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PETITIONER: COMMISSIONER OF INCOME TAX WEST BENGAL I, CALCUTTA

       Vs.

RESPONDENT: CLIVE INSURANCE CO.  LTD., CALCUTTA

DATE OF JUDGMENT02/05/1978

BENCH: DESAI, D.A. BENCH: DESAI, D.A. CHANDRACHUD, Y.V. ((CJ) PATHAK, R.S.

CITATION:  1978 AIR 1290            1978 SCR  (3) 844  1978 SCC  (3) 161

ACT: Income-tax  Act, 1922, S. 49D-Relief in respect  of  Incomes accruing or arising outside the taxable  territories-Warrant of  Payment  of interim dividend shows  net  dividend  after deducting at source U.K. income-tax and certified to be,  so Whether  relief under s. 49D of the Act permissible  to  the assessee.

HEADNOTE: The claim for relief under s. 49D of the Income Tax Act 1922 made  by the respondent-assessee Company in its  return  for the  assessment  year 1960-61, the  relevant  previous  year being the calendar year 1959, in respect of the net dividend income of Rs. 15,266/- after deduction of British income-tax of  Rs.  9,881/-  was rejected  by  the  Income-tax  Officer without making the reasons for his decision explicit. In   appeal  by  the  assessee,  the   Appellate   Assistant Commissioner  confirmed  the  decision  of  the   Income-tax Officer  observing  that  even if it be held  that  the  net dividend  income  suffered U.K. tax by deduction,  there  is nothing  to  show  that the tax deducted was  paid  to  U.K. Revenue  and therefore s. 49D is not attracted.  In  further appeal by the assessee the Tribunal accepted the  contention of the assessee and at the instance of the Revenue  referred the  question  to the High Court.  The High Court  after  an exhaustive  examination  of the relevant provisions  of  the Income-tax  Act  of U.K. and the decisions  bearing  on  the question confirmed the decision of the Tribunal. Dismissing the appeal by certificate, the Court HELD  : 1. All the requirements of s. 49D of the  Income-tax 1922   read  with  Explanation  have   been   satisfactorily established  by  the assessee and therefore the  High  Court rightly  answered the question in the affirmative in  favour of the assessee. [854 F] 2.To  be eligible for relief under s. 49D read  with  its Explanation, the assessee must establish excluding the  non- disputed requirement that (i) the assessee has income  which has  accrued or arisen without taxable territory;  and  (ii) the assessee has paid in any country income-tax by deduction or  otherwise under the law in force in that country;  (iii) in  that  event  the  assessee  would  be  entitled  to  the

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deduction from Indian income tax payable by him; (iv) a  sum calculated on such doubly taxed income at the Indian rate of tax  or  the rate of tax of the said country,  whichever  is lower.  The expression rate of tax of the said country’ must be  given  the  meaning  as set out in  para  (iii)  of  the explanation  and  in doing so the importance  of  the  words ’income  assessed  in the said country’ has to be  borne  in mind. [847 F-H] 3.Under  U.K.  law,  the company has to pay  tax  on  its profits  or  gains  as its liability and  not  as  agent  of members  to  whom dividend is distributed  out  of  profits. Therefore,  if dividend is distributed after profit or  gain of  the company is charged to tax, it is optional  with  the company either to deduct or not to deduct income tax paid by it  from the dividend paid to members and if it  chooses  to exercise the option it can do so at standard rate.  There is no specific provision under U.K. Income-tax Act which  would show  that  dividend  income in U.K. in  the  hands  of  the assessee is exempt from payment of income tax.  The  company is liable to pay income-tax on its profits and gains and  s. 184 enables the company to deduct from the dividend paid out of  profits, tax at the standard rate for the year in  which the  amount payable becomes due.  Dividends which  represent the  distribution of a taxed Fund are, therefore  styled  as franked  income so far as concerns any further  taxation  at the standard rate, i.e. the rate at which deduction has been made.   The assumption underlying this position is that  the dividend  represents the residue of the total  income  which has already been 845 taxed in the hands of the company, the fiction being that if tax  was  not paid by the company there would  have  been  a higher  dividend  and,  therefore, the  dividend  income  is already   taxed.   The  company  is  treated  as   a   large partnership and though this system is highly artificial  but it is a domestic expedient limited in its operation to  U.K. [849 F-G, 850 B-D, 851 E] According to the statute law of U.K. and the  interpretation put  on  it  by  the highest  court  in  that  country,  the dividends  which have borne tax in the hands of  the  paying company  were treated as franked income in the hands of  the assessee.   In other words it would mean that the income  is the  income in the form of dividends has been  subjected  to tax.   It is immaterial whether they are taxed in the  hands of  the  assessee or not but they are deemed  to  have  been taxed  in the hands of the assessee in U.K. Dividends  which are  styled as franked income have borne tax at the  source. [852 C-D, F] If the dividends styled as franked income have been  charged to  income-tax at the source, it would mean that it  is  the income  in  respect  of which income tax has  been  paid  by deduction  or otherwise in accordance with the law in  force in  the country in which the income accrued.  If it  is  now charged to tax under the Indian Income-tax Act it  obviously becomes a doubly taxed income and one of the requirements of s. 49D would be satisfied. [852 F-G] Bradbury v. English Sewing Cotton Co. Ltd., 8 Tax Cases  481 (House  of Lords), Commissioners of Inland Revenue v.  Cull, 22  Tax Cases 603 at 636 Canadian Eagle Oil Co. Ltd. v.  The King, 27 Tax Cases 205; Cenlon Finance Co.  Ltd. v. Ellwood, 40  Tax  Cases  176 at 205; F. S. Securities  Ltd.  v.  Com- missioners of Inland Revenue, 41 Tax Cases 666 discussed. 4.Undoubtedly  to be entitled to relief under s. 49D  the requirements  for  eligibility therein  prescribed  must  be satisfied  by  the assessee. one such  requirement  is  that

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income  in respect of which relief from double  taxation  is sought,  is  the  income in respect of  which  he  has  paid income-tax by deduction or otherwise under the law in  force in the country in which the income accrued. [853 A] While  examining  the  question  whether  the  assessee  has fulfilled  this requirement, it will have to be  ascertained what  is  the law bearing on income-tax in  the  country  in which  income has arisen and whether according to that  law, the  said income has suffered tax by deduction or  otherwise again  according to the law in that country.   According  to the   income-tax  law  in  U.K.  dividends   represent   the distribution  of  a taxed fund and are therefore  styled  as franked  income.   The  payment of tax by  the  company  and deduction made at standard rate from dividend distributed to shareholder  operates in relief of the  shareholders.   Such dividend income according to the law of the country where it has arisen is deemed to have been subjected to tax.   Viewed from  this  angle  the  dividend  income  in  the  hands  of shareholder is not charged to income-tax.[853 B-C] Inland Revenue Commissioner v. Blott, [1921] A.C. 171 @ 201; quoted with approval. 5.Once  it  is  accepted  that  the  dividend  represents franked income distributed out of profits and gains and  not liable  to  further income-tax in the hands  of  member,  it clearly  transpires that for relief against double  taxation it  is  the income which has been subjected to  tax  in  the foreign  country in which it has arisen and irrespective  of the  fact that there is no provision comparable to s.  18(5) of our Act in the Income-tax Act of U.K. yet the payment  of tax by the company operates in relief of the shareholder and on that account alone the dividend income is not  chargeable to  tax  in U.K. Therefore, it can be said  with  reasonable certainty  that  in respect of the dividend  income  of  the assessee income-tax has been paid by deduction or  otherwise under  the law in force in the country in which  income  has arisen.   The principle of agency in payment by the  company is  worked  out on the basis of company being treated  as  a large partnership so that the payment of tax by the  company would operate to discharge the quasi-partners. [854 D-E] commissioner  of Income-tax v. Tata Sons P. Ltd.  [1974]  97 ITR  128; Commissioner of Income Tax v. Cotton Fabrics  Ltd. [1976] 104 ITR 233 over-ruled, 846 6.The expression ’income assessed in the foreign  country would  clearly,  in the context in which it  is  used,  mean subjected  to  tax  in the foreign  country.   In  order  to ascertain  whether the rate under the Indian Income-tax  Act or  the rate of tax in the foreign country is  lower,  apart from  any other consideration, the rate. of tax in  U.K.  in the  context  of  dividend income  is  easily  ascertainable inasmuch  as company can deduct income-tax at standard  rate only.   Undoubtedly, where the assessee was also  liable  to pay  surtax in U.K. on the dividend income  no  complication would  arise  in  working out the  rate  because  surtax  is payable  on dividend income.  But in the present  case  that difficulty  does not arise as the assessee being a  company, it  was  neither liable to any surtax nor  entitled  to  any relief  in  U.K.,  and, therefore, the rate of  tax  can  be worked out with certainty consistent with the provisions  of para  (iii)  of  the Explanation.   The  assessee  thus,  in respect of the dividend income has paid tax at the  standard rate and that is the rate of tax of the foreign country  for the purpose of para (iii) of the Explanation. [853 F-H,  854 A]

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JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1590 (T)  of 1973. From  the Judgment and Order dated the 11th May 1971 of  the Calcutta High Court in Income Tax Ref.  No. 138 of 1967. S. I. Desai, K. C. Dua and A. Subhashini for the Appellant. K.   Ray, J. Ramamurthy and D. N. Gupta for the Respondent. The Judgment of the Court was delivered by DESAI,  J.  The  Revenue  in  this  appeal  by   certificate questions  the correctness of the judgment of  the  Calcutta High Court in Income Tax Reference No. 138 of 1967 in  which the  Income  Tax  Appellate Tribunal,  Calcutta  Bench  ’A’, referred  the following question to the High Court  for  its opinion               "Whether on the facts and in the circumstances               of  the  case, the assessee could be  said  to               have paid income-tax in U. K. by deduction  or               otherwise  in respect of the net dividends  of               Rs. 15,266 so as to be eligible for the relief               contemplated  by  section 49D  of  the  Indian               Income Tax Act,, 1922 ?" The  Respondent assessee is a resident Company  carrying  on business  of general insurance.  The Company held shares  of U.K.based joint stock companies.  The net dividend income in respect  of the shares held by it amounted to  Rs.  15,266/- after deduction of British Income-tax of Rs. 9 8 8 1 /-, the amount  being  stated  in  rupee  equivalent  of  the  pound sterling.   For  the assessment year  1960-61  the  relevant previous  year  being the calendar year 1959,  the  assessee applied  for  relief under S. 49D of the  Indian  Income-tax Act,  1922  (for short the Act’).’  The  Income-tax  Officer declined  to  grant  the  relief but  the  reasons  for  the decision were not made explicit.  In appeal by the assessee, the Appellate Assistant Commissioner confirmed the  decision of the, Income-tax Officer observing that even if it be held that   the:  net  dividend  income  suffered  U.K.  tax   by deduction,  there is nothing to show that the  tax  deducted was  paid  to U.K. Revenue and, therefore, S.  49D  is  not. attracted.  In further appeal by the assessee, the  Tribunal accepted the contention of the assessee and at the  instance of the 847 Revenue,  referred the question hereinabove set out, to  the High Court.  The High Court, after an exhaustive examination of the relevant provisions of the Income-tax Act of U.K. and the  decisions  bearing  on  the  question,  confirmed   the decision of the Tribunal. The Assessee claims relief in respect of the income  arising outside the taxable territory under s. 49D of the Act.   The relevant portion of s. 49D reads as under :               "49.D.  Relief in respect of incomes  accruing               or arising outside the taxable territories  :-               (1)  If  any  person who is  resident  in  the               taxable  territories in any year proves  that,               in  respect  of his income  which  accrues  or               arises  during that year without  the  taxable               territories (and which is not deemed to accrue               or arise, in the taxable territories), he  has               paid  in any country, with which there  is  no               reciprocal arrangement for relief or avoidance               of  double taxation, income-tax, by  deduction               or  otherwise, under the law in force in  that               country, he shall be entitled to the deduction

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             from the Indian income-tax payable by him of a               sum calculated on such doubly taxed income  at               the  Indian rate of tax or the rate of tax  of               the said country, whichever is the lower.  (2)  x    x x x  (3)  x    x x x      Explanation-In this section-                (i)  x    x x x                (ii) x        x          x            x               (iii) the expression "rate of tax of the  said               country"   means  income-tax   and   super-tax               actually   paid   in  the  said   country   in               accordance with the corresponding laws of  the               said  country after deduction of  all  reliefs               due, but before deduction of any relief due in               the   said  country  in  respect   of   double               taxation,  divided by the whole amount of  the               income assessed in the said country". To  be  eligible  for  relief under s.  49D  read  with  its explanation, the assessee must establish excluding the  non- disputed  requirement  that : (i) the  assessee  has  income which  has accrued or arisen without taxable territory;  and (ii)  the  assessee has paid in any  country  income-tax  by deduction  or  otherwise  under the law  in  force  in  that country;  and  (iii)  in that event the  assessee  would  be entitled to the deduction, from Indian income-tax payable by him;  (iv) a sum calculated on such doubly taxed income,  at the  Indian  rate  of tax or the rate of  tax  of  the  said country, whichever is lower.  The expression ’rate of tax of the  said country’ must be given the meaning as set  out  in para (iii) of the explanation and in doing so the importance of the words ’income assessed in the said country’ has to be borne in mind.  848 There  is  no controversy that the assessee  is  a  resident company  and has dividend income from the U.K. based  joint- stock  companies,  i.e.  income  accruing  without   taxable territory.  Admittedly, there is. no reciprocal  arrangement for relief or avoidance of double taxation between India and U.K. The  assessee  has  received dividend  income.   A  specimen dividend warrant issued in favour of assessee reads as under STOCKHOLDERS  ARE  PARTICULARLY  REQUESTED  TO  NOTIFY   THE COMPANY OF ANY CHANGE OF ADDRESS 12125 J. LYONS AND COMPANY LIMITED. Ordinary & ’A’ Ordinary Stock. Annexed is a warrant in payment of Interim Dividend on  your Stock on account of the year ending 31st March 1960.      Gross Dividend of is od per 1 unit on-      pound  ... Ordinary stock.....        Pound 96 120      pound 1932 ’A’ Ordinary stock....     pound 37 88      Less-Income-tax at 7/9d in the pound                                            ------------                              Net Dividendpound 59 3 4                                              ----------- THE CLIVE INSURANCE CO.  LTD., CLIVE BUILDINGS, 8, NETAJI SUBHAS, ROAD, CALCUTTA. I  hereby  certify  that income-tax on the  profits  of  the Company, of which profits this dividend forms a portion, has been  or  will be duly paid to the proper  officer  for  the receipt  of  taxes.  This voucher will be  accepted  by  the Island  Revenue  as  proof of the deduction of  the  tax  in claiming the exemption from or return of income-tax.                                     H.E. LOFTHOUSE,                                         Secretary

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1st December, 1959.                                 Cadby Hall, London, W.14". The  real  controversy centres round  the  question  whether deduction  of  income-tax  from dividend  as  shown  in  the dividend  voucher constitutes payment of income-tax  by  the assessee  by deduction or otherwise in U.K. on his  dividend income. The first submission is that the income in respect of  which relief  can be claimed under s. 49D must be income  actually chargeable  top  income-tax  under the law  of  the  foreign country,  the income must be subject to tax and  must  hence actually  be taxed in the foreign country Section  49D  does postulate  that  in order to be entitled to  relief  against double  taxation  the income which has  arisen  without  the taxable  territory must have been charged to  income-tax  by deduction or otherwise 849 under  the law in force in the country in which  the  income has  accrued.   It cannot be gainsaid  that  relief  against double  taxation can be had in respect of the  income  which has been taxed once according to law in force in the country in  which it has arisen and it is the income of  the  person who  is  resident in taxable territory and is liable  to  be charged  to income-tax according to Indian  Income-tax  Act. In other words, it must be doubly taxed income. The  question  which was vigorously debated is  whether  the dividend income which accrued in U.K. was charged to tax  by deduction or otherwise according to the law of Income-tax in force at the relevant time in U.K. In U.K. there is a slight anomalous position with regard  to dividend  income.  Broadly it is stated that  dividend  paid out  of  the profits of the company to shareholders  of  the company is not chargeable to income-tax in the hands of  the assessee.  The company pays tax on its profits.  If dividend is  distributed  after  tax is paid by  the  company  it  is optional with the company not to deduct any income-tax  from the  dividend  paid  to  shareholders  or  the  company  may reimburse  itself  in  respect  of the tax  paid  by  it  by deducting  income-tax  at standard rate from  the  dividends paid to the shareholders, vide s. 184, U.K. Income-tax  Act, 1952.  The dividend income thus received by the shareholders is not chargeable to income-tax but is certainly  chargeable to  surtax  in the hands of the assessee.  In view  of  this legal position,, it was strenuously contended that there was no statutory provision for taxing dividend income under  the law  of  U.K. nor was there any  machinery.  prescribed  for assessing  to  income-tax the dividend income accrued  to  a shareholder.  The Company having been charged to tax on  its income, the dividend income in the hands of shareholders was not  chargeable to income-tax in the hands of  shareholders. It was further said that to work out the mechanics of relief to  be granted it must be shown that the dividend income  in the  hands of the assessee must be assessed at some rate  of income-tax  in  U.K. and then comparison can  be  made  with Indian rate of income-tax to grant relief. Initially tile difference that stares in our face in respect of deduction of income-tax from dividends paid by  companies under  U.K.  income-tax  law and our Act  must  be  noticed. Under U.K. law the company has to pay tax on its profits  or gains  as its liability and not as agent of members to  whom dividend  is  distributed  out of  profits.   Therefore,  if dividend is distributed after profit or gain of the  company is charged to tax, it is optional with the company either to deduct  or not to deduct the income-tax paid by it from  the dividend  paid to members and if it chooses to exercise  the

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option,  it can do so at standard rate.  Under s. 18 of  our Act,  the company has to deduct income-tax and  supertax  at prescribed rate from the dividend paid to member as agent of the member and all sums so deducted shall for the purpose of computing the income of an assessee, be deemed to be  income received  vide  sub s. (4) of s. 18.   The  dividend  income including  deduction,  that is grossed up  income,  will  be assessed  as income of the shareholder and he will be  given credit  for the. amount so deducted by the company and  paid over to the authority.  It was 850 accordingly pointed out that in U.K. company pays tax  under s.  184 on its own liability and reimburses itself  to  some extent  by  the  tax  deducted at  standard  rate  from  the dividend paid to shareholder and the deduction so made would not   be  paid  to  treasury  for  and  on  behalf  of   the shareholder.   Therefore, Mr. Desai submitted that  even  if income-tax  at standard rate is deducted from  the  dividend paid by the company to the asseseee, the dividend income  in the  hands of assessee is not assessed and charged  to  tax, and  it could not be said that it is a doubly taxed  income, as envisaged by s. 49D. No  specific  pro-vision was pointed out to us  which  would show  that  dividend  income in U.K. in  the  hands  of  the assessee is exempt from payment of Income-tax.  The  company is liable to pay income-tax on its profits’ and gains and s. 184 enables the company to deduct from the dividend paid out of  profits, tax at the standard rate for the year in  which the  amount payable becomes due. Dividends  which  represent the  distribution of a taxed fund are, therefore, styled  as franked  income so far as concerns any further  taxation  at the standard rate, i.e. the rate at which deduction has been made.   The assumption underlying this position is that  the dividend  represents the residue of the total  income  which has  already  been taxed in the hands of  the  company,  the fiction being that if tax was not paid by the company  there would  have  been  a higher  dividend  and,  therefore,  the dividend income-is already taxed.  But this fiction led to a number   of   complications  because  the  company   is   an independent juristic person and the scheme of the Income-tax Act  in  U.K. does not imply that the Company  pays  tax  on behalf of the member.  To reconcile this position, way back, Lord  Phillimore  in  Bradbury  English  Sewing  Cotton  Co. Ltd.,(1) observed as under :               "Their taxation would seem to be logical,  but               it would be destructive of joint stock company               enterprise,   so   the  Act   of   1842   has,               apparently,  proceeded  on the idea  that  for               revenue purposes a joint stock company  should               be treated as a large partnership, so that the               payment  of  in,come tax by  a  company  would               discharge the quasi-partners,   The reason for               their discharge may be the avoidance of double               taxation,   or   to  speak   accurately,   the               avoidance of increased taxation.  But the  law               is  not founded upon the introduction of  some               equitable principle as modifying the  statute;               it  is  founded  upon the  provisions  of  the               statute  itself; and the statute  carries  the               analogy  of  a  partnership  further,  for  it               contemplates a company declaring a divid   end               on  the gross gains, and then on the  face  of               the  dividend warrant making  a  proportionate               deduction in respect of the duty, so that  the               shareholder  whose  total income is  so  small

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             that he is exempt from income tax or pays at a               lower  rate, can get the income tax which  has               been deducted on the dividend warrant returned               to him". It  would appear that company for tax purpose being  treated as a large partnership was not merely a fiction resorted  to reconcile  the position of the dividend income in the  bands of the shareholder (1)  8 Tax Cases 481 (House of Lords) 851 and the juristic personality of the joint stock company, bat it  was  traceable in the words of Lord Phillimore,  to  the statute  itself.  Mr.  Desai, however, contended  that  this theory  of company being treated as a large partnership  has been  discarded and long since exploded in U.K. itself,  and in  this connection reliance was placed on Commissioners  of Inland  Revenue  v. Cull,(1) where Lord  Atkin  observed  as under :               "My Lords, it is now clearly established  that               in  the case of a limited company the  company               itself  is chargeable. to tax on its  profits,               and  that it pays tax in discharge of its  own               liability   and   not   as   agent   for   its               shareholders.   The latter are not  chargeable               with Income-tax on dividends, and they are not               assessed  in  respect  of  them.   The  reason               presumably   is  that  the  amount  which   is               available  to be distributed as  dividend  has               already been diminished by tax on the company,               and  that it is thought inequitable to  charge               it again.  At one time it was thought that the               company, in paying tax, paid on behalf of  the               shareholder:  but this theory is now  exploded               by  decisions in this House, and the  position               of  the  shareholders as to tax is as  I  have               stated it." However,  in  Canadian Eagle Oil Co. Ltd. v. The  King,  (2) wherein Lord Macmillan, after observing that this topic  has been darkened rather than illumined by a false analogy which it has been sought to draw with the case of the taxation  of the   income   of  United  Kingdom   companies   and   their shareholders,  affirmed the observations of Lord  Phillimore in  Bradhury’s case (supra) and further observed  that  this system  of  treating the company as a large  partnership  is highly artificial; but it is a domestic expedient limited in its operation to U.K. In Cenlon Finance Co. Ltd. v. Ellwood, (3)  Lord Reid in his speech, after referring to  Bradbury’s case (supra) and two other cases, observed that at one  time it  was thought that a company pays tax on behalf of  or  as agent  for  its  shareholders, and, if  that  were  so,  the explanation  would be obvious, but that idea has  long  been discarded.  But as late as 4th June 1964, the House of Lords in F. S. Securities Ltd. v. Commissioners of Inland Revenue, (4) has reaffirmed the earlier view which becomes abundantly clear from the speech of Viscount Radcliffe.  After  quoting the relevant sentence from the speech of Lord Phillimore  in Bradbury’s  case (supra), the noble Law Lord  observed  that this   analysis.  of  treating  the  company  as   a   large partnership so that payment of income-tax by a company would discharge  the  quasi-partners  is  now  accepted  as  being correct  and it remains essential to the application of  the whole   system  even  though  the  connection  between   any particular  fund  of  profits and a dividend  paid  has  now become, in effect untraceable and the rule (1)  22 Tax Cases 603 at 636

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(2)  27 Tax Cases 205. (3)  40 Tax Cases 176 at 205. (4)  41 Tax Casts 666. 852 that the company recoups itself at the standard rate of  tax that  is current at the date of payment means  that  company and  shareholder do not necessarily equate their  respective positions as completely as   the theory of the matter  would require.   Proceeding further, it was observed that  if  the dividends have borne tax in the hands of the paying  company and if they were, therefore, franked income in the hands  of the  respondent as receiving shareholder, the Revenue  could not  enter  them as receipt in its trading account  for  the purpose  of  assessing  it  to tax  on  a  separate  taxable subject,  that is the trading profit. It was in  terms  said that  to do so would be to recognise double taxation in  its most obvious form. There was some dispute whether this  view is the majority view but having seen the opinion of all  Law Lords,  we have no doubt about this and it is on this  basis that the appeal of the appellant was allowed. It,  therefore,  appears well established according  to  the statute law of U.K. and the interpretation put on it by  the highest court in that country that the dividends which  have borne  tax in the hands of the, paying company were  treated as  franked  income in the hands of the assessee.  In  other words,  it  would  mean  that the  income  in  the  form  of dividends  has  been  subjected to  tax.  It  is  immaterial whether they were taxed in the hands of the assessee or  not but  they are deemed to have been taxed in the hands of  the assessee in U.K. It would be: 0advantageous to refer Simon’s Income  Tax,  2nd Edn., Vol. I, p. 307, where it  is  stated that  it  is a general principle of the Income Tax  Acts  in U.K.  that  as far as possible tax is charged at  the  point where  the income first emerges from the source and this  is so  even  if the person primarily in receipt of  the  income does  not ultimately enjoy it but pays it over  or  accounts for it to another who is the person beneficially entitled to it.  In  such  cases the person assessed has  the  right  to recoup  himself,  when  making a payment of  income  to  the person entitled thereto, by deducting the tax appropriate to that  income, or by crediting himself with the  amount  when accounting. The author includes dividend income as one  such income. It  thus clearly emerges that dividends which are styled  as franked income have borne tax at the source and that is  why they  are not assessable for income-tax in the hands of  the shareholder. Now,  if  thus the dividends styled as franked  income  have been charged to income-tax at the source, it would mean that it  is  the income in respect of which income-tax  has  been paid by deduction or otherwise in accordance with the law in force  in the country in which the income accrued. If it  is now  charged  to  tax under the Indian  Income-tax  Act,  it obviously  becomes  a  doubly taxed income and  one  of  the requirements of s. 49D would be satisfied. It was contended on behalf of the Revenue that S. 49D should be interpreted having regard to the scheme of our Act and in harmony   with other relevant provisions, and it should  not be interpreted by reference to English statutes not in  pari material  or  decisions of courts  in  England  interpreting those  statutes. It was pointed out that the course  adopted in England in relation to dividend income has been 853 described  as  anomalous.  Undoubtedly, to  be  entitled  to relief  under  s.  49D,  the  requirements  for  eligibility

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therein  prescribed must be satisfied by the assessee.   One such  requirement is that income in respect of which  relief from double taxation is sought, is the income in respect  of which he has paid income-tax by deduction or otherwise under the law in force in the country in which the income accrued. While  examining  the  question  whether  the  assessee  has fulfilled  this requirement, It will have to be  ascertained what  is  the law bearing on income tax  in the  country  in which  income has arisen and whether according to that  law, the  said income has suffered tax by deduction or  otherwise again  according to the law in that country.   According  to the   income-tax  law  in  U.K.  dividends   represent   the distribution  of a taxed fund and are, therefore, styled  as franked  income.   The  payment of tax by  the  company  and deduction made at standard rate from dividend distributed to shareholders,  operates in relief of the shareholders  (vide Inland Revenue Commissioners v. Blott.(1) Such dividend  in- come according to the law of the country where it has arisen is  deemed to have been subjected to tax.  Viewed from  this angle the dividend income in the hands of shareholder is not charged to income-tax. It was, however, said that no relief could be granted to the assessee  because in order to work out the mechanics of  the relief it would be necessary to ascertain the rate at  which the  Indian  income-tax  will be payable on  the  income  in question and the, rate of income-tax at which income-tax  by deduction  or otherwise is paid in the foreign  country  and then  to ascertain which of the two is the lower  one  which can be allowed as a deduction from the tax payable under the Indian  Income-tax  Act  in respect  of  such  doubly  taxed income.  The contention is that in England it being optional with the company to deduct or not to deduct income-tax  from the  dividend paid by it from its profits after tax is  paid by the company, it would be impossible to ascertain the rate at  which the tax is paid in the foreign country in  respect of  such income.  Now, the position in U.K. with  regard  to deduction  of incometax from the dividend  distributed  from the, profits of the company is clear inasmuch as the tax can be  deducted  only  at the standard  rate.   The  expression ’income  assessed in the foreign country’ would clearly,  in the  context in which it is used, mean subjected to  tax  in the foreign country.  In order to ascertain whether the rate under  the Indian Inccome-tax Act or the rate of tax in  the foreign country is lower apart from any other consideration, the rate of tax in U.K. in the context of dlvidend income is easily ascertainable inasmuch as company can deduct  imcome- tax at standard rate only.  Undoubtedly, where the  assessee wag also liable to pay surtax in U.K. on the dividend income no complication would arise in working out the rate  because surtax  is payable on dividend income.  But in  the  present case that difficulty does not arise as the assessee being  a company, it was neither liable to any surtax nor entitled to any  relief in U.K., and, therefore, the rate of tax can  be worked out with certainty consistent with the provisions  of para  (iii)  of the Explanation.  The assessee thus  on  the interpretation  put by us in respect of the dividend  income has paid tax at the standard (1)  [1921] A.C. 171 at 201. 854 rate and that is the rate of tax of the foreign country  for the purpose of para (iii) of the Explanation. Mr.  Desai  submitted  that  the  expressions  ’paid’,   ’by deduction  or  otherwise"  and  ’rate of  tax  of  the  said country’  and  the Explanation to s. 49D  clearly  postulate that  relief  can  be granted under  that  section  only  in

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respect of the tax on income charged, assessed and  actually paid by the assessee, to the Revenue of the foreign country. In other words, it was said that the income in the hands  of the  person  who now claims relief against  double  taxation must  be assessed as his income and income-tax must be  paid by  him to the Revenue of the foreign country or even if  it is paid by the company in respect of dividend income it must be shown as agent of the shareholder collecting it on behalf of  the  shareholder  and paying it to the  Revenue  of  the foreign  country on behalf of the shareholder.  Some of  the facets  of  this submission have already been  examined  and dealt  with  by  us.   The  only  question  is  whether  the expression ’assessed’ in para (iii) of the Explanation could mean assessed in the hands of the shareholder as his income. Once  it  is accepted that the dividend  represents  franked in.;  come  distributed  out of profits and  gains  and  not liable  to  further income-tax in the hands  of  member,  it clearly  transpires that for relief against double  taxation it  is  the income which has been subjected to  tax  in  the foreign  country in which it has arisen and irrespective  of the fact that there is no provision  comparable to s. 18 (5) of our Act in the Income-tax Act of U.K. yet the payment  of tax by the company operates in relief of the shareholder and on that account alone the dividend income is not  chargeable to  tax  in U.K. Therefore, it can be said  with  reasonable certainty  that  in respect of the dividend  income  of  the assessee income-tax has been paid by deduction or  otherwise under  the law in force in the country in which income  has. arisen.   The principle of agency in payment by the  company is  worked  out on the basis of company being treated  as  a large partnership so that its payment of tax is on behalf of quasi-partners. Thus, it clearly transpires that all the requirements of 49D read   with   the  Explanation  have   been   satisfactorily established  by the assessee and, therefore, the High  Court rightly  answered the question in the affirmative in  favour of the assessee. Before  we conclude, it may be pointed out that  the  Bombay High  Court in Commissioner of Income-tax v. Tata Sons  Pvt. Ltd..,(,)  and the Gujarat High Court in.   Commissioner  of Income-tax  V.  Cotton,  Fabrics Ltd.,  (2)  have  in  terms followed  the  decision  of the Calcutta  High  Court  under appeal. This appeal accordingly fails and is dismissed with costs. S.R.                         Appeal dismissed. (1)  [1974] 97 ITR 128. (2)  [1976] 104 ITR 233. 855