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Judgment
T. Kochu Thommen, J.—The following two questions have been, at the instance of the assessee, referred to us by the Income Tax Appellate Tribunal, Cochin Bench :
"1. Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in holding that the gross interim dividend declared by M/s. Nirlon Synthetic Fibres & Chemicals Ltd., Bombay, before the valuation date, i.e., on March 25, 1975, but encashed alter the valuation date, was an asset includible in the net wealth of the assessee for the assessment year 1974-75 ?
If the answer to the first question is in the affirmative, whether the Income Tax Appellate Tribunal was right in holding that the gross dividend and not the net dividend, i.e., interim dividend declared less tax deducted at source, is to be included as the value of the asset in the net wealth of the assessee for the assessment year 1975-76 ?"
The assessee held shares in M/s. Nirlon Synthetic Fibres & Chemicals Ltd., Bombay. In the accounting year relevant to the assessment year 1974-75, the company declared in respect of the assessee dividend in the sum of Rs. 1,50,255 and paid to her as net dividend a sum of Rs. 1,11,696 after deducting at source of Rs. 34,559 u/s 194 of the Income Tax Act, 1961. The Wealth-tax Officer treated the total sum of Rs. 1,50,255, being the gross dividend, as an accretion to the net wealth of the assessee during the relevant year and the assessee was assessed on that basis. Aggrieved by this decision, the assessee appealed contending that the tax deducted at source u/s 194 of the Income Tax Act was not part of her assets and, therefore, not includible in her net wealth for the purpose of assessment under the Wealth-tax Act, 1957. This contention was rejected both by the Appellate Assistant Commissioner and by the Tribunal.
Counsel for the assessee, Shri N. Srinivasan, contends that tax deducted at source under the Income Tax Act was not money received by the assessee, but retained by the company and later paid over to the Revenue under the Income Tax Act prior to the valuation date for the purpose of the Wealth-tax Act, namely, March 31, 1974. That sum was, therefore, not part of the net wealth of the assessee. Counsel for the Revenue, referring to the definition of "net wealth" under the Wealth-tax Act and various decisions concerning that provision, submits that, in so far as no demand had been made on the assessee for payment of Income Tax, the tax deducted at source u/s 194 of the Income Tax Act was not a "debt owed" by the assessee for the purpose of deduction in computing the net wealth u/s 2(m) of the Wealth-tax Act. Counsel lays much stress on the principle laid down by the Supreme Court in Commissioner of Wealth Tax, Gujarat, Ahmedabad Vs. Kantilal Manilal and Others, , where it was held that only after a demand for payment of tax had been made, would Section 2(m)(iii)(a) come into play.
The decisions cited by counsel for the Revenue deal with the question whether money payable as tax, but not yet paid, is a "debt owed by the assessee" for the purpose of computing the net wealth u/s 2(m) of the Wealth-tax Act. None of the decisions cited at the bar, However, deals with the question whether the money actually paid as tax was liable to be treated as part of the net wealth of the assessee during the relevant year. Counsel tor the Revenue does not in fact contend, and rightly so, that Income Tax actually paid by the assessee during a particular year can any longer be treated as part of his net wealth. The argument of counsel, however, is that what was deducted at source u/s 194 of the Income Tax Act is not money paid by the assesses as tax, but money retained by the company for the purpose of payment of tax. The position, according to counsel, does not change even when money deducted at source is actually paid over to the Revenue by the company.
We do not agree with the assessee''s counsel that tax deducted at source is not money received by the assessee. The scheme of the Income Tax Act indicates that although tax is deducted at source, what is deducted is income of the assessee. In the chapter dealing with collection and recovery of tax, the Legislature has adopted a machinery for easy collection of tax in respect of certain types of income such as salary, dividend, etc. The company declaring dividend is, for the purpose of the Act, treated as an instrumentality for collection of tax due on the dividend and for payment to the Revenue for and on behalf of the person receiving the dividend. Dividend being income, Income Tax paid on the dividend is part of the income received by the assessee. This is clear from Section 198 which says :
"All sums deducted in accordance with the provisions of Sections 192 - 194, Section 194A, Section 194B, Section 194BB, Section 194C, Section 194D and Section 195 shall, for the purpose of computing the income of an assessee be deemed to be income received."
Although the liability to pay Income Tax is in substantive law squarely on the assessee himself, the machinery for collection is so devised as to place that liability for the purpose of collection and recovery upon the principal officer of the company paying the dividend, just as in the case of an employer who pays salary. Nevertheless, deduction at source is only one mode of recovery and it is without prejudice to any other mode of recovery (section 202 of the Income Tax Act). The principal officer of a company who fails to deduct tax at source or who fails to pay the tax after deducting the same, as required u/s 194 and Section 200 of the Income Tax Act, is "deemed to be an assessee in default in respect of the tax" and visited with the consequences stipulated u/s 201 of the Income Tax Act. At the same time, there is a bar against direct demand on the assessee to the extent of the tax deducted at source. Section 205 of the Income Tax Act says :
"Where tax is deductible at the source under Sections 192 - 194, Section 194A, Section 194B, Section 194BB, Section 194C, Section 194D and Section 195, the assessee shall not be called upon to pay the tax himself to the extent to which tax has been deducted from that income."
These and other provisions of the statute show that in law the liability to pay Income Tax is upon the assessee. Income Tax is paid not for the purpose of earning the income, as in the case of sales tax, excise duty and the like, but paid out of the income already earned by the assessee. Nevertheless, the assessee, though liable in law to pay Income Tax on the dividend, is not liable to be called upon to pay the tax herself to the extent to which tax has been deducted from her income. The person who is visited with the consequences in case of failure to pay the tax deducted at source is not the assessee, but the principal officer of the company who is burdened with the liability to deduct and pay the tax.
Consequently, the assessee is in law deemed to have received as income the entire dividend declared and is at the same time deemed to have paid the tax due thereon when the tax was deducted at source by the principal officer of the company. Notionally, therefore, with the declaration of the dividend and the deduction of Income Tax at source, the assessee simultaneously received the entirety of the dividend and paid the Income Tax thereon in accordance with the applicable rate.
In the light of this principle, we shall now consider the matter in issue with reference to the relevant provision of the Wealth-tax Act. Section 2(m) of this Act, in so far as it is material, defines "net wealth" as follows :
"''net wealth'' means the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included in his net wealth as on that date under this Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date other than--..." (emphasis* supplied)
The question of deducting any amount as a debt owed by the assessee does not arise where the amount in question is tax already paid. What is paid as tax is not money in the pocket of the assessee which represents either asset or debt. What the Supreme Court stated in Commissioner of Wealth Tax, Gujarat, Ahmedabad Vs. Kantilal Manilal and Others, :
"In order to invoke Section 2(m)(iii)(a) (of the Wealth-tax Act), the Revenue must establish that an amount of tax was outstanding on the valuation date. An amount of tax is outstanding if it is payable and has remained unpaid, in other words, if there is a debt due and there has been no payment of the debt....
..... It seems to us that Section 2(m)(iii)(a) conies into play only after a demand for payment of tax has been made."
The court was dealing with an existing debt and not a discharged debt. The court was not speaking of any amount which was no longer with the assessee and which had been already paid in discharge of a legal obligation. The position would, of course, be different if the payment was nothing but a sham. But in a case where tax has been already paid, whether it was paid directly by the assessee to the Revenue or by means of deduction at source, the assessee is no longer in possession or command of the amount paid and that amount is no longer part of his assets. It represents neither his assets nor his debts. In computing the net wealth, therefore, there is no question of either including or deducting any amount which has been already paid as tax. That amount is no longer relevant in the computation of net wealth. It is no longer available to be included. The amount which has been deducted and retained by the company, whether or not it has been actually paid over to cne Revenue--(in the present case, it has admittedly been paid to the Revenue)--is an amount which is no longer in the possession of the assessee, although, as seen above, it had been but notionally and simultaneously received as income and paid as Income Tax by the assessee. At one moment of time, the receipt became a payment and, therefore, what was notionally received was no longer with the assessee. In the circumstances, for the reason stated by us, we are of the view that the tax deducted at source u/s 194 of the Income Tax Act did not form part of the net wealth of the assessee for the purpose of assessment under the Wealth-tax Act.
However, we modify the second question to read as follows :
"Was the Income Tax Appellate Tribunal right in holding that the gross dividend and not the net dividend, i.e., interim dividend declared less tax deducted at source, is to be included as the value of the asset in the net wealth of the assessee for the assessment year 1975-76 ?"
We answer this question in the negative, that is, in favour of the assessee and against the Revenue. In the light of our answer to the second question, we decline to answer the first question,
We direct the parties to bear their respective costs in this tax referred case.
A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.