Commissioner of Income Tax, Gujrat vs Cotton Fabrics Ltd.

Divan, C.J.—In this case at the instance of the revenue the following question has been referred to us for our opinion :

Whether, on the facts and in the circumstance of the case, the Tribunal was right in law in holding that the assessee-company was entitled double

Income Tax relief u/s 91 of the Act in respect of divident income received from the companies in U K ?

Before we deal with the reference proper, it must be pointed out that the title of the reference and all relevant records are required to be

corrected in view of an order passed by this High Court on April 7, 1975, in company Petition No. 18 of 1975, Cotton Fabrics Ltd, Baroda, the

respondent herein that is, the assessee-company, has been allowed to be merged with Distributors (Baroda) Private Ltd., and the result, therefore,

is that after the said order the assessee-company is the Distributors (Baroda) Private Ltd. ""Accordingly, we direct that the cause title of this

reference and all relevant papers be corrected to read ""Distributors (Baroda) Private Ltd."" as the respondent, that is, as the assessee-company.

In the present case we are concerned with the assessment year 1964-65 and the facts leading to this reference are few. The assessee is a limited

company. It derived income mostly from dividend and interest. In the original assessment the Income Tax officer allowed double tax relief u/s 91 of

the Income Tax Act, 1961, to the extent of Rs. 9,497. Out of this relief, an amount of Rs. 8,870 was in respect of dividends of U K companies

and an amount of Rs. 625 was in respect of dividends of Ceylon companies. Thereafter, the assessment was reopened by the Income Tax Officer

and in the reassessment proceedings, double Income Tax relief to the extent of Rs. 9,497, which was originally allowed, was withdrawn because,

according to the Income Tax Officer, the tax deducted at source by the companies on the dividends distributed by them had not been paid to the

credit of the Government in the United Kingdom. Against the order of the Income Tax Officer withdrawing the double Income Tax relief, the

assessee went in appeal to the Appellate Assistant Commissioner and he held that, so far as companies in Ceylon and U K were concerned, the

assessee was entitled to the double Income Tax relief and to that extend the Income Tax Officer was not justified in withdrawing that relief. With

regard to the dividend from companies in U K, the Appellate Assistant Commissioner noted that it was not disputed that no tax was paid to the U

K Government. The U K companies had deducted tax from the dividend declared but the assessee had failed to prove that the tax deducted by

the companies was paid over to the respective Government. The Appellate Assistant Commissioner considered the provisions of section 91 and

noted that it was not disputed by the department that the U K companies deducted Income Tax from the dividend declared but what was disputed

before the Appellate Assistant Commissioner was that the U K companies did not pay over the same to the U K Government. According to the

Appellate Assistant Commissioner, when tax was deducted by the U K companies in accordance with the U K tax laws, the condition laid down

in section 91 of our Income Tax Act has been fulfilled. He also held that in the absence of any assessment of the assessee in U K the average rate

of tax of that country would be the tax actually paid in accordance with the law of the country divided by the whole income and thus the appeal

was allowed by the Appellate Assistant Commissioner. The matter was taken in appeal to the Tribunal and the arguments which were advanced

before the Appellate Assistant Commissioner were once again reiterated before the Tribunal. The Tribunal held that it emerged from the facts of

the case that the deduction was made by the U K companies in accordance with their law and in the view of the Tribunal this would fulfill the

requirement that Income Tax was paid in U K by way of deduction or otherwise under the law in force in that country. How the U K companies

dealt with such amount deducted in accordance with the U K law may not be of direct relevance and, according to the Tribunal, Income Tax could

be paid by deduction also and, in the view of the Tribunal, not necessarily directly to the Government but it could also be collected through

recognised agencies. As regards the rate of tax in U K the Tribunal agreed with the Appellate Assistant Commissioner and dismissed the appeal of

the department. Thereafter, at the instance of the revenue the question hereinabove set out has been referred to us for our opinion.

In order to appreciate the contentions which have been raised in this case, it is necessary first to refer to certain admitted facts. It is admitted :

(1) that the U K companies deducted tax at the standard rate while paying dividends to their shareholders; (2) the U K company concerned has

not paid the amount thus deducted to the U K Government; and (3) that the assessee has not been assessed in the U K.

Chapter IX of our Act deals with double taxation relief. Section 90 speaks of agreement with foreign countries and it provided :

The Central Government may enter into an agreement -

(a) with the Government of any country outside India for the granting of relief in respect of income on which have been paid both Income Tax

(including super-tax) under this Act and Income Tax in that country; or

(b) with the Government of any country outside India for the avoidance of double taxation of income under this Act and under the corresponding

law in force in that country;

and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.

It is common ground before us that no such agreement has been entered into, as is referred to either in clause (a) or clause (b) of section 90 by

the Central Government with the U K Government. u/s 91 provision regarding double taxation relief has been made in regard to countries with

which no agreement exists. Sub-section (1) of section 91 is material for our purpose and it provided :

(1) If any person who is resident in India in any previous year proves that, in respect of his income which accrued or arose during that previous

year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is agreement u/s 90 for the

relief or avoidance of double taxation, Income Tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the

deduction from the Indian Income Tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax

of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal.

The Explanation to section 91 provides by clause (iii) :

the expression ''rate of tax of the said country'' means Income Tax and super-tax actually paid in the said country in accordance with the

corresponding laws in force in the said country after deduction of all relief due, but before deduction of any relief due in the said country in respect

of double taxation, divided by the whole amount of the income as assessed in the said country.

It may be pointed out that under the Indian Income Tax Act, 1922, section 49D, which was introduced in the Act with effect from April 1,

1952, by section 24 of the Indian Income Tax (Amendment) Act, 1953, was equivalent to section 91 of the Act of 1961 and the Explanation,

clause (iii), of section 49D was in identical terms as the Explanation, clause (iii), of section 91 of the Act of 1961.

On analysing section 91, sub-section (1), of the Act of 1961, it is clear that double taxation relief referred to in section 91 can be given under

the following conditions :

(1) income must have accrued outside India;

(2) in respect of that income, the assessee must have paid Income Tax, by deduction or otherwise, under the law in force in that country; and

(3) the relief can be given by deduction from the Indian Income Tax payable by him of a sum calculated on such doubly taxed income at the rate of

tax of the foreign country, provided that tax is lower than the Indian rate of tax. If the rate of tax of the foreign country is higher, then the relief is to

be calculated at the Indian rate and if both are equal, then, at the Indian rate of tax.

The scheme of payment of Income Tax by deduction at source so far as dividends paid by companies in India are concerned, is to be found in

Chapter XVII of the Act of 1961. Sections 192 to 206A deal with deduction at source. Section 192 deals with deduction of Income Tax at

source so far as ""salary"" income is concerned. Section 193 deals with deduction of Income Tax on interest on securities; and section 194 deals

with deduction at source of Income Tax so far as dividends are concerned. Section 194 makes it obligatory on the principal officer of an Indian

company to deduct Income Tax payable on the dividend amount before payment of any amount in connection with the dividend to the shareholder

concerned. Section 198 provides for grossing up and states that all sums deducted in accordance with the provisions of sections 192 to 194,

section 194A and section 195 shall, for the purpose of computing the income of an assessee, be deemed to be income received. Section 199

provides for credit for tax deducted at the source and section 200 imposes a duty on the person deducting tax to pay within the prescribed time,

the sum so deducted to the credit of the Central Government or as the Board directs. Section 203 imposes an obligation on every person

deducting tax at the source to furnish to the person to whose account such credit is given or to whom such payment is made a certificate to the

effect that tax has been deducted, and specifying the amount so deducted, the rate at which the tax has been deducted and such other particulars

as may be prescribed. Section 205 states that where tax is deductible at the source, inter alia, u/s 194, the assessee shall not be called upon to pay

the tax himself to the extent to which tax has been deducted from that income.

The Calcutta High Court in Commissioner of Income Tax v. Clive Insurance Co., Ltd., had an occasion to consider a similar problem relating

to double taxation when tax was deducted at the source on dividend paid by joint stock companies in England. The section with which the Calcutta

High Court was concerned was section 49D of the Act of 1922, and the Calcutta High Court held that the relief from double taxation granted u/s

49D can be claimed only if the following basic requirements are satisfied : (1) that the assessee is resident in the taxable territories; (2) that his

income has accrued or arisen during the relevant year without the taxable territories; (3) there is no reciprocal arrangement for relief or avoidance

of double taxation with the country where the income has accrued or arisen; and (4) the assessee has paid in that country in which the income has

accrued or arisen Income Tax by deduction or otherwise under the law in force in that country. Apart from satisfying these basic requirements the

assessee must further establish the rate at which tax has been paid as provided in Explanation, clause (iii), contained in the section as otherwise the

quantum or measure of relief cannot be worked out in terms of the provisions of the section. The Division Bench of the Calcutta High Court

considered all the available decisions of the courts in England relating to the scheme of Income Tax to be paid by a company in the United

Kingdom and deduction from the dividend amount payable to the shareholder by the company of the amount of the tax. It seems that in England

there is no scheme of deduction of tax at the source so far as dividends are concerned on the lines that we have in India. In the English statute there

is no provision corresponding to the provision of the Indian Income Tax Act which specifically provides that amounts deducted from the dividend

income of a member will constitute payment of Income Tax by the member. Unlike the position in India, the amounts so deducted by companies

are not made over to the revenue authority in the U K and are retained by the company concerned. Further, incomes from dividends in the hands

of the shareholders are not liable to payment of any Income Tax when such dividends have been declared and paid out of profits which have been

taxed in the hands of the company. Notwithstanding these peculiar features, according to the Calcutta High Court, the sums deducted from the

dividend amount payable to a member constitute under the law and system of taxation in the U K payment of Income Tax by deduction by the

member and are treated and recognised as such. The provisions of the statute and the judicial decisions make this position quite clear. Section 184

of the English Income Tax Act,1992, empowers the company to deduct tax at the standard rate from the dividend payable to its members. Section

199 of the English Act which deals with ""Explanations of Income Tax deductions to be annexed to dividend warrants, etc."" refers to such

deduction specifically as ""deduction of income tax"". Again, in section 493 of the English Act, deduction made u/s 184 from the dividend income is

categorically described as deduction of Income Tax. Judicial decisions in Canadian Eagle Oil Co., Ltd. v. King, which was the decision of the

House of Lords, and Ritson v. Phillips make it clear that whenever tax is deducted by the company from the dividend amount payable to a member

u/s 184 of the U K Act, the sum so deducted as tax clearly constitutes payment of Income Tax by deduction by the member. In that particular

case before the Calcutta High Court, the assessee was a company resident in India and had earned income by way of dividend from a company in

the U K in the accounting year relevant to the assessment year 1960-61. The tax had been deducted at the standard rate from the dividend in

accordance with the provisions of the English Income Tax Act and the assessee claimed relief in respect of such deducted sum u/s 49D of the

Indian Income Tax Act, 1922. It was held by the Calcutta High Court on these facts that in that particular case all the requirements of section 49D

(1) were satisfied. The assessee-company had paid tax at the standard rate and, therefor, there was no difficulty in applying the provisions of

Explanation, clause (iii), to section 49D and ascertaining the rate of tax of the said country in accordance therewith. Therefore, the assessee was

entitled to relief u/s 49D according to the Calcutta High Court. Passages in extenso were citied from the judgments and decisions of different cases

in England. Lord Atkin in the course of his speech in Commissioners of Inland Revenue v. Cull puts the matter in proper light in the following terms

:

It is now clearly established that in the case of a limited company, the company itself is chargeable to tax on its profits, and that it pays tax in

discharge of its own liability and not as agent for its shareholders. The latter are not chargeable with Income Tax on dividends, and they are not

assessed in respect of them. The reason presumably is that the amount which is available to be distributed as dividend has already been diminished

by tax on the company, and that it is thought inequitable to charge it again. At one time it was thought that the company, in paying tax, paid on

behalf of the shareholders; but this theory is now exploded by decisions in this House, and the position of the shareholders as to tax is as I have

stated it.

At page 576 A. N. Sen J. of the Calcutta High Court delivering the judgment of the Division Bench observed :

We, therefore, hold that the sum in question deducted from the dividend income of the assessee constitutes payment of Income Tax by deduction

by the assessee on the assessee''s dividend income in U.K. under the law prevailing in U.K........ To us, however, it appears that section 49D

which has been enacted for the purpose of granting relief to an assessee should be so constructed as will serve the object and purpose of the said

section and the said section should be construed liberally in favour of an assessee and necessary relief should be granted whenever the requisite

conditions are fully satisfied.

It will serve no useful purpose if we are again to set out in the course of this judgment the different provisions of the English Companies Act

and how they differ from the provisions of the Indian law; the learned judges of the Calcutta High Court have also pointed out that under the

English Company Law, the amount which is deducted by the company at the standard rate from the amount of the dividend is Income Tax

deducted at the source though the company itself is under no obligation to deduct the amount nor is it bound to pay to the Treasury in England the

amount of the tax that the company deducts. This position emerges from the analysis of the different sections and decisions having a direct bearing

on the interpretation of the question before us as made by the Calcutta High Court and no useful purpose will be served by our referring to all the

provisions of the English Income Tax Act and the different decisions which are exhaustively dealt with in the Calcutta High Court judgment. We

agree with the reasoning of the learned judges of the Calcutta High Court who decided Commissioner of Income Tax v. Clive Insurance Co. Ltd.,

and we follow that decision. It is, therefore, clear that the amount deducted by the company at the standard rate is tax deducted at the source

within the meaning of section 49D of the Act of 1922 equivalent to section 91(1) of the Act of 1961 and, as the Calcutta High Court has

observed, full credit must be given. In our opinion, therefore, there should be no difficulty whatsoever about applying section 91(1) of the Act to

the income from dividends of companies in the U K.

We may point out that in Commissioner of Income Tax v. Tata Sons Private Ltd., a Division Bench of the Bombay High Court has also taken

the same view as we are taking in the instant case regarding the decision in Commissioner of Income Tax v. Clive Insurance Co., Ltd. As a matter

of fact, the Bombay High Court has pointed out following the practice and policy which has been established for the last several years that one

High Court must accept the view taken by another High Court on the interpretation of the section of a statue which is an all-India statute and,

moreover, the Division Bench found that the decision of the Calcutta High Court in Commissioner of Income Tax v. Clive Insurance Co., Ltd.,

correctly summed up the legal position as it prevails in England. In our opinion, even if the practice referred to by the Bombay High Court were not

to be followed, the decision of the Calcutta High Court in Commissioner of Income Tax v. Clive Insurance Co., Ltd., sets out the correct law and

must be followed and we respectfully follow it.

Under these circumstances we hold that the assessee-company was entitled to double Income Tax relief u/s 91 of the Act with respect to

dividend income received from the companies in the U K. We, therefore, answer the question referred to us in the affirmative, that is, in favour of

the assessee and against the revenue. The question referred to us is, therefore, answered accordingly and the reference is disposed of. The

Commissioner will pay the costs of this reference to the assessee.