm Jewanram Gangaram. During the relevant assessment year 1957-58 (corresponding to the previous year 2013 R.N., covering the period April 19, 1956 to April 9, 1957), they used to carry on business in cloth and money lending. Prior to the year 1951, the Assessee firm used to hold certain shares in a private limited company called Messrs. Sankershan (Private) Limited. Out of 2,000 issued shares of the private company, as many as one thousand shares were held by the Memanis of the Assessee firm. Out of these shares again, 997 shares stood registered in the name of the Assessee firm and three shares were held by three of the partners of the firm, namely, Kanhaiyalal Memani, Surajmal Memani and Mulchand Memani. On January 15, 1951, the Assessee firm transferred the 997 shares held by it to five of the partners of the firm. These transfers were duly registered in the register of shareholders of the private company above-named. Subsequently, on December 28, 1951, 956 of these shares were again transferred by the then registered shareholders to their sons and daughters-in-law. These subsequent transfers were also registered in the register of shareholders of the private company above-named. The Assessee firm did not retain a single share to itself.
The Assessee firm says that it owed considerable amount of money to the private company abovenamed and the debt stood at Rs. 1,40,000 at the beginning of the year 2013 R.N. This fact is relevant, in the present context, because it is the case of the Assessee firm that it undertook to pay to the shareholders the dividend declared by the private company, on the 1,000 shares, mentioned above, out of the money it owed to the private company.
It is not disputed that Messrs. Sankershan Private Limited declared the following amounts of dividends on the aforesaid 1,000 shares:
On 22.1.1951 ... Rs. 37,500
On 16.11.1951 ... Rs. 30,000
On 18.8.1954 ... Rs. 60,000
On 26.6.1956 ... Rs. 24,000
Total Rs. 1,51,500
In the books of the Assessee company, for the year 2013 R.N., there appeared a credit of Rs. 37,500 in the profit and loss account. In the return on total income, however, a deduction in respect of the said amount was claimed on the ground that the said sum represented the income from dividend, which did not relate to the year previous to the assessment year 1957-58.
The income tax Officer probed into the account books of the Assessee firm for the relevant year and found that in the account of the private company abovenamed appearing at ledger p. 8, a debit entry of Rs. 1,30,000 had been made on Chait Sudi 8 and corresponding credit entries were also made in the personal accounts standing in the names of several persons belonging to the families of the partners of the Assessee firm, except that a sum of Rs. 37,500 was credited in the profit and loss account of the Assessee firm. The Income tax Officer further found that there was a second account of the private company in the books of the Assessee firm, opening with a credit balance of Rs. 39,000, which was debited by Rs. 33,700 on account of the alleged distribution of dividends on behalf of the private company. The details of the persons in whose account the credit was given for such distribution were furnished to the income tax Officer. By way of explanation it was stated by the Assessee that although some of the dividends were declared as far back as 1951, distribution could not be earlier made to the shareholders as no advice as to declaration of dividends had been earlier received from the private company. The income tax Officer disbelieved the story of transfer of shares and distribution of dividends with the following observations:
The dividend was allegedly declared in 1951, but the distribution to the shareholders according to the Assessee was not made as the Assessee did not receive advice earlier from the company. This ingenious explanation is not so simple as it seems on the surface. All these years the Assessee had been showing the amount standing to the credit of this company as a liability owned by the firm to it on which year after year interest was paid and charged to the Profit and Loss Account of the firm. Even during the current year the Assessee credited a sum of Rs. 10,994 by way of interest and corresponding debit for it has been passed to the P. and L. A/c.
... ... ... ...
These entries in the books of the Assessee did not affect the fiduciary relations between the firm and the company in any manner and no part of the funds held by the Assessee on account of the company were transferred or alienated in any manner until the previous year relevant for the present assessment year. May be the new direct taxes like Wealth-tax and Gift-tax provided the motivating force for making these entries in the books of accounts. These are patently collusive transactions instigated by the partners to reduce their own liabilities for Wealth-tax or income tax.
On the other hand even on the basis of explanation now given by the Assessee itself, it is obvious that dividend income belonged to the Assessee inasmuch as it related to the period when the shares were held by the Assessee firm in its own name or in the names of its partners. The entire gamut of entries about the distribution of this dividend income, reflects a deplorable attempt at chicanery an effort to defraud the revenues by suppression or twisting of material facts and by manipulating the accounts.
He, therefore, treated both the sums of Rs. 1,30,000 and Rs. 33,700, adjusted by the Assessee in the accounts of the private company, as the income of the Assessee itself.
The Assessee appealed to the Appellate Assistant Commissioner of income tax, who again affirmed the order of the income tax Officer on the ground that there were materials which indicated that the Assessee firm was the real owner of the shares of the private company, namely,
(i) that the thousand shares were still included in the assets of the firm in the balance-sheet filed subsequent to year 1951,
(ii) that the dividend was claimed to have been paid by the said company, namely, through the Assessee firm''s account,
(iii) that the Assessee firm held a few shares in its name right from the inception of the firm, and
(iv) that the Assessee firm continued to receive the director''s fees from the said company Messrs. Sankershan Pr. Ltd., which post they would not have retained had the shares not been their own.
Thereafter, the Assessee preferred a second appeal before the Appellate Tribunal and submitted the following point for consideration, namely, that the assessment of the sum of Rs. 1,51,500 as dividend income of the Assessee in the relevant assessment year was erroneous on two grounds:
(a) That, such dividend did not arise in the relevant previous year, and
(b) Notwithstanding the fact that the Assessee was not the registered shareholder in respect of any shares after January 15, 1951, dividend was assessed as accrued to the Assessee.
The Tribunal found that the income tax department''s specific case was that a sum of Rs. 1,51,500 was dividend income of the Assessee firm, because the transfer of the shares, yielding dividend, was a collusive transaction between the Assessee and the transferee. But it was not the department''s case that even though the income by way of dividend accrued to the registered shareholders, since they were nominal shareholders, such dividend-would be treated as the Assessee''s income, not as dividend but from other source. The Tribunal relied upon a decision of the Supreme Court in Howrah Trading Co. Ltd. Vs. Commissioner of Income Tax, Central, Calcutta., and held that it was only a registered shareholder and not the person having any equitable right to the dividend on the shares who would be entitled to the benefit of grossing-up dividend income for the purpose of obtaining credit for the tax deducted at source. In the instant case, the Tribunal held, the Assessee ceased to be the registered share holder in respect of all the shares since January 15, 1951 and dividends which formed the subject-matter of the assessment, after such cessation, could not belong to the Assessee firm but to the registered shareholders. The previous year in this case being 2013 R.N. corresponding to the period April 19, 1956 to April 9, 1957, the Tribunal found that any income to be taxed must fall within the previous year. The Tribunal further found that the question as to the point of time when a dividend would be construed to be an accrual of income must be the point of time when it was declared. In the view taken, the Tribunal held that the sum of Rs. 37,500 out of the sum of Rs. 1,51,500 was assessable in the hands of the Assessee but not during the relevant year and so far as the balance was concerned it was not at all assessable as dividend income of the Assessee.
The Commissioner of income tax thereupon obtained a reference of the following questions u/s 66(1) of the income tax Act for opinion of this Court:
(i) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that out of the dividend income of Rs. 1,51,500 the sum of Rs. 1,14,000 was not at all assessable as the dividend income of the Assessee?
(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that out of the said sum of Rs. 1,51,500, the sum of Rs. 37,500, Rs. 30,000 and Rs. 60,000 could not in any event be assessed in the assessment year in question?
Mr. Sabyasachi Mukharji, learned Counsel for the Commissioner of income tax, submitted that the Tribunal was wrong in holding that the sum of Rs. 1,14,000 out of the dividend income of Rs. 1,51,500, was not at all assessable as the dividend income of the Assessee and also that out of the said sum of Rs. 1,51,500, the sums of Rs. 37,500, Rs. 30,000 and Rs. 60000 could not, in any event, be assessed in the assessment year in question.
The relevant sections of the income tax Act, 1922, which we need consider in this context, are:
(a) Section 16(2):
For the purpose of inclusion in the total income of an Assessee any dividend shall be deemed to be income of the previous year in which it is paid, credited or distributed or deemed to have been paid, credited or distributed to him and shall be increased to such amount as would, if income tax but not super-tax at the rate applicable to the total income of the company without taking into account any rebate allowed or additional income tax charged for the financial year in which the dividend is paid, credited or distributed or deemed to have been paid, credited or distributed, were deducted therefrom, be equal to the amount of the dividend.
Provided... ... ... ...
(b) Section 18(5):
Any deduction made and paid to the account of the Central Government in accordance with the provisions of this section and any sum by which a dividend has been increased under Sub-section (2) of Section 16 shall be treated as a payment of income tax or super-tax on behalf of the person from whose income the deduction was made, or of the owner of the security or of the shareholder, as the case may be and credit shall be given to him therefore on the production of the certificate furnished under Sub-section (9) of Section 20, as the case may be, in the assessment, if any, made for the following year under this Act:
Provided... ... ... ...
(c) Section 49B(1):
Where any dividend has been paid, credited or distributed or is deemed to have been paid, credited or distributed to any of the persons specified in Section 3 who is a shareholder of a company which is assessed to income tax in the taxable territories or elsewhere, such person shall, if the dividend is included in his total income, be deemed in respect of such dividend himself to have paid income tax exclusive of super-tax of an amount equal to the sum by which the dividend has been increased under Sub-section (2) of section 16.
Explaining the above sections, the Supreme Court observed in the case of Howrah Trading Co. Ltd. v. Commissioner of income tax (Supra), that a person who purchased shares in a company under blank transfer and in whose name the shares were not registered in the books of the company was not a ''shareholder'' in respect of such shares within the meaning of Section 18(5) of the income tax Act, notwithstanding his equitable right to dividends on such shares and was not, therefore, entitled to have the dividend income grossed up u/s 16(2) of the Act, by the addition of the income tax paid by the company in respect of those shares and claim credit for the tax deducted at source, u/s 18(5) of the Act. Hidayatullah, J., who delivered the judgment of the Court, observed:
The words of Section 18(5) must accordingly be read in the light in which the word ''shareholder'' has been used in the subsequent sections and read in that manner, the present Assessee, notwithstanding the equitable right to the dividend, was not entitled to be regarded as a ''shareholder'' for the purpose of Section 18(5) of the Act. That benefit can only go to the person who, both in law and in equity, is to be regarded as the owner of the shares and between whom and the company exists the bond of membership and ownership of a share in the share capital of the company.
The Supreme Court appears to have reiterated the same view in the case of income tax Officer v. Arvind N. Mafatlal (1962) 45 ITR 273.
Mr. Mukharji submitted that the Tribunal misread the judgment in Howrah Trading Company''s case (Supra) and minimised the effect of collusive transfer of shares. He drew inspiration for this branch of the argument from a later judgment of the Supreme Court in Kishanchand Lunidasingh Bajaj Vs. Commissioner of Income Tax, Mysore, , in which the Supreme Court explained the decision in Howrah Trading Company''s case (Supra) and observed (per Shah. J.):
Under the income tax Act, 1922, certain items of income are exempt from liability to tax and do not enter into the computation of total income; there are other items of income, which though exempt from tax are liable to be included in the total income of the Assessee for determining the rate applicable. Sub-sections (1) and (3) of Section 16 provide that certain income which does not accrue or arise to the Assessee or which is not received as income by him is deemed to be part of his total income. These sub-sections deal with inclusion of the specified classes of income in the computation of total income. The only difference between the two clauses is that Sub-section (1) applies to all Assessees, whereas Sub-section (3) applies to individuals only. But Sub-section (2) does not direct the inclusion of any item of income in the computation of the total income of an Assessee to whom it does not accrue or arise: it is only a processing clause applicable in respect of dividend income. In terms it provides that for the purpose of inclusion of dividend in the total income of an Assessee, dividend shall be deemed to be income of the previous year in which it is paid, credited or distributed, or deemed to be paid, credited or distributed and further that the dividend shall be increased, or as it is sometimes called ''grossed up'', by adding thereto the income tax deemed to have been paid by the company on behalf of the shareholder. The subjection in the first instance designates the year in which the dividend income is to be included in the total income. Therefore dividend will be included in the income of the Assessee in the year in which it is paid, credited or distributed, or be deemed to be paid, credited or distributed. Since the same income cannot be taxed twice over, dividend income will be taxed in the hands of the real owner of the shares and in the year designated by Section 16(2). But by virtue of the second part of Section 16(2), dividend may be grossed up only if the registered shareholder is the real owner of the shares. If the registered holder is not the real owner of the shares, i.e., he is a trustee or benamidar for the real owner, dividend income cannot be grossed up when including it in the total income of the real owner. But Sub-section (2) of Section 18 does not operate as an exemption from the pale of either Section 3 or Section 4(1) of the Act, nor does it provide that liability to tax arises only when the person by whom dividend is received from the company is the real owner of the shares. Sub-section (5) of Section 18 also does not lead to that result. The clause provides that deduction made by a company and paid to the account of the Central Government in accordance with the previsions of Section 18 and any sum by which a dividend has been increased under Sub-section (2) of Section 16 shall be treated as payment of income tax or super-tax on behalf of the person from whose income the deduction was made and credit shall be given to him therefore, in so far as it deals with dividend which is grossed up, Sub-section (5) of Section 18 forms a corollary to Section 16(2). Therefore, when tax is paid on behalf of a shareholder and deduction is made from dividend, credit is given to him for the tax paid in his final assessment. But the scheme of ''grossing up'' is not susceptible of the interpretation that the income from dividend is to be regarded as the income only of the registered shareholder and not of the real owner of the share.
The Supreme Court also took up for consideration the observation contained in the judgment of the Howrah Trading Company''s case (Supra), namely,
the benefit can only go to the person who, both in law and in equity, is to be regarded as the owner of the shares and between whom and the company exists the bond of membership and ownership of a share in the share capital of the company,
and explained,
It was said by counsel for the Appellants that by the use of the expression ''benefit can only go to the person who, both in law and in equity, is to be regarded as the owner of the shares'', it was laid down that dividend may be taxed only in the hands of 3 person who is ''in law as well as in equity'' the shareholder. But these observations are not susceptible of any such meaning. Hidayatullah, J. in that case was seeking to explain that dividend income cannot be ''grossed up'' in the hands of the real owner of shares if the shares are registered in the name of another person. He did apt say that the real owner of shares cannot be taxed in respect of dividend receive by him, if the shares are. registered in the name of another person.
We are unable to accept the argument of counsel for the Appellants that be-cause the dividend income in respect of the shares cannot be ''grossed up'' and credit for tax paid cannot be obtained by the Appellants, the Appellants are not liable to be taxed in respect of dividend received by them. There is no provision in the Act which supports this plea and the scheme of the Act lends no countenance to an expedient which may lead to gross evasion of tax.
Mr. Mukharji submitted that the income tax Officer characterised the share transfers by the Assessee firm as ''patently collusive transactions''; the Appellate Assistant Commissioner agreed with the income tax Officer and observed that the conclusion was "irresistible that the shares were the property of the firm though held in the name of various persons as nominess." The Tribunal, he submitted, did not express any different opinion on the point. The Tribunal merely found themselves helpless in the face of the judgment of the Howrah Trading Co. (Supra), which, he submitted, they misread and felt compelled to hold that the dividend income could not be treated to be the income of the real owner. Now fortified by the judgment of the Supreme Court in the case of Kishanchand Lunidasing Bajaj (Supra) Mr. Mukharji submitted that the transfers being sham transfers, the dividend income should be treated as income of the Assessee firm.
In our opinion, there is a good deal of substance in what Mr. Mukharji submits. In Kishanchand Lunidasing Bajaj''s case (Supra), the Supreme Court was pleased to explain its two previous decisions in Howrah Trading Co. (Supra) and Arvind N. Mafatlal (Supra) and laid down the proposition of law that the real owner was taxable in respect of dividends received by him, even if the shares stood registered in the name of a name-lender. This must be all the more so if the shares were made to stand in the names of other persons under a collusive or sham transfer of shares. For reasons given in the order of the Appellate Assistant Commissioner (which we have already set out), we feel no doubt that the share transfers, in the instant case, were collusive and sham transactions and that the real owner of the shares was the Assessee firm.
Mr. K. Roy, learned Counsel for the Respondent, however, submitted that regard being had to the frame of question No. 1 (already set out), this Court need not go into the point of law raised by Mr. Mukharji. Mr. Roy strenuously contended that the question referred to this Court was whether the income was dividend income (or income from any other source), as in Arvind N. Mafatlal v. income tax Officer North Satara (Supra) not whose income it was. We are unable to uphold this argument, although we feel that the question was not very expressively worded. Still then, read" in the context, the question means whether the income may be taxed in the hands of the Assessee as dividend income, with the benefits of grossing up. We are therefore, of the opinion that question No. 1 must be answered in the negative and the view taken by the income tax Officer and the Appellate Assistant Commissioner should be treated as the correct view.
We now turn to answer question No. 2. In which particular year the dividend income is taxable is to be determined in the light of Section 16(2) which we have already set out. Explaining the section, the Supreme Court observed in the case of J. Dalmia Vs. Commissioner of Income Tax, New Delhi, as follows:
But whether dividend interim or final is income taxable in a particular year of assessment must be determined in the light of Section 16(2) of the Indian income tax Act. The legislature has not made dividend income taxable in the year in which it becomes due: by express words of the Statute, it is taxable only in the year in which it is paid, credited or distributed or is deemed to be paid, credited or distributed. The legislature has made distinct provisions relating to the year in which different heads of income become taxable.... The year in which a particular class of income becomes taxable must, therefore, be determined in the, light of its true character and subject to the special provision, if any, applicable thereto. The legislature has enacted an express provision making dividend income taxable in the year in which it is paid, credited or distributed or is to be deemed so paid, credited or distributed. The expression ''paid'' in Section 16(2) it is true does not contemplate actual receipt of the dividend by the member. In general, dividend may be said to be paid within the meaning of Section 16(2) when the company discharges its liability and makes the amount of dividend unconditionally available to the member entitled thereto.
Thus, it is necessary for us to see when the dividend income in question was paid or deemed to have been paid that is to say un conditionally made available to the members entitled thereto. The dates when the dividends were declared by resolutions are January 22, 1951, November 16, 1951 and August 18, 1954. It is, however, the case of the Assessee firm that the resolutions declaring the dividends were not brought to the notice of the Assessee earlier than the time when the book adjustments were made. Thus the dividends were not unconditionally made available to the members earlier than the assessment year in question. We are, therefore, of opinion that question No. 2 also should be answered in the negative.
Thus we answer both the questions in the negative.
The Commissioner of income tax is entitled to costs of this reference.
Masud, J.
I agree.