1936 (5) TMI 37 - Other - Income Tax

Summary

Issues Involved:
1. Whether the proportion of dividends received by the assessee from a company, whose profits include sums not chargeable to Indian Income Tax, is exempt from taxation under Section 14(2) of the Income Tax Act, 1922.

Detailed Analysis:

Background and Facts:
1. Reference to High Court: The appeal was brought by the Commissioner of Income Tax, Bengal, from the decision of the High Court at Calcutta upon a reference made under Section 66(2) of the Income Tax Act, 1922. The sole question was whether a proportion of the dividends received by the assessee from a company, whose profits included specified sums not chargeable to Indian Income Tax, is exempt from taxation under Section 14(2).

2. Assessee and Company: The assessee, Hungerford Investment Trust, Ltd., holds the entire ordinary share capital of Turner Morrison & Co., Ltd. The assessee received dividends declared by Turner Morrison & Co., Ltd. in 1931, which included profits not chargeable to Indian Income Tax.

3. Assessment and Disintegration: The Commissioner disintegrated the total dividend sum into three parts, treating Rs. 7,500 as interest on tax-free securities, Rs. 76,500 as dividend from non-taxable profits, and Rs. 3,66,000 as dividend from taxable profits. The question before the Court was specifically about the Rs. 76,500.

Legal Provisions and Interpretation:
1. Section 14(2)(a): The core issue revolves around the interpretation of Section 14(2)(a) which exempts tax on dividends received by a shareholder if the profits or gains of the company have been assessed to Income Tax.

2. Double Assessment Principle: The Income Tax Act requires returns from both companies and individuals, leading to a principle sometimes described as double assessment. However, Section 14 aims to prevent double payment of tax on the same income.

3. Arguments and Contentions:
- Assessee's Argument: The assessee contended that as long as the company has been assessed to Income Tax on its total income, any dividends received should be exempt from further taxation, regardless of whether some of the profits were not chargeable to Indian Income Tax.
- Commissioner's Argument: The Commissioner argued that only the portion of the dividends paid out of profits assessed to Income Tax should be exempt. He differentiated between income specifically exempt under the Act and income that merely escaped assessment because it was not accrued or received in India.

4. High Court's Interpretation: The High Court rejected the Commissioner's argument that the clause only applied where the whole of the profits of the company had been assessed to Income Tax. The Court held that such an interpretation would lead to unreasonable results, such as taxing shareholders on dividends from tax-free securities or agricultural income.

Judgment:
1. Distributive Construction: The Board considered but ultimately rejected a distributive construction of Section 14(2)(a), which would exempt only that part of the dividends paid out of profits assessed to Income Tax. This construction was deemed impractical and not supported by the Act.

2. Ordinary and Natural Meaning: The Board agreed with the High Court's interpretation that the phrase "where the profits and gains of the company have been assessed to Income Tax" should be given its ordinary and natural meaning. The clause should be understood to mean that if the company's profits have been assessed to Income Tax, the dividends received by the shareholder are exempt from further taxation.

3. Conclusion: The Board concluded that the Rs. 76,500 in question was exempt from taxation under Section 14(2)(a) as the profits of Turner Morrison & Co., Ltd. had been assessed to Income Tax. The appeal was dismissed with costs.

Summary:
The judgment clarified that under Section 14(2)(a) of the Income Tax Act, 1922, dividends received by a shareholder from a company are exempt from further taxation if the profits of the company have been assessed to Income Tax, regardless of whether some of the profits were not chargeable to Indian Income Tax. The High Court's interpretation that the clause should be given its ordinary and natural meaning was upheld, and the appeal by the Commissioner of Income Tax was dismissed.