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PETITIONER: COMMISSIONER OF INCOME-TAX, BOMBAYCITY II

       Vs.

RESPONDENT: SHAKUNTALA AND TWO OTHERS ETC.

DATE OF JUDGMENT: 18/07/1961

BENCH: DAS, S.K. BENCH: DAS, S.K. HIDAYATULLAH, M. SHAH, J.C.

CITATION:  1966 AIR  719            1966 SCR  (2) 871  CITATOR INFO :  RF         1966 SC1583  (7)

ACT: Income-Tax--Shares  registered in names of members of  Hindu undivided   family-Undistributed   income   deemed   to   be distributed dividend--Whether assessable in hands of family- Indian Income-tax Act, 1922 (11 of 1922), s. 23A.

HEADNOTE: A Hindu undivided family was the beneficiary of 1842  shares in  a  company;  but the shares were held in  the  names  of different  members of the family.  For the  assessment  year 1949-50 the Income-tax Officer applied the provisions of  s. 23A  of the Income-tax Act, 1922 (as it stood at that  time) and ordered that the undistributed portion of the assessable income  of the company in the previous year shall be  deemed to have been distributed as dividend among the shareholders. The proportionate amount of dividend in respect of the  1842 shares after being grossed up was added to the income of the joint family.  The assessee-family contended that the  divi- dend  deemed to have been distributed under s.23A should  be assessed  in  the hands of the shareholders and not  in  the hands of the family. Held,  that  the dividend deemed to  have  been  distributed under  s. 23A of the Act could not be assessed in the  hands of the Hindu undivided family but could be assessed only  in the  hands of the members of the family who were  registered shareholders of the company.  Under the express words of the section the artificial or notional income bad to be included in  the  total income of the  shareholder.   The  expression "shareholder"  in s.23A meant the person who was shown as  a shareholder in the register of the company.  The section did not  talk of the beneficial owner of the share.   The  Hindu undivided family was not a shareholder of the Company.   The fiction enacted by the legislature must be restricted to the plain terms of the statute. S.   C.  Cambatta  v. Commissioner  of  Income-tax,  Bombay, (1946)  14  I.  T. R. 748 and Shree Shakti  Mills  Ltd.,  v. Commissioner of Income-tax, Bombay, (1948) 16 1. T. R.  187, approved. Howrah  Trading  Co. Ltd., v.  Commissioner  of  Income-tax,

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Central Calcutta, (1959) 36 I.T.R. 215 and Oharandas Haridas v.  Commissioner of Income-tax, Bombay, (1960) 39 1.  T.  R. 202, applied. 872

JUDGMENT: CIVIL  APPELLATE JURISDICTION : Civil Appeals Nos. 125,  231 and 447 of 1960. Appeals  from  the judgment and order  dated  September  25, 1957, of the Bombay High Court of Income-tax References Nos. 30, 29 & 37/57, respectively. K.   N. Rajagopal Sastri and D. Gupta, for the appellant. A.   V.  Viswanatha  Sastri and J. B.  Dadachanji,  for  the respondents. 1961.  July, 18.  The Judgment of the Court was delivered by S.   K.  DAS, J. These three appeals, with special leave  of this  Court.. have been heard together.  They arise  out  of three  Income-tax  References  made to  the  High  Court  of Bombay, namely, Income-tax Reference No. 29 of 1957, Income- tax Reference No. 30 of 1957 and Incometax Reference No.  37 of  1957.  The facts are similar in the three cases and  the question  of law which the High Court had to answer was  the same  in each of the cases.  The High Court gave its  answer in its leading judgment in.  Income-tax Reference No. 29  of 1957,  and  the  other two References were  disposed  of  in accordance  with.  that answer.  For the purposes  of  these appeals,  it  would  be  enough if we  state  the  facts  of Reference No. 29 and then indicate the question which  arose for decision and the answer which the High Court gave to it. One  Nanalal  Haridas  was the karta of  a  Hindu  undivided family  which admittedly was the beneficiary of 1842  shares in  a  company called the Cotton Export and  Import  Limited (hereinafter  referred to as the Company).  The shares  were held  in  the names of different members of  the  family  as given below.  873 No.  of shares               Name or names in which                       they stand     877                       Tribhuvandas Haridas     815                       Nanalal Haridas     150                       Nanalal Haridas and                       Tribhuvandas Haridas The   Company  was  one  in  which  the  public   were   not substantially  interested.  For the assessment year  1949-50 the  Income-tax Officer concerned applied the provisions  of s.  23A  of  the Indian Income-tax Act, 1922  (as  it  stood previous  to  :the amendment of 1955) and ordered  that  the undistributed  portion  of  the  assessable  income  of  the Company  of  the  relevant previous year,  as  computed  for income-tax purposes and reduced by the amount of  income-tax and  supper-tax payable by it in respect thereof,  shall  be deemed  to  have  been distributed  as  dividend  among  the shareholders as at the date of the relevant General  Meeting of the-Company.  The:proportionate;amount of dividend of the 1842 shares, after being grossed up, came to Rs.  54,30,7/-. This  amount the Income-tax Officer added to the  income  of the  joint  family.  The assessee family  claimed  that  the dividend deemed to have been distributed under s. 23A should be  assessed in the hands of the shareholders, that is,  the persons  in whose names the, shares stood registered in  the books  of  the Company, and not in the hands  of  the  Hindu undivided  family though ;admittedly it was the  beneficiary of  the  shares.  The Income-tax Officer and  the  Appellate

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Assistant,Commissioner   rejected  ,this  contention.    The matter  them  went  in appeal to  the  Income-tax  Appellate Tribunal.  The Department contended before the Tribunal that having  regard  to  the scheme of s.23 A  and  the  ordinary dictionary  meaning of the word "share holder, there was  no reason  why  the joint family should not be held to  be  the shareholder  within the meaning of s 23 A. The  Tribunal  by its order dated February 15, 1957, expressed the view that 874 the  interpretation  of  s.  23A  for  which  the   assessee contended would defeat the very purpose of that section, but held  that it was bound by the decision of the  Bombay  High Court  in  S. C. Cambatta V.  Commissioner  of  Income,-tax, Bombay  (1).  Accordingly, the Tribunal allowed  the  appeal and directed the Income-tax Officer concerned to delete  the deemed  dividend  income  from  the  income  of  the   Hindu undivided  family.  The Commissioner of Income-tax,  Bombay, then  moved the Tribunal to refer the following question  of law to the High Court of Bombay:       "Whether  the dividend income of Rs.  54,307/-       is  to  be  assessed  in  the  hands  of   the       assessee, the Hindu undivided family? The Tribunal was of the view that the question did arise out of  its  order  and  made a  reference  to  the  High  Court accordingly. The  High  Court  by its order  dated  September  25,  1957, answered  the question in favour of the assessee.   It  held that  in  respect  of  an income  which  was  deemed  to  be distributed  under the provisions of s. 23A, the section  in terms   provided  that  the  proportionate  share   of   the shareholders  in  such distribution should  be  included  in their income; and as the Hindu undivided family was not  and could  not be a registered shareholder of the  Company,  the amount in question could not be treated as the income of the Hindu undivided family under the provisions of that section. The High Court re-affirmed the view it had expressed in  its earlier  decision  in  S. C.  Cambatta  v.  Commissioner  of Income-tax, Bombay (1). The High Court having refused leave to appeal to this  Court from  its decision in question, the Commissioner of  Income- tax,  Bombay,  applied to this Court for special  leave  and having obtained (1)  (1946) 14 I.T.R. 748. 875 such leave has brought these appeals to this Court. It  is necessary now to read the relevant portion of s.  23A as it stood prior to its amendment by the Finance Act, 1955.       "23A: Power  to assess individual  members  of       certain companies.       (1)   where   the   Income-tax   Officer    is       satisfied that in respect of any previous year       the profits and gains distributed as dividends       by  any  company up to the end  of  the  sixth       month  after  its accounts for  that  previous       year  are laid before the company  in  general       meeting  are less than sixty per cent  of  the       assessable  income  of  the  company  of  that       previous  year,  as reduced by the  amount  of       income-tax   and  super-tax  payable  by   the       company in respect thereof he shall, unless he       is  satisfied  that having  regard  to  losses       incurred by the company in earlier years or to       the smallness of the profits made, the payment       of  a dividend or a larger dividend than  that       declared would be unreasonable, make with  the

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     previous approval of the Inspecting  Assistant       Commissioner  an  order in  writing  that  the       undistributed portion of the assessable income       of  the  company  of  that  previous  year  as       computed  for income-tax porposes and  reduced       by  the  amount of  income-tax  and  super-tax       payable  by  the company  in  respect  thereof       shall  be deemed to have been  distributed  as       dividend  amongst the shareholders as  at  the                     date  of  the general  meeting  aforesaid,  and       thereupon  the proportionate share thereof  of       each  shareholder  shall be  included  in  the       total  income  of  such  shareholder  for  the       purpose of assessing his total income        x                    x         x       876       Provided- further that this- sub-section shall       not  apply to any company in which the  public       are  substantially  interested or  to  a  sub-       sidiary company of such a company if the whole       of  the  share capital  of-’  such  subsidiary       company  is held by the parent company  or  by       the nominees thereof." The  section  in  effect creates  a  fictional  or  notional dividend-income  which  is  not  in  fact  received  by  the shareholder.   The notional dividend is deemed to have  been distributed’  as  on the date on which the accounts  of  the previous  year  were laid before the. company in  a  general meeting.   It is clear from the section that an  order  made under it is not in itself an order of assessment-, it has to be followed by an assessment on the shareholder either under s. 23 or under s.34. Under the express terms of the section, the artificial or notional income has to be included in  the total  income  of  the  shareholders  for  the   purpose  of assessing his total income.  The High Court has referred  to its earlier decision in S.C. Cambatta.  Thee Commissioner of Income tax, Bombay(1).  That decision laid down that where a share, stood registered in two or more names, the registered holders  treated  as  an  association  of  persons  must  be regarded  I as the ,shareholder’ under s.23A and’ they  must be  assessed accordingly.  It further laid down that’s.  23A did  not- say anything about equities or  beneficial  owner- ship;  it was a procedural section not a  charging  section. It  created a notional incomes which was  wholly  artificial and did not in fact exist in the pocket of any  shareholder. In   a  later  provision  in  Shree-Shakti  Mills  Ltd.   v. Commissioner of,’ Income-tax, Bombay, City(2) the. same High Co-art held that the, expression "shareholder" mentioned  in a.  18(5)  of the Act meant the person who was shown  as  ’a shareholder in the, register of the company and it was only, the  shareholder  of  a  company who  was  entitled  to  the procedure  (1)  (1946) 14 I.T.R. 748. (2) (1948)  16  I.T.R. 187.  877 of  processing permissible under ss. 16 (2) and 18(5 of  the Act.  This view was accepted by this Court in Howrah Trading Co., Ltd.  Commissioner of Income-tax, Central Calcutta  (1) where  it  said that no valid reason existed as to  why  the expression  ’shareholder’ as used in s. 18(5) should mean  a person other than the one denoted by the same expression  in the Indian Companies Act, 1913.  A reference was made to the decision of the Bombay High Court in Shree Shakti Mills Ltd. v.  Commissioner  of Income-tax, Bombay  City(2)  and  other decisions  bearing  on the subject.  Similarly,  we  see  no reason why the expression ’shareholder’ in s. 23A should not

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have  the same meaning, namely, a shareholder registered  in the  books  of the company.  It would be  anomalous  if  the expression  "shareholder’ has one meaning in S. 18(5) and  a different meaning in s. 23A of the Act ; for that would mean that  a Hindu undivided family treated as a shareholder  for the  purpose of s. 23A would not be entitled to the  benefit of s. 18(5) of the Act. The  learned counsel for the appellant has urged two  points in   support   of  his  contention   that   the   expression "shareholder’ in s. 23A means the person who owns the share, irrespective  of  the circumstance whether  that  person  is registered in. the books of the company as a shareholder  or not.  His first point is that the very object of the section is to prevent avoidance of super-tax by the shareholders  of a  company, and if the beneficial owner of the shares  is  a Hindu undivided family, that family will not come within the purview of s. 23A, because a Hindu undivided family as  such cannot be a shareholder in a company.  The argument is  that the narrow interpretation put on s.23 A will defeat the very purpose of the section.  The second point urged is that  the principle that a (1)  (1959) 36 I.T.R. 215. (2) (1948) 16 I.T.R. 187, 878 legal  fiction  must be carried to  its  logical  conclusion cannot be overlooked in construing s. 23A. The legal fiction enjoined by the section is that the profits must be  ’deemed to   have   been  distributed  as   dividend   amongst   the shareholders  as at the date of the general meeting".   This legal  fiction must be carried to its logical conclusion  by holding that the dividend had been actually distributed  and received  by the Hindu undivided family.  It is pointed  out that  if the same dividend were actually distributed by  the company,  it would certainly be income in the hands  of  the Hindu  undivided  family which would be liable  to  pay  all taxes on its income, whether actual or artificial. We  do not think that either of the two points urged by  the appellant is really decisive of the question.  The  question is  really  one  of interpretation of s. 23A,  and  we  must interpret  s.  23A  with reference to its  own  terms.   The section in express terms says that "the proportionate  share of each shareholder shall be included in the total income of the  shareholder  for  the purpose of  assessing  his  total income".  The section does not talk of the beneficial  owner of  the share.  It talks of the shareholder  only.   Section 18(5) of the Act deals with grossing up of dividend and  two expressions  occur therein "owner of the security"  and  the ’,’shareholder".   So far as the expression "’owner  of  the security"  is concerned it may perhaps include a  beneficial owner  ;  but it has been decided by this  Court  that  the- expression  "shareholder" in s.18 (5) means the  shareholder registered in the books of the company.  As we have  earlier said,  no  good  reason  exists as  to  why  the  expression "shareholder"  in  s. 23A shall not have the  same  meaning. Sub-sections  (3) and (4) of s. 23A also make  the  position clear:  they  talk  of members of the company  and  a  Hindu undivided family as such is not a member of the company. 879 The  position  of  a  Hindu  undivided  family  vis-a-vis  a partnership  was  considered  by  this  Court  in  Charandas Haridas  v.  Commissioner  of  Income-tax  Bombay  (1)   and Commissioner of Income-tax, Bombay v. Nandlal Gandalal  (?). It  is not disputed that the Hindu undivided family as  such was  not a shareholder of the company in the  present  case. Therefore,  so far as the notional income is  concerned,  we must go by the terms of s.23A and if there is any lacuna  in

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the  wording of the section, we cannot cure it in the  guise of interpretation.  The question here is not one of deciding the  matter  from the point of view of partnership  law,  or Hindu  law, as was the question in Commissioner  of  Income- tax,  Bombay  v.  Nandlal  Gandalal  (2)  which  led  to   a difference  of  opinion.   The  question  here  is  one   of interpretation  only and that interpretation must, be  based on  the  terms of the section.  The fiction enacted  by  the Legislature  must be restricted by the plain terms  of’  the statute.   Nor  do  we  see flow it can  be  said  that  the interpretation  put  on  s.23A  that it  is  confined  to  a shareholder registered in the books of’ the company  defeats the  very  purpose of the section.  The section  will  still apply  to  shareholders of the company and to  their  income will  be added the notional income determined under s.  23A. We are unable to accept the argument that the principle that a  legal fiction must be carried to its  logical  conclusion requires  us  to travel beyond the terms of the  section  or give  the expression "shareholder" a meaning which  it  does not obviously bear. For  these  reasons we are of the view that the  High  Court correctly  answered the question which was referred  to  it. In view of that answer the High Court rightly held that  the second question referred to it did not fall for (1)  (1960) 39 1. T. R. 202, (2) (1960) 40 I. T. R 1                     880 consideration.   The  result, therefore, is that  all  these three  appeals fail and must be dismissed with costs  ;  one hearing fee. Appeals dismissed.