1961 (9) TMI 73 - HC - Income Tax

Summary

Issues Involved:
1. Accrual of Dividend Income
2. Application of the Merged States (Taxation Concessions) Order, 1949
3. Situs of Shares and Source of Dividend Income
4. Legal Fiction and Income Accrual
5. Applicability of Section 42(1) of the Indian Income-tax Act, 1922

Issue-wise Detailed Analysis:

1. Accrual of Dividend Income:
The primary issue in the case was whether the net dividend income of Rs. 47,120 accrued to the assessee in the former Baroda State or in British India. The assessee argued that since the dividends were declared out of profits retained in the Baroda State and were paid and kept there, the income accrued in the Baroda State. The Tribunal, however, held that the dividend income did not accrue in the Baroda State as the source of the income was the shares held in British India.

2. Application of the Merged States (Taxation Concessions) Order, 1949:
The Tribunal initially did not consider the applicability of the Merged States (Taxation Concessions) Order, 1949, as it held that the dividend income did not accrue in the Baroda State. Upon remittance by the Supreme Court, it was clarified that the question of accrual should be decided under the Income-tax Act, and not the Concessions Order. The High Court concluded that the Concessions Order had no application to the case of the assessee.

3. Situs of Shares and Source of Dividend Income:
The Court examined whether the situs of the shares (Bombay) determined the place of accrual of dividend income. It was argued that the source of dividend income is the shares, and since the shares were located in Bombay, the income accrued in British India. The Court noted that the situs of shares does not necessarily determine the place where the income accrues. The place of declaration and payment of dividends was considered relevant in determining the place of accrual.

4. Legal Fiction and Income Accrual:
The Court discussed the legal fiction created by the Taxation Laws (Extension to Merged States) Ordinance, 1949, which treated the merged states as part of British India for tax purposes from 1st April 1949. However, the Court held that this legal fiction did not affect the factual position that the dividends accrued in the Baroda State before its merger into British India on 1st August 1949.

5. Applicability of Section 42(1) of the Indian Income-tax Act, 1922:
The Court considered whether the dividend income could be deemed to have accrued in British India under Section 42(1) of the Act. It was concluded that since the source of the dividend income was the shares held by the assessee in British India, the income could be deemed to have accrued in British India. The Court noted that the third explanation to Section 4(1) of the Act, which deems dividends paid outside taxable territories as accruing in taxable territories, applies only to non-resident shareholders. Since the assessee was a resident, Section 42(1) was applicable, and the income was deemed to have accrued in British India.

Conclusion:
The High Court concluded that the net dividend income of Rs. 47,120, though in fact accrued to the assessee in the former Baroda State, is deemed to have accrued in British India under Section 42(1) of the Indian Income-tax Act, 1922. The assessee was ordered to pay the costs of the department.