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PETITIONER: PROVAT KUMAR MITTER

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX,WEST BENGAL

DATE OF JUDGMENT: 08/12/1960

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

CITATION:  1961 AIR 1019            1961 SCR  (3)  37  CITATOR INFO :  D          1961 SC1023  (7)  RF         1961 SC1059  (6)  D          1967 SC 383  (10)

ACT: Income  Tax-Assignment by shareholder of right  to  dividend Liability to tax of such share-holder-Indian Income-tax Act, 1922 (11 of 1922), ss. 16(1)(c), 16(3).

HEADNOTE: The appellant who was the registered holder of 500 shares of a  company executed a deed dated January 19, 1953, by  which he assigned to his wife the right, title and interest to all dividends and sums of money which might be declared or might become due on account or in respect of those shares for  the term of her natural life.  During the accounting year  which ended on March 31, 1953, the dividend declared on the shares amounted  to Rs. 12,000, and in assessing the appellant  for the assessment year 1953-54 the Income-tax Officer  included the said sum in his income under s. 16(i)(c) and s. 16(3) of the Indian Income-tax Act, 1922. The appellant claimed  that since  the settlement was for the lifetime of his wife,  the third proviso to s. 16(i)(c) applied and the dividend  which his wife received could not be deemed to be his income under s.  16(i)(c), and that s. 16(3) was not  applicable  because there was no transfer of the shares to his wife. Held,  that on its true construction the deed dated  January 19, 1953, was not a transfer of any existing property of the appellant  namely,  the  shares  held by  him,  but  only  a contract  to transfer or make over in future every  dividend and  sum  of money which may be declared or become  due  and payable on account or in respect of the shares, to his  wife during  her  lifetime.   Since the  company  could  pay  the dividend  only  to the registered shareholder or  under  his orders,  the  income continued to accrue  to  the  appellant though  applied  subsequently towards payment  to  the  wife under the terms of the contract.  The income, therefore, was assessable in the hands of the appellant. Howrah Trading Co.  Ltd. v. Commissioner of Income-tax, Cal- cutta, [1959] SUPP. 2 S.C.R. 448, relied on. Bacha  F.  Guzday  v. Commissioner  of  Income-tax,  Bombay,

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[1955] 1 S.C.R. 876, held not applicable. Bejoy Singh Dhudhuria v.  Commissioner of Income-tax, (1933) L.R. 60 I.A. 196, distinguished.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 366 of 1959. 38 Appeal from the judgment and order dated September 18, 1958, of the Calcutta High Court in Income Tax Reference No. 9  of 1955. S.   Mitra and S. N. Mukherjee, for the appellant. K.   N. Rajagopal Sastri and D. Gupta, for the respondent. 1960.   December 8. The Judgment of the Court was  delivered by. S.   K.  DAS,  J.-This  is an appeal  on  a  certificate  of fitness  granted  by  the High Court of  Calcutta  under  s. 66A(2)  of the Indian Income-tax Act, 1922.   The  assessee, Provat  Kumar Mitter, is the appellant before us. He  was  a registered  holder of 500 Ordinary shares. of  the  Calcutta Agency  Ltd.   By a written instrument,  dated  January  19, 1953, he assigned to his wife, Ena Mitter, the right,  title and interest to all dividends and sums of money which  might be declared or might become due on account or in respect  of those shares for the term of her natural life.  We may  read here the material portion of the instrument:               "This  Deed Witnesseth that for effecting  the               said  desire  and  in  consideration  of   the               natural love and affection of the Settlor  for               the Beneficiary the Settlor as the  beneficial               owner assigns unto the Beneficiary the  right,               title  and interest to every dividend and  sum               of  money which may be declared or become  due               and payable on account of or in respect of the               said  shares  (not being the  price  or  value               thereof) and further hereby covenants with the               Beneficiary  to hand over and/or endorse  over               to the Beneficiary any dividend Warrant or any               other  document of title to such  dividend  or               sum of money as aforesaid and to instruct  the               said Company to pay any such dividend or  such               sum  of money to the Beneficiary To  Hold  the               same  unto the Beneficiary  absolutely  during               the term of her natural life.               And It Is Hereby Agreed And Declared that  the               Beneficiary shall remain entitled to and shall               receive  and  stand  possessed  absolutely  of               every dividend and sum of money which she  may               receive on               39               account of the said shares during the term  of               her  natural life and that the  Settlor  shall               have  no right, title or interest  therein  or               derive  any benefit therefrom during the  said               period." It  is to be noticed that under the terms quoted  above  the shares themselves remained the property of the assessee, and it was only the income arising therefrom which was sought to be  settled or assigned to his wife.  During the  accounting year which ended on March 31, 1953, the dividend declared on the  shares  amounted to Rs. 12,000.  In assessing  the  as- sessee  for  the  assessment  year  1953-54  the  Income-tax Officer  included the said sum of Rs. 12,000 in  his  income under the provisions of s. 16(1)(c) and s. 16(3) of the Act,

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as  he said in his assessment order.  The contention of  the assessee was that since the settlement was for the  lifetime of  his wife, the third proviso to s. 16(1)(c)  applied  and the dividend which his wife received could not be deemed  to be  his income under s. 16(1)(c); as to s. 16(3) of the  Act the assessee contended that it did not apply, because  there was  no transfer of the shares to his wife.   The  assessee, accordingly,  appealed  to  the  Appellate  Assistant   Com- missioner.    Before  that  authority  a  somewhat   unusual contention  was  put forward on behalf  of  the  Department, viz.,  that  the  third proviso to  s.  16(1)(c)  should  be ignored inasmuch as it was repugnant to the main  provisions contained in s. 16(1)(c) and the general scheme of the  Act. A  further contention urged on behalf of the Department  was that since the shares continued to stand in the name of  the assessee  and the dividends had been declared in  his  name, the transfer of the dividend to the beneficiary was only  an application  of  the dividend income  and,  therefore,,  the assessee could not claim exemption from being taxed on it as a   part  of  his  own  income.   The  Appellate   Assistant Commissioner  accepted  both the aforesaid  contentions  and dismissed the appeal. In  a further appeal to the Income-tax  Appellate  Tribunal, the  assessee  again  relied  on the  third  proviso  to  s. 16(1)(c)  of  the Act and  the  Departmental  Representative urged the same two contentions plus 40 a new one to the effect that the deed by which the  dividend had  been transferred was altogether invalid inasmuch as  it was  an  unregistered instrument and,  therefore,  no  valid transfer  of  the dividend income had been effected  by  it. The  Tribunal rejected the Department’s contention that  the third proviso was in conflict with the main provisions of s. 16(1)(c)  or  the  scheme  of the Act.   As  to  the  second contention  that the transfer of the dividend income  was  a mere application of it by the assessee after it had  accrued to  him, the Tribunal apparently expressed no  opinion.   It gave  effect,  however,  to  the  third  contention  of  the Department,  namely,  that the deed  being  an  unregistered instrument  did  not  operate as a  valid  transfer  of  the dividend income in favour of the assessee’s wife. Both  the  assessee  and the  Commissioner  then  moved  the Tribunal to refer to the High Court the questions which  had respectively  been decided adversely to them.  The  Tribunal acceded  to the request and referred three questions to  the High Court, two at the instance of the Commissioner and  one at  the  instance of the assessee.  The  questions  referred were as follows :               "(1) Whether the deed dated January 19,  1953,               assigning  the dividends to accrue, merely  on               account of natural love and affection, is void               as it is not registered?               (2)   Whether  the  third proviso  to  section               16(1)(c)  is  repugnant  to  the  main  clause               16(1)(c)  and the general scheme of  the  Act,               and should not be given effect to?               (3)   Whether, on the facts and in the circum-               stances  of the case, the payment of  dividend               income  to  the assessee’s wife,  Ena  Mitter,               under  the covenant in the deed of  assignment               dated  January 19, 1953, was merely a case  of               application of the assessee’s income?" The High Court answered the first two questions in favour of the  assessee.   It answered the  third  question,  however, against the assessee and in favour of the  Department.   The

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High Court expressed its conclusion on the third question in the following words: 41               "...............  the conclusion must be  that                             there  being only a voluntary covenant  entere d               into by the settlor to pay over the  dividends               received by him to the wife or to instruct the               company to pay them to her and the income  not               having  been made the wife’s income  from  the               beginning, what the settlement provides for is               only   an  application  of  the   income   and               therefore  the  income is  assessable  in  the               hands of the settlor, irrespective of  whether               the  wife is also assessable on her  receipts.               The case is outside the main clause of section               16(1)(c) and, therefore, the third proviso  to               the section is also not relevant." The  appeal  before  us is limited to the  question  of  the correctness  or  otherwise of the answer given by  the  High Court to the third question.  The first two questions having been  answered in favour of the assessee and the  Department not having filed any appeal with regard to them, we are  not concerned  with the correctness or otherwise of the  answers given by the High Court to those questions and we express no opinion as respects those answers. On behalf of the appellant it has been argued that the  High Court  should not have answered the third question,  because it  did  not arise out of the order of  the  Tribunal.   The argument  is  that under s. 66 of the  Income-tax  Act,  the Tribunal  could refer to the High Court any question of  law which  arose  out of its order, but it was not open  to  the Tribunal to refer a question which did not so arise.  We are unable  to accept the contention that the question  did  not arise out of the Tribunal’s order.  Indeed, it is true as we have  stated  earlier, that the Tribunal did not  state  its specific  finding on this question; but in the statement  of the case drawn up by the Tribunal under s. 66 it has  stated that  though no specific finding was given the question  was raised  by  the Department and by  implication  was  decided against the respondent.  In its application to the  Tribunal for   a  reference,  the  present  respondent   specifically mentioned  the question as one decided adversely to  it  and though the appellant 42 submitted that the question did not arise, the Tribunal held that the question did arise out of its order.  No  objection appears  to  have  been  taken in  the  High  Court  to  the reference  made  by  the Tribunal  on  the  three  questions including  the  one now under consideration before  us.   In these  circumstances  it  is not open to  the  appellant  to contend  now  that  the question did not arise  out  of  the Tribunal’s   order.   We  must,  therefore,  overrule   this contention. - Now,  as to the correctness of the answer given by the  High Court.  Learned counsel for the appellant has contended that the High Court did not correctly construe the instrument  of January  19,  1953, and on a proper construction,  the  High Court  should have held that a right of property in  present was  assigned  in favour of the wife.  Learned  counsel  has submitted  that the assessee as a registered holder  of  500 Ordinary shares of the Calcutta Agency Ltd., had a bundle of rights  in the Company: (1) a right to vote; (2) a right  to participate in the distribution of assets on dissolution  or liquidation  of the Company; and (3) a right to  participate

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in the profits, e.g., dividends which might be declared.  It is contended that the aforesaid third right was assigned  to the  wife by the assessee, and that the High  Court  ignored the said assignment while it emphasised the other  covenants for  endorsing or handing over the dividend  warrants,  etc. In  support of his contention learned counsel has relied  on certain  observations made by this Court in Bacha F.  Guzdar v. Commissioner of Income-tax, Bombay (1) at p. 883. ,  That was a case in which the question that arose for decision was whether   dividend  declared  by  a,  company  growing   and manufacturing tea was agricultural income within the meaning of  s.  2(1)  of the Income-tax Act and  hence  exempt  from income-tax under s. 4(3)(viii) of the said Act.  It was held that  the dividend of a shareholder was the outcome  of  his right  to participate in the profits of the company  arising out of the contractual relation between the company and  the shareholder,  and the observations on which learned  counsel has relied were to the effect (1)  [1955] 1 S.C.R. 876. 43 that  "the  right  to  participate  in  the  profits  exists independently  of  any declaration by the company  with  the only  difference that the enjoyment of profits is  postponed until dividends are declared." We  do  not  think  that  those  observations  are  of   any assistance to the appellant in the solution of the  question before  us,  which  is really one  of  construction  of  the instrument of January 19, 1953.  A transfer of property  may take place not only in the present, but also in future;  but the  property must be in existence.  It is clear to us  that the  instrument of January 19, 1953, was not a  transfer  of any  existing property of the assessee.  It was in its  true nature  a contract to transfer or make over in future  every dividend  and sum of money which may be declared  or  become due and payable on account or in respect of the shares  held by the assessee, to his wife during her lifetime; the  other covenants  are  ancillary in nature and subserve  this  main object  of  the contract.  The assessee did not  assign  the shares and, therefore, retained the right to participate  in the profits of the company; he did not part with that right. What  the  contract  provided  for  was  merely  this:   the beneficiary was given the right to receive from the assessee every dividend and other sum of money which may be  declared or become due and payable in respect of the shares.  If this is  the true construction of the document, then it is  clear to  us  that  the  answer given by the  High  Court  to  the question referred to it is correct.  The High Court  rightly pointed  out that the Company paying the dividend can  pay. it  only to the registered shareholder or under  his  orders (see Howrah Trading Co. Ltd. v. Commissioner of  Income-tax, Central,  Calcutta)  (1);  therefore,  s.  16(1)(c)  of  the Income-tax  Act  was  not attracted nor  the  third  proviso thereto, and the income continued to accrue to the  assessee but was thereafter paid over to his wife under the terms  of the contract.  The income was, therefore, assessable in  the hands  of  the assessee, because it was part of  his  income though  applied  subsequently towards payment  to  the  wife under the terms of the contract. (1)  [1959] Supp. 2 S.C.R. 448. 44 In  this view of the matter, it is not necessary  to  decide the  further question if a contract of this nature  operates only  as a contract to be performed in future which  may  be specifically  enforced  as soon as the property  comes  into existence  or is a contract which fastens upon the  property

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as  soon  as the settlor acquires it. In  either  view,  the income  from  the shares will first accrue  to  the  settlor before  the  beneficiary  can  get  it.   Such  income  will undoubtedly  be  assessable  in the  hands  of  the  settlor despite  the contract.  We think that the true  position  is that if a person has alienated or assigned the source of his income so that it is no longer his, he may not be taxed upon the income arising after the assignment of the source, apart from  special  statutory provisions like s. 16(1)(c)  or  s. 16(3)  which  artificially  deem it  to  be  the  assignor’s income.   But if the assessee merely applies the  income  so that  it  passes  through him and goes  on  to  an  ultimate purpose,  even  though  he may have  entered  into  a  legal obligation  to apply it in that way, it remains his  income. This  is exactly what has happened in the present case.   We need  only  add that the principle laid down  by  the  Privy Council in Bejoy Singh Dudhuria v. Commissioner  of  Income- tax (3), does not apply to    this case; because this is not a case of an allocation of    a sum out of revenue before it becomes  income  in  the hands of the  assessee.   In  other words,  this is not a case of diversion of income before  it accrues but of application of income after it accrues. We  have,  therefore, come to the conclusion that  the  High Court  correctly answered the question referred to it.   The appeal fails and is dismissed with costs.                      Appeal dismissed. 45