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TMI Blog1952 (3) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... to Rule 24 of the Indian Income-tax Rules. The contention of the assessee before the Tribunal was and it is before us that 60% of this dividend income was agricultural income in her hand and therefore was exempt from tax. A large number of authorities have been cited at the Bar and our attention has been drawn to various observations made by different High Courts and the Privy Council. There is no direct decision on this point and therefore it is advisable first to look at the Act itself and to consider what are the principles which should govern this case before we turn to the authorities. Now, exemption from tax can only be claimed under Section 4(3) of the Income-tax Act and that section provides that any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them. Therefore, it is for the assessee to satisfy us that the income received by her falls within any of the classes enumerated in Section 4(3), and the contention of the assessee is that her income falls in the category of agricultural income mentioned in Section 4(3)(viii). Therefore, it is only if her income is agricultural income that she is e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the shareholders. A shareholder pays tax on his own income which may include income derived from dividends, and it is true as Sir Jamshedji has pointed out that the law provides that a shareholder is entitled to refund if tax has been paid by the company on the income which is represented by the dividends received by him. But this is merely as a legal fiction that it is recognised that the tax has been paid by the company on behalf of the shareholder and therefore the shareholder is entitled to a refund. In fact and in law income-tax is paid by the company as a company on its own income and the shareholder also in fact and in law has to pay tax on his own income. Take the case of super-tax. The company pays super-tax on its income. On the same income the shareholder when he receives a dividend as representing part of those profits or income also pays super-tax and no rebate is given to the shareholder. Therefore, on the same income earned the company pays super-tax and the shareholder also pays super-tax. The reason is not that there is duplication of taxation, but because in the eye of the law and in the eye of the fiscal taxing statute the company and the shareholder and differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the most important condition is satisfied, viz., that the profits are distributed and a dividend is declared. To my mind the difference between the position of a partner and a shareholder in this respect is vital and that difference distinguishes the case of a partner from that of a shareholder. Turning to the authorities, I am afraid I am myself largely responsible for the difficulty created by certain observations which I made when delivering the judgment of this Court in Phaltan Sugar Works Ltd. v. Commissioner of Income-tax [1949] 17 I.T.R. 499. Now, the observations of every Judge and of every Court must be read in the light of the facts actually decided and the point that arose for decision. What were the facts in Phaltan Sugar Works' case which called for the observations on which such strong reliance is placed and rightly placed by Sir Jamshedji? What we were dealing with in that case was a contention that inasmuch as the Phaltan Government had exempted by a contract the Phaltan Sugar Works from paying tax, therefore there was no obligation upon the company to deduct at source the tax from the dividends which it paid to its shareholders. Sir Jamshedji's content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Privy Council and after reviewing the case Sir John Beaumont delivering the judgment of the Privy Council stated at page 384:- In their Lordship's view the principle to be derived from a consideration of the terms of the Income-tax Act and the authorities referred to is that where an assessee receives income, not itself of a character to fall within the definition of agricultural income contained in the Act, such income does not assume the character of agricultural income by reason of the source from which it is derived, or the method by which it is calculated. Pausing here for a moment, it is clear that what the Privy Council was considering was a case of a direct recipient of agricultural income and what the Privy Council was emphasising was that when you have a direct recipient of agricultural income it is irrelevant to consider in what character he receives the agricultural income and the case they had in mind was the case to which they had referred earlier, viz., the case of Commissioner of Income-tax, Bihar Orissa v. Maharajadhiraj of Darbhanga [1935] 3 I.T.R. 305. In that case a mortgagee went into possession and received rents from lands belonging to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifornia Texas Oil Co., was liable to pay tax in India under Section 42 of the Act. It was in this connection that the observations relied upon by Sir Jamshedji were made. We held there that income, profits or gains accrued to the California Co. by reason of the fact that there was a source of income in British India and the source of income according to us was the profits made by the Indian company in India. Sir Jamshedji contended that dividends could not be said to have been derived from profits and we rejected that contention, and at page 229 of the judgment it is stated: If the source from which his dividend emanates is the profits made by the company, then undoubtedly the dividend that he receives is an income which arises from that source. It cannot be disputed that in one sense, and perhaps an important sense, the dividend received by an assessee is derived from the profits made by the company. But what we are concerned with in the present case is not whether the dividends are derived from the profits made by the company, but whether the dividends themselves constitute revenue derived from land, and as I shall presently point out, even though the source may be the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of that part of the dividend which corresponded to the actual income of the company. This contention was rejected by Mr. Justice Rowlatt. In his judgment he referred to another case which he had decided and which was relied upon on behalf of the assessee and that was Whelan v. Henning [1924] 10 Tax Cas. 263. In that case the assessee had received a sum of ? 35 as dividend. No tax had been paid by the company and yet the Income Tax Commissioners added to the sum of ? 35 the sum of ? 9 which according to them was the tax that should have been paid in respect of the dividend of ? 35 and wanted to assess the assessee to super tax on ? 44. Mr. Justice Rowlatt in that case held that the Commissioners were not justified in assessing the assessee to a larger amount by Mr. Justice Rowlatt on which reliance has been placed. This is what the learned Judge said:- It was said that the ? 35 was a taxable sum in itself, never mind what the company had done; that was the dividend, and a profit and gain, and it ought to be taxed. As to that, I held (as I thought, and think, rightly) that a dividend is not a taxable subject matter in itself. The operation of declaring a dividend is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ires in so far as they purported to authorise the levy of tax on non-resident companies in respect of income from dividends which had accrued to them outside British India, and the Federal Court held that the Indian Legislature in enacting that particular provision was not giving any extra-territorial operation to its law, and it was in this connection that observations were made by Chief Justice Spens at page 275: It is true that the profits of a company may not materialise into a dividend for the shareholder till a dividend is declared but that is different from saying that when the dividend is declared, the 'source' of the dividend is not the same as the source of the profits made by the company. But as I shall presently point out, what is necessary for us to decide is not that the ultimate source of the dividend is the same as the source of the profits made by the company. What we have to decide is whether land used for agricultural purposes is the effective and immediate source of the dividend received by the assessee. In the same connection Sir Jamshedji also relied on an observation of Lord Anderson in Commissioners of Inland Revenue v. Forrest [1924] 8 Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atute might give a rebate to the assessee in respect of the amount paid as tax on the dividend by the company, the assessee would be liable to pay tax on the dividend. But the most helpful and illuminating decision to which our attention has been drawn is the judgment of the Privy Council in Commissioner of Income-tax v. Kamakhaya Narayan Singh [1948] 16 I.T.R. 325. The contention that was urged before the Privy Council was that interest on arrears of rent payable in respect of land used for agricultural purposes was agricultural income within the definition of the Act and was therefore exempt from tax. This contention was rejected by the Privy Council and Lord Uthwatt delivering the judgment of the Board at page 328 made the following observations:- Equally clearly the interest on rent is revenue, but in their Lordships' opinion it is not revenue derived from land. It is no doubt true that without the obligation to pay rent--and rent is obviously derived from land--there could be no arrears of rent and without arrears of rent there would be no interest. But the affirmative proposition that interest is derived from land does not emerge from this series of facts. All tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation between a company and its shareholders and the proper interpretation to be placed upon the definition of agricultural income in Section 2(1) of the Indian Income-tax Act. Now, there cannot be any question that a company in law is an entirely separate entity from the shareholders. A company is in no sense an agent of the shareholder or of the shareholders even collectively. It is perfectly true that a shareholder when he purchases a share acquires a right to share in the distribution of profits, which is a somewhat different thing from saying that he acquires a right to share in the profits, because the profits made by the company may never be shared by the shareholders at all if no dividends are in fact declared. The company when it earns profits does not earn them as an agent of the shareholders and the shareholders have no right in any profit earned until a dividend is in fact declared in the manner provided by the articles of association of a company. It is important in this connection to remember that although the articles of association may make what provision they like for the declaration of the dividend, Section 17(2) of the Companies Act provides that there shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax on its profits does not pay it as agent for its shareholders. It pays as a taxpayer, and if no dividend is declared the shareholders have no direct concern in the payment. If a dividend is declared, the company is entitled to deduct previously paid by the company; and in that case the payment by the company operates in relief of the shareholders. But no agency, property so called, is involved. Therefore, under the income-tax law as well, there is no agency between a company and its shareholders. Turning next to the definition of agricultural income under which an income has to fall in order to secure an exemption from liability to tax, the material words of that definition are derived from land . Now of course, in its ordinary sense it would be very difficult to say that the income derived by the shareholder, who is the assessee in this case, was derived from land, in any event in the sense that it was directly derived from land. But what is urged by Sir Jamshedji is that the dividends were paid out of profits which included agricultural income, and to the extent to which they were so paid they are agricultural income in the hands of the shareholders. That conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no doubt that in this case the ultimate source of the income was the land, because but for the assessee having had the land which he conveyed to his co-sharer he would not have got the annual payment. But none the less their Lordships held that this was not sufficient to make it agricultural income. Lord Russell of Killowen in his judgment at page 240 observes:- In their Lordships' opinion it is impossible to hold that this annual payment is 'agricultural income' within the meaning of the Act. It is not rent or revenue derived from land; it is money payable under a contract imposing a personal liability on the covenantor the discharge of which is secured by a charge on land. The covenantor is at liberty to make the payments out of any of her monies, and is bound to make them whether the land is sufficiently productive or not. The next decision of their Lordships of the Privy Council is reported in the same volume at page 305, Commissioner of Income-tax, Bihar Orissa v. Sir Kameshwar Singh [1935] 3 I.T.R. 305. In this case the assessee's father who carried on a money-lending business made a loan under an indenture described as a zarpeshgi lease with u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee and therefore his Lordship observes that it does not matter in what character he received it so long as it is agricultural income. This decision was given at a time when the opening words of Section 4(3) were different from what they are today. The words then were: This Act shall not apply to the following classes of income , so that agricultural income was wholly excluded from the operation of the Act. These words were substituted in 1939 by the words which at present exist and which are: Any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving it, the emphasis in the amendment being on the receipt of income by the assessee, while under the old Act agricultural income by itself was exempted from the operation of the Act. This really emphasises what was even laid down by their Lordships under the old Act that receipt by the assessee is the main test and in the hands of the assessee the income must be received as agricultural income. We next have two decisions of their Lordships of the Privy Council reported in 16 I.T.R. The first of these decisions is the decision of Commissioner of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... character to fall within the definition of agricultural income contained in the Act, such income does not assume the character of agricultural income by reason of the source from which it is derived, or the method by which it is calculated. But if the income received falls within the definition of agricultural income it earns exemption, in whatever character the assessee receives it. These observations of their Lordships, in my opinion, emphasise two points. The first is that there must be a receipt of agricultural income by the assessee, and the second is that if what is received by the assessee is not agricultural income then you cannot go back to its source and from that say that the income was agricultural income. Certain observations which we made in a decision of the Division Bench in Phaltan Sugar Works Ltd. v. Commissioner of Income-tax [1949] 17 I.T.R. 499, have been strongly relied upon by Sir Jamshedji. I was a party to that decision and I share my full responsibility for everything that was stated therein. The passage that was relied upon was a passage in the judgment delivered by my Lord the Chief Justice reported at page 507:- The principle which Sir Jam ..... X X X X Extracts X X X X X X X X Extracts X X X X
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