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TMI Blog1966 (2) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... . Mangoomal Kishanchand. Under the deed of partnership Shyam Sundar and Girdharlal were each entitled to a seventh share and the remaining five-sevenths share was to belong to Kishanchand as karta of the Hindu undivided family. Dividends received in respect of the shares were credited to the profit and loss account of the firm. In proceedings for assessment of the firm for the year 1959-60, it was claimed that the shares which stood registered in the name of Kishanchand belonged not to the Hindu undivided family but to the firm of Messrs. Mangoomal Kishanchand. The Income-tax Officer rejected that contention. He held that the Hindu undivided family was " the real and legal owner of the shares ", and that the shares were at no time the property of the firm. The order of the Income-tax Officer was confirmed in appeal by the Appellate Assistant Commissioner. In second appeal to the Income-tax Appellate Tribunal, it was contended on behalf of the Hindu undivided family that the dividend from the shares could be assessed only in the hands of the person who held ownership " legal as well as equitable " in the shares, and as the family had ceased to be the " equitable owner " of the sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esiding in the taxable territories during such year, accrue or arise, or are deemed to accrue or arise to him. By sub-section (3) of section 4 any income, profits or gains falling within the clauses (i) to (xxii) are not liable to be included in the total income of the person receiving them. Tax being charged by section 3 upon dividend income and not being excluded under section 4(3), such income would be chargeable to income-tax under the Act in the hands of the person to whom it accrues or by whom it is received. A company for its purposes does not recognize any trust or equitable ownership in shares : it merely recognizes the registered shareholder as the owner and pays the dividend to that shareholder. But the shares may, because of a trust or other fiduciary relationship, belong to a person other than the registered shareholder, and the dividend distributed by the company would for the purpose of tax be deemed to accrue or arise to the real owner of the shares. Section 16 of the Indian Income-tax Act, 1922, deals with the exemptions and exclusions in determining the total income. The expression " total income " is defined in section 2(15) : it means " total amount of income, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dual for the purpose of assessment, there shall be included-- (a) so much of the income of a wife or minor child of such individual as arises directly or indirectly-- (i) from the membership of the wife in a firm of which her husband is a partner ; (ii) from the admission of the minor to the benefits of partnership in a firm of which such individual is a partner ; (iii) from assets transferred directly or indirectly, to the wife by the husband otherwise than for adequate consideration or in connection with an agreement to live apart ; or (iv) from assets transferred directly or indirectly to the minor child not being a married daughter, by such individual otherwise than for adequate consideration ; and (b) so much of the income of any person or association of persons as arises from assets transferred otherwise than for adequate consideration to the person or association by such individual for the benefit of his wife or a minor child or both. " Under the Income-tax Act, 1922, certain items of income are exempt from liability to tax and do not enter into the computation of total income ; there are other items of income, which though exempt from tax are liable to be incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause provides that deduction made by a company and paid to the account of the Central Government in accordance with the provisions of section 18 and any sum by which a dividend has been increased under sub-section (2) of section 16 shall be treated as payment of income-tax or super-tax on behalf of the person from whose income the deduction was made, and credit shall be given to him therefor. In so far as it deals with dividend which is " grossed up ", sub-section (5) of section 18 forms a corollary to section 16(2). Therefore, when tax is paid on behalf of a shareholder and deduction is made from dividend, credit is given to him for the tax paid in his final assessment. But the scheme of " grossing up " is not susceptible of the interpretation that the income from dividend is to be regarded as the income only of the registered shareholder and not of the real owner of the share. The authorities of this court which have interpreted section 16(2) may be reviewed. In Howrah Trading Company's case it was held that a person who had purchased shares in a company under a blank transfer and in whose name the shares had not been registered in the books of the company is not a " shareholde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e shares stood in the register of the company, and as the Hindu undivided family was not a registered shareholder of the company, the amount deemed to be distributed could not be assessed as the income of the family under section 23A. The court in Shakuntala's case was dealing with notional income. The amounts which were not distributed by the company, but which by virtue of an order under section 23A of the Act were deemed to be distributed were sought to be assessed and the court held in the light of the express provisions of section 23A that the undistributed portion of the distributable income of the company of the previous year as computed for income-tax purposes shall be deemed to be distributed as dividend among the shareholders. The decision of the court was that for the purpose of section 23A, the expression " shareholder " meant only the registered shareholder and not an equitable owner. The decision has no bearing on the true interpretation of section 16(2). Reliance was placed by counsel for the appellant on the following observations made by Hidayatullah J. in delivering the judgment of this court in Howrah Trading Company's case : " The words of section 18(5) must ..... X X X X Extracts X X X X X X X X Extracts X X X X
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