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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 ..... the previous year, which was 1946. The total income of thedone was determine at Rs. 20,63,016. What the company haddirectly to the general reserves and not to the profit and loss accountand no part of the same was distributed as dividend. The dividenddeclared amounted to Rs. 4,34,768. This was less than 60% of the assessable income of the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 12,59,901 Rs. 4,34,768 &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ands of thecompany should be taxed in the hands of the sharehodlers also at therate appropriate to " capital gains " as indicated in section 17(6) of theAct. The Income-tax Officer as well as the Appellate Assistant Com-missioner negative that contention. The mater was carried don appealby the assessees to the Tribunal and the Tribunal also dismissed thatcontention. The view taken by the Tribunal was that section 23Adividend that is included in he total income of an assessee shareholdercannot be dissected as urged on behalf of the assessees for the purposeof determining the income-tax and super-tax payable by them on the" deemed dividend income ". The assessees have now come before uson these reference. The question which we are called upon to determined is : " Whetherthe section 23A dividend of Rs.. 6,31,527 can be dissected into tow parts in the ratio of Rs. 7,86,900 : Rs. 20,63,016 for the purpose of determiningthe amount of income-tax and super-tax payable by the assessee share-holder on his total income and if so, whether that smaller portion ofRs. 6,31,527 is liable to be taxed at the rates applicable to ' capitalgains ' as laid down in section 17(6) of the Income-tax Act, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... included any income chargeable under the head ' Capital gains ',the tax, including super-tax payable by him on his total income shallbe- (i) income-tax and super-tax payable on his total income asreduced by the amount of such inclusion, had such reduced incomebeen his total income . . . . " Clause (ii) has been altered. Ir relates, to rates. Section 23Aas it stands today had also been recast. The material part of the sec-tion as it took before its amendment by the Finance Act, 1955, was asunder : " 23A. Power to assess individual members of certain companies.-(1) Where the Income-tax Officer is satisfied that in respect of anyprevious year the profits and gains distributed as dividend by anycompany up to the the end of the sixth month after its accounts for thatprevious year are laid before the company in general meeting are lessthan sixty per cent. of the assessable income of the company of thatprevious year, as reduced by the amount of income-tax and super-taxpayable by the company in respect thereof he shall, unless he is satisfiedthat having regard to losses incurred by ht company in earlier years orto the smallness of the profit made, the payment of a dividend o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of thecapital gains would be capital gains in the hands of the shareholdersMr. Palkhivala has drawn our attention to a decision of the SupremeCourt in the case of Mrs. Bacha F. Guzdar v. Commissioner of Income-tax,Bombay(1) It is said that the Tribunal was in error in placing too muchrelince on certain observations in that case. We shall presently quotethem. The argument is that case the Supreme Court was dealing with" agricultural income " under section 4(3)(viii). An attempt is made toshow that there is nothing in the observation s made by their Lordshipsin that case which goes counter to the submission urged before us andwhich submission if analysed required an equivalence to be establishedbetween the capital gains of a company. Now, we agree with Mr. Palkhivalathat in that case of Supreme Court was not dealing with any questionunder section 23a. There are, however, some general observations oftheir Lordships in that case, which, if we may respectfully say so,throw light and afford guidance on the question of the nature of therights of a shareholder vis-a-vis the company in the context of income-tax law. At page 5 of that report. it is observed as under : " That a shareholder ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of the company and in thecase of an assessee who is not a company in these two sub-sections.What is more important is the language of section 12B. The tax pay-able by an assessee under the head of " capital gains " relates to theassessee and it relates to the capital gains of the assessee in respect ofany profits or gains arising from the sale, exchange or transfer orcapital assets of the assessee himself. If the assessee is a company, thecapital gain are the gain of the assessee company ; if the assessee isan individual shareholder, the capital gains are the capital gains of theindividual shareholder. There is nothing in the language of sub-sections(6) and(7) of section 17 or in the language of section 12B which lendsslightest support to or countenances the suggestion that an equationcan possibly be established between the capital gains of a companyand the dividends which the assessee is deemed to have received bythe operation of section 23A. They are apart The other argument of Mr. Palkhivala is founded on section 23A.It was stated that under that section it is not the income of the companywhich is deemed to have been distributed amongst the shareholders,but it is the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch permits an assessee shareholder totake advantage of the provision relating to assessment of capital gainson the income of a company in the manner and at the rate laid downin the relevant provisions. It has so often been emphasized that as far as possible nothing canbe read and nothing can be implied in a taxing statute. We have tolook fairly at the language used. The indispensable starting potion andthe first step is to examine the words of the provisions under consider-tion. When we examine the words of the provisosn itself, we findnothing in it which may even remotely be said to suggest that theassessee is entitled to say that when he is deemed to have receiveddividend by the fiction of law incorporated in section 23A(1), he isentitled o identify himself with the company or to assert an equivalencebetween his income and the income of the company. True,we have to remember that we are dealing with a fictio furis. Now, in the judgment of the Tribunal we find that Mr. Palkhivala,who appareled before the Tribunal, had also urged that full effect mustbe given tot he legal fiction that is created by section 23a. The Tribunalstates in its judgment :" We are unable to accept this con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the shareholder along with other shareholders and it is to be included intheir total income fro the purpose of assessing their total income. Wehave not to permit our imagination to boggle and have to continue toimagine as real the consequences and incidents of that putative stateof affairs, and the putative state of affairs is that dividend in is deemedto have been declared and received by the shareholders. Therefore, we have to take it hat dividend was in face received by the share-holders, and if the dividend was in face received by the shareholdersthe only consideration that remains is can a shareholder who has receiv-ed dividend in respect of the profits of a company say that the divi-dend which he has received is to be split up into a number of heads forthe purpose of assessment in arriving at his total income. Can he saythat a part of that dividend income is income from " capital gains " anda part of that dividend income is dividend income assessable under the head " other sources " ? The answer to this seems to us to e obvious. There is, as we have already mentioned, not the remotes suggestion inany relevant section which can lend supper to the proposition canvass-ed bef ..... X X X X Extracts X X X X X X X X Extracts X X X X
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