1968 (8) TMI 8 - SC - Income Tax

Company failed to declare dividend - company in a general meeting resolved to make available out of its reserve as dividend to the shareholders and to credit the account of each shareholder his respective share therein - Pursuant to that resolution Rs. 23,328 were credited to the account of the appellant who held 1,333 shares of the company - sum of Rs. 23,328 could not be assessed to tax in hands of appellant - Assessee s appeal allowed

Summary

Issues:
1. Interpretation of section 23A of the Indian Income-tax Act, 1922.
2. Taxability of deemed dividend income in the hands of shareholders.
3. Application of section 16(2) and section 4(1)(b) of the Income-tax Act.
4. Double taxation and the impact of section 23A(4) on the assessment of dividend income.

Analysis:

The case involved the interpretation of section 23A of the Indian Income-tax Act, 1922, concerning the distribution of dividends by a company. The Income-tax Officer had ordered that an amount be deemed distributed amongst the shareholders due to the company's failure to declare dividends as required by law. The issue arose when the actual distribution of dividends occurred in a subsequent year, leading to a dispute over the taxability of the distributed amount in the hands of the shareholders.

The court highlighted that under section 23A, when the Income-tax Officer makes an order against the company, dividend is deemed to be distributed amongst the shareholders as of the date of the general meeting. The proportionate share of each shareholder is then included in their total income for the purpose of assessment. This provision leaves no discretion to the Income-tax Officer and mandates the inclusion of the deemed dividend income in the appropriate assessment year.

Furthermore, the court emphasized the application of section 16(2) and section 4(1)(b) of the Income-tax Act, which deem dividend income to be included in the total income of the shareholders in the year of distribution. The law prohibits double taxation and requires that income cannot be taxed twice unless expressly provided otherwise.

Regarding section 23A(4), which aims to prevent double taxation, the court clarified that if tax has been paid on the deemed dividend income, any subsequent actual distribution of that dividend should not be taxed again. However, this provision does not give the Income-tax Officer the discretion to tax the deemed income at the time of actual receipt if it was not assessed in the appropriate year as required by law.

In conclusion, the court disagreed with the High Court's interpretation and held that the express provisions of the statute do not allow for the assessment of dividend income twice. Therefore, the court discharged the High Court's answer and ruled in favor of the appellant, allowing the appeal with costs.

This judgment clarifies the legal principles governing the taxation of deemed dividend income under section 23A of the Income-tax Act and underscores the importance of adhering to statutory provisions to prevent double taxation and ensure consistency in tax assessments.