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Issues Involved:
1. Entitlement to grossing up under section 16(2) of the Income-tax Act. 2. Entitlement to credit under section 18(5) of the Income-tax Act for shares held in blank transfer. Issue-wise Detailed Analysis: 1. Entitlement to grossing up under section 16(2) of the Income-tax Act: The primary issue was whether the assessee, a public limited company, was entitled to gross up the dividend income under section 16(2) of the Income-tax Act, despite holding the shares in blank transfer, meaning the shares were not registered in the name of the assessee company. The court noted that section 16(2) states, "for the purposes of inclusion in the total income of an assessee, any dividend shall be deemed to be income of the previous year in which it is paid, credited or distributed or deemed to have been paid, credited or distributed to him" and shall be increased to such an amount as would leave an amount equal to the dividend, if income-tax at the rate applicable to the company were deducted from it. This implies that the dividend amount is to be grossed up for assessment purposes. However, the court emphasized that the term "assessee" in section 16(2) refers to a registered shareholder. The court rejected the argument that the term "shareholder" could include unregistered holders, stating, "I am unable to agree that the Indian Companies Act makes a distinction between a shareholder and a member or that the word 'shareholder', as used in the Income-tax Act, can be construed as meaning merely the holder of a share who may or may not be a member." 2. Entitlement to credit under section 18(5) of the Income-tax Act for shares held in blank transfer: The second issue was whether the assessee was entitled to credit under section 18(5) of the Income-tax Act for the tax paid by the companies on the dividend income received from shares held in blank transfer. Section 18(5) states, "any sum by which a dividend has been increased under sub-section (2) of section 16 shall be treated as a payment of income-tax on behalf of ... the shareholder." The court interpreted this to mean that the credit for tax paid can only be claimed by a registered shareholder, as the company pays the tax on behalf of those whose names are registered in its books. The court clarified, "Credit for payment of tax given to a shareholder under section 18(5) presupposes and indeed requires that he should be among the persons between whom the company has distributed the dividend, from the amount payable to whom it has made a deduction and on whose behalf it may be treated as having paid the amount of the deduction as tax." The court also addressed the argument that an unregistered transferee could be considered a trustee for the dividend received, stating, "The expression 'paid to him' in section 16(2) cannot, therefore, be taken to cover a case of payment to a transferor of shares in trust for the transferee who has not yet got his name registered." Conclusion: The court concluded that the terms "assessee" in section 16(2), "shareholder" in section 18(5), and "a shareholder of a company" in section 49B contemplate a registered shareholder. Therefore, an unregistered transferee of shares is not entitled to the benefits of grossing up under section 16(2) or credit under section 18(5). The court acknowledged the apparent injustice of including the dividend income in the assessee's total income without granting the benefits of sections 16(2) and 18(5) but emphasized that such matters are for legislative adjustment, not judicial interpretation. The judgment answered the reference question in the negative, stating that the assessee is not entitled to the process of grossing up under section 16(2) or getting credit under section 18(5) for shares held in blank transfer. The Commissioner of Income-tax, West Bengal, was awarded the costs of the reference.
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