1966 (2) TMI 22 - SC - Income Tax

Whether on the facts and circumstances of the case the dividend income from shares standing in the name of Kishanchand Lunidasingh Bajaj and acquired with the funds of the Hindu undivided family of which the said person was the karta was assessable in the hands of the assessee-family ? Held that - In so far as it deals with dividend which is grossed up sub-section (5) of section 18 forms a corollary to section 16(2). Therefore when tax is paid on behalf of a shareholder and deduction is made from dividend credit is given to him for the tax paid in his final assessment. But the scheme of grossing up is not susceptible of the interpretation that the income from dividend is to be regarded as the income only of the registered shareholder and not of the real owner of the share. Unable to accept the argument of counsel for the appellants that because the dividend income in respect of the shares cannot be grossed up and credit for tax paid cannot be obtained by the appellants the appellants are not liable to be taxed in respect of dividend received by them. There is no provision in the Act which supports this plea and the scheme of the Act lends no countenance to an expedient which may lead to gross evasion of tax. Appeal dismissed.

Issues Involved:
1. Ownership of shares and liability for tax on dividend income.
2. Interpretation of Section 16(2) of the Indian Income-tax Act, 1922.
3. Applicability of tax exemptions and exclusions under the Income-tax Act, 1922.

Detailed Analysis:

1. Ownership of Shares and Liability for Tax on Dividend Income:
The primary issue was whether the Hindu undivided family (HUF) or the firm of Messrs. Mangoomal Kishanchand was liable to be taxed on the dividend income from shares registered in the name of Kishanchand. The Income-tax Officer determined that the HUF was the "real and legal owner of the shares" and thus liable for the tax. This decision was upheld by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. The Tribunal referred the question to the High Court of Mysore, which affirmed that the dividend income was assessable in the hands of the HUF. The Supreme Court upheld this view, stating that the dividend income would be chargeable to income-tax under the Act in the hands of the person to whom it accrues or by whom it is received.

2. Interpretation of Section 16(2) of the Indian Income-tax Act, 1922:
The appellants contended that under Section 16(2) of the Indian Income-tax Act, 1922, only the registered shareholder should be taxed on the dividend income. They cited the Howrah Trading Company Ltd. v. Commissioner of Income-tax case to support their argument. However, the Supreme Court rejected this contention, clarifying that Section 16(2) is a processing clause applicable to dividend income and does not exempt such income from being taxed under Sections 3 or 4(1) of the Act. The Court emphasized that the dividend income would be taxed in the hands of the real owner of the shares, even if the registered holder is different, and that the scheme of "grossing up" does not imply that only the registered shareholder should be taxed.

3. Applicability of Tax Exemptions and Exclusions under the Income-tax Act, 1922:
The Court examined the provisions of Section 16, which deals with exemptions and exclusions in determining total income. It noted that certain incomes are exempt from tax and do not enter into the computation of total income, while others, though exempt, are included to determine the applicable tax rate. The Court highlighted that Section 16(2) designates the year in which dividend income is included in the total income and allows for "grossing up" only if the registered shareholder is the real owner. However, it does not provide an exemption from tax liability for the real owner of the shares. The Court reviewed relevant case law, including Howrah Trading Company's case, Income-tax Officer, North Satara v. Arvind N. Mafatlal, and Commissioner of Income-tax v. Shakuntala, to support its interpretation.

Conclusion:
The Supreme Court concluded that the appellants' argument lacked substance and upheld the decision that the HUF was liable to be taxed on the dividend income from the shares. The appeal was dismissed with costs, affirming that the real owner of the shares is liable for the tax on the dividend income, regardless of registration. The Court's interpretation of Section 16(2) and related provisions emphasized that tax liability arises based on the real ownership of the shares and the receipt of income, not merely on registration.

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