S. Radhakrishnan and Another vs Income Tax Officer and Another

Mohan, J.—All these revisions can be dealt with under a common order. It is enough if I note the facts in Civil Revision Petition No. 129 of

1980. The revision petitioner is an assessee on the file of the ITO, Companies Circle IV, Coimbatore. He objected to the inclusion of a sum of Rs.

34,375 representing gross dividends from M/s. B.M.S. (P.) Ltd., for assessment year 1972-73. His case was that by virtue of section 104 of the

Income Tax Act, hereinafter be referred to as ""the Act"", this amount had suffered tax because it was undistributed profits at the hands of the

company. Where, therefore, after such suffering of tax it is distributed to the qua shareholders of the company, the further tax sought to be levied,

will amount to double taxation. This claim was rejected by the Revenue as seen from the proceedings of the Commissioner of Income Tax by the

ultimate order in revision dated March 30, 1979. It is his which is sought to be revised under article 226 of the Constitution of India.

In Civil Revision Petitions Nos. 130 and 131 of 1980, except that they relate to different assessees, the points are one and the same.

Mr. K. Srinivasan, the learned counsel for the petitioners, states that it is a salutary principle of law that there cannot be a double taxation. Once

the undistributed profits had suffered tax u/s 104 of the Act, the same cannot, after distribution in favour of the petitioners, assume a different

character, thereby enabling the Revenue to tax once over again. The view of the Revenue is a total cause of the fundamental postulate of law of

taxation and certainly it cannot be denied when there are specific provisions in the Act providing for double taxation. However, the case on hand is

not of that character. In opposition to this, what is contended on behalf of the Revenue by Mrs. Nalini Chidambaram is that section 104 of the Act

is one wherein Income Tax on undistributed income of the company is subjected to tax. After suffering tax, when that is distributed to the

petitioners, it will amount to income under other sources as profits u/s 14(f) of the Act, and, therefore, it can be taxable. In support of this

submission, reliance is placed on T. N. K. Govindaraju Chetty and Co. (Private) Ltd. Vs. Commissioner of Income Tax, Madras, , where the

managing agency commission was held to be taxable once in the hands of the company and again in the hands of the individual. Reliance is also

placed on Commissioner of Income Tax (Central) Vs. Express Newspapers Ltd., , where a double deduction was given with regard to certain

claims since those claims were chargeable under two different heads. Lastly, reliance was placed on Jain Bros. and Others Vs. The Union of India

(UOI) and Others, and it is pointed out that double taxation is also permissible. Here, section 56 of the Act talks that when the profit is distributed

to the shareholders, it partakes the character of benefits and that has nothing to do with the company paying tax u/s 104 of the Act.

The foreunder of the present section 104 is section 23A of the 1922 Act. As to what exactly is the position with regard to this can be gathered

from the following passage at page 737 of Kanga and Palkhivala''s The Law and Practice of Income Tax, Seventh Edition, Vol. 1 :

Scheme and Object : The scheme of section 23A of the 1922 Act was examined by the Supreme Court in COMMISSIONER OF Income Tax,

BOMBAY CITY I Vs. AFCO (PRIVATE) LTD., . Before the amendment of that section in 1955, the section was held to be a procedural and

not a charging section. But the present section 104 should, it is submitted, be treated as both a procedural and charging section, since it is a self-

contained section which provides for a substantive levy of additional Income Tax on companies and also for the making of an order, as distinct

from the usual order of assessment, to effectuate the additional charge.

Section 104 is mandatory in terms. The object of this section is to prevent avoidance of tax by the shareholders of a company in which the public

are not substantially interested. The rates of Income Tax applicable to companies are lower than the highest rates applicable to other assessees.

But the shareholders have to pay tax again in respect of the dividends even if the dividends are paid out of profits which have borne tax in the

hands of the company. An individual might avoid the high incidence of tax by transferring to a private limited company, in return for shares, the

source of his income, and by securing that, instead of any dividends being declared, the profits made by the company should be allowed to

accumulate in the hands of the company and should be ultimately distributed in a capital from by creating bonus shares which are not assessable as

income in the hands of the equity shareholders. This section aims at foiling such an attempt to avoid tax by such means. But the section would apply

even if in a given case there is no intention to evade tax.

Further, by virtue of the definition of dividend in section 2(22), the accumulated profits would attract tax when they reach the shareholder in certain

capitalized forms, and similarly any distribution made to shareholders on liquidation out of the accumulated profits of all past years would also be

chargeable as dividend income. Thus, the scope for reduction of tax by using the cloak afforded by company law is now very restricted.

If really this be the object, the fact that profits have not been distributed within 12 months immediately following the expiry of the previous years,

would mean section 104 of the Act is automatically attracted. Therefore, that income, namely, undistributed profits which ought to have been

distributed within the time-limit specified as above, suffers tax. Thereafter, there is no question of the same amount when it reaches the

shareholders and qua shareholders, suffering tax once over again. The ruling in Govindaraju Chetty & Co. v. CIT [964] 51 ITR 731 is the case of

a company suffering tax in relation to managing agency commission and that when it reaches the assessee, it does not partake of the same

character. But here, the character continues to be the same. Supposing the profits had been distributed within time and the tax due have been

suffered, the assessee would not be liable at all. It is to provide a safeguard in relation to that, section 104, as the objects disclosed, has been

enacted. The ruling in Commissioner of Income Tax (Central) Vs. Express Newspapers Ltd., was a case which related to loans on equitable

mortgage and the question arose whether the income was chargeable under two different heads, in which event whether there was double taxation.

It was answered in the affirmative. The position here is entirely different. Now again, the ruling in Jain Bros. and Others Vs. The Union of India

(UOI) and Others, will be of any assistance to the Revenue because, as stated above, the character of the income remains the same and, therefore,

there cannot be double taxation. As a matter of fact, all these interesting passages occur at page 9 of Kanga and Palkhivala''s The Law and

Practice of Income Tax, Seventh Edition, Volume I, wherein it is stated as follows :

Broadly stated, the principle of the Income Tax Act is to charge all income with tax, but in the hands of the same person only once. There could

be double taxation if the Legislature distinctly enacted it, but upon general words of taxation, and when you have to interpret a taxing Act, you

cannot so interpretit as to tax the subject twice over to the same tax. Thus, if an association or unregistered firm is taxed in respect of its income,

the same income cannot be charged again in the hands of the members, individually and vice versa.

It is this principle which, in my considered view, should be made applicable to this case as well. Needless for me to say that this is because the

character of the income does not get changed as contended on behalf of the Revenue as though charged over the source of income in the hands of

the assessee. That argument overlooks the fact that the very income at the hands of the company which, as a legal entity, has suffered tax u/s 104

of the Act. For all these reasons, the revision petitions will stand allowed. However, there will be no order as to costs.