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Issues Involved:
1. Taxation of Section 23A dividend as capital gains. 2. Interpretation of relevant sections of the Income-tax Act, 1922. Issue-wise Detailed Analysis: 1. Taxation of Section 23A dividend as capital gains: The primary question addressed in the judgment was whether the Section 23A dividend of Rs. 6,31,527 could be dissected into two parts in the ratio of Rs. 7,86,900: Rs. 20,63,016 for determining the income-tax and super-tax payable by the assessee shareholder on his total income and if so, whether that smaller portion of Rs. 6,31,527 is liable to be taxed at the rates applicable to 'capital gains' as laid down in Section 17(6) of the Income-tax Act, 1922. The assessees contended that the portion of Section 23A dividend attributable to capital gains in the hands of the company should be taxed in the hands of the shareholders also at the rate appropriate to 'capital gains' as indicated in Section 17(6) of the Act. This contention was rejected by the Income-tax Officer, the Appellate Assistant Commissioner, and the Tribunal. The Tribunal's view was that Section 23A dividend included in the total income of an assessee shareholder cannot be dissected for the purpose of determining the income-tax and super-tax payable by them on the 'deemed dividend income'. The court examined the relevant sections, including Section 12B, which deals with capital gains, and Section 17(7), which specifies the treatment of capital gains in the total income of a company. The court concluded that there is no provision in the language of Section 23A that suggests the capital gains of a company should be treated as capital gains of the shareholders. The court emphasized that the legal fiction created by Section 23A deems the undistributed income of the company to be distributed as dividends and included in the total income of the shareholders for the purpose of assessing their total income. The court held that the income deemed to be received by the shareholders under Section 23A cannot be split into different heads for taxation purposes. 2. Interpretation of relevant sections of the Income-tax Act, 1922: The court referred to various sections of the Income-tax Act, 1922, including Section 12B (capital gains), Section 17(6) (taxation of capital gains for non-company assessees), and Section 23A (deemed distribution of dividends). The court noted that Section 12B pertains to the tax payable by an assessee under the head 'capital gains' in respect of any profits or gains arising from the sale, exchange, or transfer of a capital asset. Section 17(6) deals with the computation of tax on total income, including capital gains, for non-company assessees. The court also examined the language of Section 23A, which deals with the deemed distribution of dividends among shareholders when the profits distributed by a company are less than 60% of its assessable income. The court emphasized that Section 23A creates a legal fiction that the undistributed portion of the assessable income of the company is deemed to have been distributed as dividends among the shareholders and included in their total income for tax assessment purposes. The court referred to the Supreme Court's decision in Mrs. Bacha F. Guzdar v. Commissioner of Income-tax, Bombay, which clarified that a shareholder has no interest in the assets of the company and only a right to participate in the profits when the company decides to distribute them. The court also cited the judgment in East End Dwellings Co. Ltd. v. Finsbury Borough Council, which emphasized that when a legal fiction is created, the consequences and incidents of that fiction must be treated as real. The court concluded that the legal fiction created by Section 23A must be applied fully, and the deemed dividend income cannot be split into different heads for taxation purposes. The court held that the shareholders cannot claim that the deemed dividend income includes capital gains and should be taxed accordingly. Conclusion: The court answered the question in the negative, holding that the Section 23A dividend cannot be dissected for the purpose of determining the amount of income-tax and super-tax payable by the assessee shareholder on his total income. The assessees were ordered to pay the costs. The judgment emphasized the importance of adhering to the language of the relevant provisions and the legal fiction created by Section 23A in the assessment of dividend income.
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