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TMI Blog1958 (9) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... company for that previous year as reduced bythe amounts of income-tax and super-tax payable by the company inrespect of the same. In making the order of assessment on the companythe Income-tax officer determined the undistributed portion of theassessable income of the company of that previous year as computed forincome-tax purposes and reduced by the amount of income-tax andsuper-tax payable by the company in respect thereof. This will appearfrom the following figures : Total income finally determined Rs. 20,63,016 Rs. 8,03,115 ------------- Rs. 12,59,901 Rs. 4,34,768 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 1922. " Wemay state that the same question of law arises in the case of all theshareholders, the only difference being that in the case of one shareholderthe amount is Rs. 6,31,527 and in the case of others Rs. 1,26,305 each. Two contentions have been pressed before us by Mr. Palkivala,learned counsel for the assessees. The first contention is that the actualdistribution of dividend by the company out of the capital gains wouldbe capital gains in the hands of the shareholders. We shall presentlyexamine this argument. It will suffice here to observe that he argumentif effectseeks to establish an equivalence between the capital gainsof the company and the capital gains of the shareholders. Thesecond contention urged before us by learned counsel for theassessees is that under section 23A it is not the income of the companywhich is deemed dot have been distributed among the shareholders butit is the income as computed in the hands of the company that isdistributed. Before examining the arguments, it will be convenient to refer tothe relevant sections. Section 12B has not been recast-we are con-cerned with the old section, the relevant part of which ran as under : " 12B. Capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd or alarger dividend than that declared would be unreasonable, make withthe previous approval of the Inspecting Assistant Commissioner anorder in writing that the undistributed portion of the assessable incomeof the company of that previous year as computed for income-taxpurposes and reduced by the amount of income-tax and super-taxpayable by the company in respect thereof shall be deemed to havebeen distributed as dividend amongst the shareholders as at the dateof the general meeting aforesaid, and included in the total incomeshare thereof of each shareholder shall be included in the total incomeof such shareholder for the purpose of assessing his total income . . . " It is not very necessary to set out the provisos and the explanationto sub-section (1) of section 23A. The material words of the section quoted above are " where theIncome-tax Officer is satisfied that in respect of any provisos year theprofits and gains distributed by any company . . . . . . are less thansixty per cent. of the assessable income of the company of that previousyear, as reduced by the amount of income-tax and super-tax payable bythe company in respect thereof he shall . . . make an order in wri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quires a right to participate in the profits ofthe company may be readily conceded but it is not possible to accept thecontention that he shareholder acquires any interest in the assets of thecompany. The use of the word ' assets ' in the passage quitted abovecannot be exploited to warrant the inference that a shareholder, oninvesting money in the purchase of shares, become entitled to the assetsof the company and has any share in the property of the company. Ashareholder has got no interest in the property of the company thoughhe has undoubtedly a right to participate in the profits if and when the company decides to divided them . . . It is true that he shareholder ofthe company have the sole determining voice in administering theaffairs of the company and are entitled. as provided by the article s ofassociation, to declare that dividends, should be distributed out of the profits of the company to the shareholders but the interest of the share-holder either individually or collectively does not amount to morethan a right to participate in the profits of the company. The companyis a juristic person and is distinct from the shareholders. It is the com-pay which owns the property a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computed in the hands of the company that isdistributed amongst the shareholders. So far, there is no difficulty.But the difficulty of the asssessee arises when he practically chooses toignore the most important part of section 23A with brings into theassessment of the shareholders a notional income. It is by fictio juris-that the undistributed income of the company as commuted in accordancewith the requirements of the section, is to be deemed to have beendistributed as dividends amongst the shareholders as at the date of thegeneral meeting referred to in the section and it is the proportionateshare of the undistributed income of the assessable income of thecompany computed as aforesaid that is to be included in the totalincome of the shareholders for the purpose of assessing their totalincome. Learned counsel for the assessees has further submitted that theright principles governing the nature of dividend generally, and in anyevent having regard to the language of section 23A, are that the impressof capital gains remains on the notional gains and it is only the notionalgains which are distributed amounts the shareholders. It is the nationaldividend which is to be deemed to have b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not agree with the Tribunal that full effect should not be given tothe legal fiction. WE wholly agree with Mr. Palkhivala in the suges-tion made by him before the Tribunal that full effect must be given tothe legal faction incorporated in section 23A. However, it is the legalfiction which is the main difficulty of the assessees and it is the effect ofthat legal fiction which Mr. Palkhivala has very valiantly tried tostruggle against. ' We must now exmaine the submission made beforeus. The submission now is that the legal fiction is not to be applied inthis case with all its effect because there are words in the section itselfwhich retard or prevent the legal fiction having full force. What weare concerned, with, however, is not argument that was urged beforethe Tribunal, but the argument which has been pressed before us. The words that something will be deemed to have been done forthe purpose of incorporating a legal fiction have been considered bycourts in some very recent decision both in England and in India.There is a passage in the judgment of Lord Asquith of Bishopstone inEast End Dwellings Co. Ltd. v. Finsbury Borough Council(10, which hastaken a very short time to become ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... older and the company are separate entities. Section 17(6) with which we are more concern clearly postualtesincome of the assessee chargeable under the head " capital gains ". It isextremely difficult for us to see how it can be said that in the presentcase the assessee shareholder himself became chargeable under the headof " capital gains ". We have gone beyond the state of the initial fictionand we are at this state dealing with section 17(6) because the incomehas for the present purposes to be treated as income already paid to andreceived by the assessee and it is that income which is to be charged totax. " Capital gains", to go back once against to section 12B, is a headwhich relates tax payable by an assessee in respect of any profit orgain arising from the sale, exchange or transfer of a capital asset effectedby the assessee. Mr. Palkhivala has not been able to point out to us as (1) (1958) 34 I. T. R. 143. what property of the shareholders it was that was sold or exchangedor transferred to the general reserves of the company, and the argu-ment of Mr. Palkhivala can only succeed if we hold that it was theincome or to be more precise the property of the shar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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