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TMI Blog1954 (8) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... that reference, made a request to us that we might defer our judgment till we heard heard him. Accordingly, we heard the two references together and are now able to pronounce our judgment after having had the benefit of elaborate and careful arguments. The facts of the present case are simple and may be given in the words of the Tribunal. They have stated them as follows: "The assessee is a public limited company. It had during the previous year relevant to the assessment year 1948-49, received dividend income out of which income amounting to Rs. 24,318 was not grossed up under section 16(2) and the assessee was not given credit under section 18(5) for the relevant tax paid by the various companies. The shares in respect of which this dividend income of Rs. 24,318 was received were held by the assessee company in blank transfer. The transfer of these shares had not thus been registered in the name of the assessee company with the various companies. Thus, the registered shareholders in the books of those companies were some other persons from whom the assessee company purchased the shares." The contention of the assessees (I shall use the plural number) was that since the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpossible to say that there is not great force in that contention, but, at the same time, it must be pointed out that there is no equity in matters of taxation. If the Act, on its true construction, be found to have limited the benefit of section 18(5) to registered shareholders, the courts must declare such to be the law. The decision of the question depends upon three sections of the Income-tax Act. First comes section 16(2) which says that "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. A larger amount, inclusive of the tax paid, is thus to be brought under assessment. Next comes section 18(5) which says that "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." Thus, what is added to the assessable income under section 16(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an Companies Act and could be transferred by blank transfer forms and when they were so transferred, the transferee became the full owner of the shares, that is to say, a "shareholder" and as such entitled to receive the dividend declared on the shares. A member of a company, it was further argued, had to be a shareholder of it, but a shareholder was not necessarily required to be a member borne on the register of the company. That he held certain shares was sufficient to make him a shareholder and to entitle him to receive the dividend thereon. The object of the Income-tax Act, it was said, was to tax profits and in construing the word "shareholder", as used in the Act, it would be proper to hold that the Legislature intended to indicate by that word the person by whom the profits had, in fact, been received. On the main argument of Mr. Mitra, Mr. Sen took somewhat the same line and gave us the interesting history of how the word "shareholder" came into the legislation relating to joint stock companies and how it had been replaced by the word "member". It appears that in section III of 7 8 Viet. 1844 Cap. CX., "shareholder" was defined as "any person entitled to a share in a com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... areholder" and "member" have been used in the Indian Act in the same sense as in the parent statute. As to the terms as used in the English Act, their meaning has been given in Palmer in a passage remarkable for its terseness and brevity: "In the case of a company limited by shares," observes the learned author, "the terms 'member' and 'shareholder' are synonymous. A member is a shareholder, and a shareholder is a member." (See Palmer's Company Law, Nineteenth Edition, page 81). Mr. Mitra contended that with reference to the Indian Act, that statement would not be wholly accurate and he referred to the holders of share warrants who were not shareholders, but who might be deemed to be members under section 46 of the Act. That submission, to my mind, has no point in it, because a similar provision occurs in section 112(5) of the English Act and if in spite of it Palmer has stated that the words "shareholder" and "member" are synonymous, he has done so for the obvious reason that the holder of a share warrant can only be deemed to be a member if the articles of the company so provide, but he is not really and in fact a member as of right and in the primary sense of the term. Indeed, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on the shares held by him. Section 79(1)( e ) which was particularly relied upon by Mr. Sen does not suggest that there can be shareholders whose names are not entered in the register of shareholders. The section is concerned with meetings and votes and clause ( e ) of sub-section (1) provides that "any shareholder whose name is entered in the register of shareholders of the company shall enjoy the same rights and be subject to the same liabilities as all other shareholders of the same class." It is perfectly clear that by the phrase "shareholders of the same class" unregistered shareholders could not have been meant, because such shareholders could have no concern with meetings of the company and the right of voting at them. What the clause plainly means is that all shareholders of a particular class whose names are entered in the register shall have the same rights and liabilities as between themselves, irrespective of the date of the entry of their names in the register. It is a provision intended to defeat regulations, which are sometimes found to the effect that in order to be entitled to exercise the rights of a shareholder, the holder of a share must have held his share fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferred by an instrument of transfer and no deed is required, "the transferor shall be deemed to remain holder of the share until the name of the transferee is entered in the register of members in respect thereof." There is no information in the present case as to what the provisions were in the articles of the companies which had paid the dividend amount concerned, but all parties have proceeded on the footing that there was a provision of the nature of regulation 18. Indeed, Mr. Sen stated that he could not think of an ordinary trading company which would not have an article of that kind. It, therefore, follows that an unregistered transferee of shares is not a holder of the shares in the eye of the company and it will not and cannot pay dividends to him and does not make any deduction from any dividend paid to him or pay any tax on his behalf. It is wholly immaterial that a transferee of shares is entitled to fill in his own name and obtain registration of himself as the holder of the shares. Till he has done so, he has no rights as against the company and the company does not deal with him. We had a lengthy argument before us as to the rights of a transferee of shares unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital it is a share and carries certain rights and obligations inseparable from the company. As to the true nature of a share, I can do nothing better than refer to the exposition by Far well, J., as he then was, in the case of Borland's Trustee v. Steel Brothers Co., Limited [1901] 1 Ch 279 , which has now become almost classical. "A share," observed the learned Judge, " is the interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se in accordance with section 16 of the Companies Act, 1862. The contract contained in the articles of association is one of the original incidents of the share. A share is not a sum of money settled in the way suggested, but is an interest measured by a sum of money and made up of various rights contained in the contract, including the right to a sum of money of a more or less amount." It will thus be seen that a share is a share of the share-capital of a particular company and carries with it certain rights and obligations arising out of covenants as betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies had declared a dividend for the year ending on the 31st March, 1921, the other company, whose financial year was the calendar year, had done so only for the year ended on the 31st December, 1920. It was therefore necessary to make some provision for the dividend which might be declared in respect of the three months between the 31st December, 1920, and the 1st April, 1921. The provision made in the agreement for sale was that the new company would have to account for such dividend to the shareholders of the second transferor company and that the dividend for the three months should be paid to them. The transfer of the shares of the second company was thus expressly ex-dividend. When the company declared a dividend sometime later, the new company, which was then the owner and the registered holder of the shares, wrote to the transferor company to pass on the dividend to persons who were borne on its register as shareholders on the 1st of April, 1921, and the same was done. The question really decided in the case was that the amount of dividend so received by the shareholders of the second transferor company was not a part of the consideration paid for the transfer of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficial title by virtue of his position as the registered holder. It was held further that having regard to the form and operation of the transfers, the nature of the property transferred and the necessity for registration in order to perfect the legal title, coupled with the discretionary power in the directors to withhold registration, the deceased was, pending registration, in the position of a trustee of the legal title in the shares for the transferees. On the basis of these decisions, Mr. Sen contended that a transferor of shares under blank transfer forms would be a trustee for the transferee in respect of dividends declared and received thereafter and that it ought to be held that the payment of dividend to such transferor would be payment in trust for the transferee and therefore in law a payment to the latter within the meaning of section 16(2). In my opinion, the cases cited by Mr. Sen have no direct bearing on the question which we have before us. If the question had been whether the amount of the dividend income had been rightly included in the assessable income of the assessees, the decisions would have been strong authorities for holding that it had been rightly inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... done everything in his power to effect it, the company can pay the dividend only to him and he is the only person who can claim and receive that dividend, till the purchaser gets his name registered in the books of the company. 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. Indeed, it seems impossible to fit in payment of dividend to anyone other than the registered holder with the language used in section 16(2) of the Act. The section refers to the assessee and speaks of "income of the previous year in which it is paid, credited or distributed or deemed to have been paid, credited or distributed to him." The word "deemed" does not refer to the payment itself, but only to the year to which the payment is to be attributed and this was conceded by Mr. Sen. The section thus contemplates a person to whom dividend is paid or credited or distributed. It cannot for a moment be argued that any of the three words can refer to a person other than the person contemplated by the remaining two words. Taking the word "credited" first, it cannot p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but at the same time the benefit of section 16(2) and section 18(5) should be denied to him. It is not for courts to speculate as to the reasons for a particular legislative policy, but it might be that the confusion which would result if unregistered transfers were to be recognised was intended to be avoided. For example, if a particular person holds a block of shares on which he has received dividend in the past and for which he has paid tax, he will be regarded by the Department as still holding the shares so long as his name appears in the register. If he wants to prove that he has, in fact, transferred his shares, he may find it extremely difficult to do so, because having been transferred on blank transfer forms, the shares may have, in the meantime, passed through many hands and travelled a long distance away from the original transferor. In those circumstances, it would be extremely difficult to come to a right decision on the contention of the registered holder of the shares. Again, when shares have passed from hand to hand under blank transfer forms, a claim under section 18(5) may be made not only by the person who is holding the shares at the time, but also by an interm ..... X X X X Extracts X X X X X X X X Extracts X X X X
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