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TMI Blog1958 (7) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... shares in the same company between them. At a meeting of the general body of shareholders of this company held on November 11,1950, certain dividends were declared and subsequently paid in the manner and to the extent indicated below: (1) Gross dividends (2) Ceylon income-tax deducted (3) Net dividends (4) Dividend certificates annexures (5) Rs. Rs. Rs. Ramaswami Naidu (Hindu undivided family)... 26,270 8,024 18,246 "A-1, A-2, and A-3" Govindaswami Naidu 25,000... 7,375 17,625 "B-1 and B-2" The previous year of these two assessees was the Tamil year ended April 13, 1951. For the assessment year 1951-52 the Income-tax Officer assessed the gross amounts of the dividends ignoring the Ceylon income-tax that had been deducted therefrom. The assessees contended before the Appellate Assistant Commissioner that it was only the net dividend that was assessable. The Appellate Assistant Commissioner, however, confirmed the orders of the Income-tax Officer. The assessees, then went up to the Income-tax Appellate Tribunal. By its orders made on July 22, 1953, the Tribunal found--we are now quoting from paragraph 8 of the letter of reference-- "that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eep for itself the tax it has so deducted and it is not bound to pay it over to Government. It is only tax which it deducts at a rate higher than twice the unit rate in pursuance of a notice issued by the Commissioner that it is bound to pay over to Government. Sub-section (2) Of section 43 requires every person who issues a warrant or cheque or order for payment of the money relating to a dividend, to annex thereto a statement in writing showing: "(a) the gross amount which after deduction of the tax appropriate thereto corresponds to the net amount actually paid; (b) the rate and the amount of tax appropriate to such gross amount; and (c) the net amount actually paid." Sub-section (3) reads: "Where the assessable income of a person includes a dividend from a resident company paid in the form of money or of an order to pay money, he shall be entitled on production of a statement relating to such dividend made in accordance with sub-section (2), to a set-off against the tax payable by him of the amount of tax shown on such statement." Section 49 of the Ordinance provides for what we call the grossing up of the income from dividends. It is thus seen that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany enterprise, so the Act of 1842 has apparently proceeded on the idea that for revenue purposes a joint stock company should be treated as a large partnership, so that the payment of income tax by a company would discharge the quasi-partners. The reason for their discharge may be the avoidance of double taxation, or to speak accurately, the avoidance of increased taxation. But the law is not founded upon the introduction of some equitable principle as modifying the statute; it is founded upon the provisions of the statute itself; and the statute carries the analogy of a partnership further, for it contemplates a company declaring a dividend on the gross gains, and then on the face of the dividend warrant making a proportionate deduction in respect of the duty, so that the shareholder whose total income is so small that he is exempt from income tax or pays at a lower rate, can get the income tax which has been deducted on the dividend warrant returned to him." In practice, the matter did not work out quite so simply. It has to be remembered that the amount distributable in dividend in any year might, in view of the assessment of profits or gains under Schedule D being upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on and Co. Ltd. v. Commissioner of Income-tax [1954] 26 I.T.R. 27. The Privy Council in Commissioner of Income-tax v. Shaw Wallace and Co. [1932] I.L.R. 59 Cal. 1343 at page 1352 attempted a definition of the term "income" in the words following: "Income, their Lordships think, in the Indian Income-tax Act, connotes a periodical monetary return 'coming in' with some sort of regularity, or expected regularity from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. " Mukherji, J., had defined these terms in Rogers Pratt Shellac Co. v. Secretary of State for India [1925] 1 I.T.C. 363, 371: "Now what is income? The term is nowhere defined in the Act.........In the absence of a statutory definition we must take its ordinary dictionary meaning-- 'that which comes in as the periodical produce of one's work, business, lands or investments (considered in reference to its amount and commonly expressed in terms of money); annual or periodical receipts accruing to a person or c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stice Fry quoted above by Mukherji, J., were made in Colquhoun v. Brooks [1888] 21 Q.B.D. 52, while construing the provisions of 16 and 17 Vict. c. 34, s. 2, Schedule D. The words to be construed there were "profits or gains, arising or accruing" and it was observed by Lord Justice Fry at page 59: "In the first place, I would observe that the tax is in respect of 'profits or gains arising or accruing.' I cannot read those words as meaning 'received by '. If the enactment were limited to profits and gains 'received by' the person to be charged, that limitation would apply as much to all Her Majesty's subjects as to foreigners residing in this country. The result would be that no income-tax would be payable upon profits which accrued but which were not actually received, although profits might have been earned in the kingdom and might have accrued in the kingdom. I think, therefore, that the words 'arising or accruing' are general words descriptive of a right to receive profits." To the same effect are the observations of Satyanarayana Rao, J., in Commissioner of Income-tax v. Anamalais Timber Trust Ltd. [1950] 18 I.T.R. 333, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of tax, will leave the net amount at which the dividend is expressly declared................The system, however, of taxation at the source involves a treatment of corporate profits which is not compatible with any general inclusion of dividends in the shareholder's own assessment to income-tax. The profits and gains are assessed in the hands of the company prior to distribution. They are taxed collectively. Upon distribution the company is authorised, but not required, to deduct from the dividend the tax which would be payable upon the dividend. The company does not account to the Crown for the amount deducted; for the profits distributed have already borne tax in its hands. But, for the purposes of reliefs allowed to taxpayers the shareholder is entitled to treat himself, as having paid by deduction the amount which the company has withheld in paying his dividend; and in assessing his liability to super-tax or surtax, which is levied on his total income from all sources, the amount so withheld as well as the dividend must be included.................The question whether the shareholder obtains immunity from taxation by direct assessment if, and only if, he suffers a deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opriation of money for the purpose. The money would not be credited to the taxpayer and applied by the company in discharge of his liabilities." The learned judge finally expressed this conclusion: "In my opinion no more than the net amount paid to the taxpayer by the company in respect of dividends on preference or on ordinary stock was credited or paid to him. He is not liable to the inclusion in his assessment of any greater amount of dividend." The treatment of the matter by Dixon, J., was so comprehensive that on appeal from his decision the learned judges contented themselves with this statement: "In this case the appeal will be dismissed." To the same effect is the decision in Home Grown Sugar Ltd., In re [1938] 1 Ch.219. At page 227 Simonds, J., observed: "Apart, however, from this consideration it appears to me reasonably clear that the amount of dividend received by a shareholder within the meaning of this clause is that sum which he actually receives after the company has exercised the right to deduct the appropriate amount of tax, which is given to it by rule 20 of the All Schedules Rules of the Income Tax Act, 1918...............But i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any dividend or not. The payment was, therefore, not on account of the declaration of the dividend and it was not by reason of the declaration that the funds of the company were depleted to the extent of ₹ 70,313." Section 18 of the Indian Income-tax Act requires every person responsible for paying salaries to deduct at the time of payment, income- tax and super-tax at certain rates to be ascertained. The money so deducted never comes into the hands of the employee. Nevertheless, it is treated for purposes of tax as part of the salary. The amount deducted by the company from the gross dividend of the assessees must, argued Mr. Rama Rao Sahib, be regarded in the same way. We are unable to agree that the positions are similar. The money which the person charged with disbursing salaries is required to deduct on account of income-tax and super-tax is really the money of the assessee. But, in the case of the present assessees, Ramaswami Naidu and Govindaswami Naidu, the amounts which Agravas Estates Ltd. retained in their hands were always the money of Agravas Estates Ltd. and at no time became the money either of Ramaswami Naidu or Govindaswami Naidu. Another point of dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not received £ 275, and the question was whether the sum of £ 500 or the sum of £ 225 alone should be included in the assessee's total income. The court held that the whole of the amount of £ 500 ought to be included in the assessee's total income. It seems to us that this decision which relates to an annuity cannot be applied to the case of dividends. An annuity, if it resembles anything at all, resembles a salary or a pension, and the amount deducted from an annuity on account of tax must be treated in the same way as an amount deducted from a salary or pension on account of income-tax. We do not consider that the decision cited by Mr. Rama Rao Sahib is applicable. In the result, we hold that the amounts of ₹ 8,024 and ₹ 7,375 cannot be included in the taxable income of the assessees. These amounts were never received by the assessees; at no time did the amount accrue or arise to the assessees; at no time actually or notionally were the money the income of the assessees in any sense of that word. The question is answered in favour of the assessees. Respondent will pay the costs. Counsel's fee ₹ 250. Reference answered ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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