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TMI Blog1963 (7) TMI 99X X X X Extracts X X X X X X X X Extracts X X X X ..... siness in the name of Messrs. Mangoomal Kishanchand in money-lending with the assets obtained on the dissolution of the firm mentioned above. In the books started on May 16, 1956, certain items of shares and securities standing in the name of Kishanchand Lunidasingh Bajaj, the karta, were incorporated. The said shares and securities represented the investments made by the family of which the said K.L. Bajaj was the karta. The karta of the assessee family has seven sons. Two of the said sons by name Shamsudar and Giridharlal released themselves from the joint family in consideration of receipt of ₹ 2 lakhs each. A partnership was thereafter formed between the karta of the assessee family and the said two sons. This was evidenced by a deed of partnership dated August 23, 1956. The business of the partnership was to be that of bankers, shroffs, merchants, commission agents and such other business as the parties may, from time to time, agree upon. The divided sons had each 1/ 7th share in the firm while the karta of the assessee family had 5/7th share. There was no mention in the partnership deed as to the items which formed part of the partnership property. The books which ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ognised by law except for certain purposes of enforcing obligation in the nature of trust. The Tribunal came to the conclusion that the assessee family was the shareholder on the books of the company and that the assessee family was the legal owner thereof, its rights therein not having been divested in any manner known to law and that the assessment as made by the authorities was proper. The order of the Tribunal is annexure C and forms part of the case. The question of law is : Whether, on the facts and circumstances of the case, the dividend income from shares standing in the name of Kishanchand Lunidasingh Bajaj and acquired with the funds of the Hindu undivided family of which the said person was the karta was assessable in the hands of the assessee family ? [After setting out the statement of case as above K.S. Hegde J. continued :] K.S. Hegde J.-Prima facie the income contemplated in section 3 of the Indian Income-tax Act, 1922 (to be referred to hereinafter as the Act ), is the real income and not the nominal income. Broadly speaking, it is something that comes in . Under section 2(6C) income includes dividend. Therefore, if there are no provisions in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect that the company has paid or will pay income-tax on the profits which are being distributed, and specifying such other particulars as may be prescribed . (Underlining* is ours). Interpreting the effect of section 18(5) read with section 16(2), the Supreme Court held in Howrah Trading Co. Ltd. v. Commissioner of Income-tax [1959] 36 ITR 215 that a person who has purchased shares in a company under a blank transfer and in whose name the shares have not been registered in the books of the company is not a shareholder in respect of such shares within the meaning of section 18(5) of the Act , notwithstanding his equitable right to the dividend on such shares, and is not, therefore, entitled to have this dividend income grossed up under section 16(2) of the Act by the addition of the income-tax paid by the company in respect of those shares, and claim credit for the tax deducted at source under section 18(5) of the Act . In the body of the judgment, this is what Hidayatullah J., who spoke for the Bench, observed : A glance at the scheme of the Indian Companies Act, 1913, shows that the words 'member', 'shareholder' and 'holder of a share' have b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transfer was first made. See Nagabhushanam v. Ramachandra Rao [1922] ILR 45 Mad. 537. This position was reiterated by the Supreme Court in Income-tax Officer, North Satara v. Arvind N. Mafatlal [1962] 45 ITR 271 . Therein their Lordships held that it is only the registered shareholder who is entitled to the benefit of the credit for tax paid by the company under section 18(5) as well as the corresponding grossing up under section 16(2); where shares were held by three partners of a firm but it appeared that the shares were really held by these persons for the firm itself, the only persons who were entitled to be treated as shareholders to whom the provisions of sections 16(2) and 18(5) were attracted were the three partners, in spite of the fact that they were benamidars for the firm. From these decisions, I do not think that we will be justified in drawing the conclusion that for all purposes under the Act dividend income realised by a benami shareholder should be treated as his own income and not that of the real owner of the shares which have yielded the dividends in question. It is because of the language of section 18(5) read with sections 23A and 16(2), the courts ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ands of the Hindu undivided family. Proceeding further he observed : Vis-a-vis the company the managing director is undoubtedly the individual person who is appointed as such. The company is not concerned with the managing director's Hindu undivided family or the members thereof, just as the outside partners know only the 'karta' in his individual capacity as their partner and are not concerned with his Hindu undivided family or its members. The question whether the amount received by the 'karta' by way of managing director's remuneration in the one case or as his share of profits in the partnership business in the other case is his personal income or is the income of his Hindu undivided family cannot arise as between the company and the 'karta' as the managing director or between the outside partners and the 'karta' as a partner. Neither the company nor the outside partners, as the case may be, is or are interested in such a question. Such question can arise only as between the 'karta' and the members of his family and the answer to the question will depend on whether the remuneration or profit was earned with the help of j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest did not form part of his income for super-tax (super-tax follows income-tax) and the Special Commissioners, on appeal, discharged the assessment. On a case referred to it, the High Court held that for super-tax purposes (the same will be true of the income-tax) the interest in question was not income of the vendor but of the purchaser. The decision in Spence v. Commissioners of Inland Revenue [1941] 24 Tax Cas. 311 also bears on the point. In that case the facts were as follows : In 1931 the appellant entered into a contract to sell certain shares, the transfer of the shares to the purchaser being completed in 1933; in 1939, the appellant, having successfully pleaded fraudulent misrepresentation on the part of the purchaser, obtained a decree whereby the contract was reduced, the shares were re-transferred to the appellant, and the purchaser was ordered to pay him a lump sum being the difference between (i) the purchase price, which was repayable by the appellant with interest, together with a proportion of a loss suffered by the purchaser arising out of his possession of the shares, and (ii) a sum representing the dividends received by the purchaser while the shares st ..... X X X X Extracts X X X X X X X X Extracts X X X X
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