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PETITIONER: KISHANCHAND LUNIDASINGH BAJAJ

       Vs.

RESPONDENT: COMMISSIONER OF  INCOME-TAX, MYSORE

DATE OF JUDGMENT: 10/02/1966

BENCH: SHAH, J.C. BENCH: SHAH, J.C. GAJENDRAGADKAR, P.B. (CJ) WANCHOO, K.N. SIKRI, S.M. RAMASWAMI, V.

CITATION:  1966 AIR 1583            1966 SCR  (3) 573  CITATOR INFO :  R          1973 SC 651  (8)

ACT: Indian income-tax Act, 1922 (11 of 1922) S. 16(2)-Real owner and  registered owner of shares different-Tax  liability  on dividend on whom.

HEADNOTE: B  and his sons constituted a Hindu undivided  family  which Owned  certain shares in public limited comanies.The  family started business in money lending in the name of a firm  and in  the books of account of the firm the shared which  stood registered in the name of B with the companies were credited as the capital of the business.  Two sons separated from the family,  each receiving sum in lieu of his share,  and  they formed  a  partnership with the rest of the members  of  the family  for carrying business in the name of the same  firm. Under  the partnership the two separated sons were  entitled to their sham and the remaining shares were  to belong  to B as  Karta of the family.  Dividends received in  respect  of the  shares were credited to the profit and loss account  of the  firm.  In assessment proceedings, it was claimed  that. the shares which stood registered in the name of B belonged not  to  the Hindu undivided family but to  the  firm.   The claim  was  rejected.   In  appeal  to  this  Court  it  was contended  that where one taxable entity is  the  registered holder  of  shares in a company and the real owner,  of  the shares is another taxable entity, the registered shareholder alone’  is  liable to be assessed to tax in respect  of  the dividend from these shares and therefore B alone was  liable to  be  taxed  in respect of the dividend  income  from  the shares, and not the Hindu undivided family. HELD: The contention must fail. Tax  being  charged  by  a. 3 of  the  income-tax  Act  upon dividend  come  and not being excluded under s.  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

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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  share  holder  and  the dividend distributed by the company would for the se of  tax be  deemed  to  accrue or arise to the  real  owner  of  the shares. [576 A-C] Section  (2) of a. 16 does not operate as an exemption  from the  vale  of either a. 3 or 94(1) of the Act  nor  does  it provide that liability to tat arises only when the person by whom dividend is received from the company is the real owner of the shares.  Sub-section (5) of S. 18 also does not  lead to  that result.  In so far as it deals with dividend  which is "grossed up", sub-s. (5) of s. 18 forms a corollary to s. 16(2).    Therefore  when  tax  is  paid  on  behalf  of   a shareholder  and deduction Is de from dividend, it is  given to the shareholder for the tax paid in his final assessment. But  the scheme of "grossing up" is not ac- ceptible 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. [578 G-579 B] Sup.  CI/66-5 574 Income-far  Officer,  North Satara v. Arvind N.  Mafatlal  & Ors.,  45 I.T.R. 271 and Commissioner of Income-tax,  Bombay City II v.  Shakuntala and Ors., 43 I.T.R. 352, referred to. Howrah Trading Company Ltd,. v.  Commissioner of Income-tax, Central, Calcutta, 36 I.T.R. 215, explained.

JUDGMENT: CIVIL APPELLATE JURJSIDCTION : Civil Appeal No. 234 of 1965. Appeal  by special leave from the judgment and  order  dated July. 19,1963 of the Mysore High Court in I. T. R. C. No.  6 of 1963. K.   Srinivavan and R. Gopalakrishnan, for the appellant. C.   K. Daphtary, Attorney-General, R. Ganapathy Iyer, R. H. Dhebar and R. N. Sachthey, for the respondent. The Judgment of the Court was delivered by Shah, J. Kishanchand Bajaj and his seven sons formed a Hindu undivided family which owned shares exceeding Rs. 91,000  in value,  in public limited companies.  The  family  commenced business  in money-lending and gs commission agents  on  May 16,  1956 in the name of Messrs.  Mangoomal Kishanchand  and in  the books of account of the firm the shares which  stood registered  in  the name of Kishanchand with  the  companies were  credited  as capital of the business.  On  August  22, 1956  Shyam  Sundar  and  Girdharlal, two  of  the  sons  of Kishanchand separated from the family, each receiving rupees two  lakhs  in  lieu of his share.  On  August  23,  1956  a partnership was formed between Kishanchand representing  the Hindu  undivided  family of himself and his  five  sons  and Shyam Sundar and Girdharial, for carrying on the business of Messrs.  Mangoomal Kishanchand.  Under the deed of  partner- ship,  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 & 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

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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 Office  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 Oat the dividend from the shares 575 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 shares,  the  Hindu undivided family could not  be  assessed under  the  Income-tax  Act,  1922  on  the  dividend.   The Tribunal   rejected  the  contention.   The  Tribunal   then referred under s. 66 (1) of the Indian Income-tax Act, 1922, the  following  question  to the High Court  of  Mysore  for opinion :               "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 ?" The High Court answered the question in the affirmative, and with  special leave the Hindu undivided family has  appealed to this Court. In this appeal it was urged that where one taxable entity is the  registered holder of shares in a company and  the  real owner   of  the  shares  is  another  taxable  entity,   the registered shareholder alone is liable to be assessed to tax in respect of the dividend from those shares, and  therefore Kishanchand  alone was liable to be taxed in respect of  the dividend income from the phares, and not the Hindu undivided family.   Reliance in support of this contention was  placed upon  s.  16  (2) of the Indian Income-tax  Act,  1922,  and certain  observations made by this Court in the judgment  in Howrah  Trading Company Ltd. v. Commissioner of  Income-tax, Central, Calcutta.(1) In our judgment the contention is wholly without  substance. Under  s.  3,  total income of the previous  year  of  every individual,  Hindu  undivided  family,  company  and   local authority,  and  of  every firm  and  other  association  of persons  or the partners of the firm or the members  of  the association  individually  is charged to tax.   By  s.4  the total  income of any previous year of any  person  includes, subject  to the provisions of the Act, all  income,  profits and  gains from whatever source derived, which are  received or deemed to be received in the taxable territories in  such year  by or on behalf of such person, or if such  person  is resident  in  the taxable territories during such  year  the income which accrue or arise or is deemed to accrue or arise to  him  in  the taxable territories during  such  year,  or accrue  or arise without the taxable territory  during  such year, or having accrued or arisen to him without the taxable territories  or  brought in the taxable  territories  during such year, or if such person is not residing to the taxable (1)  [1959] Sup. 2 S.C.R, 448, 36 I.T.R. 215. 576 territories during such year, accrue or arise or are  deemed to accrue or arise to him.  By sub-s. (3) of g.4 any income. profits or gains., falling within the clauses (i) to  (xxii) tire  not liable to be included in the total income  of  the person  receiving  them.   Tax being charged by  s:  3  upon dividend  income  and  not being  excluded  under  s.4  such

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’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  recognises 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 rise to the real owner of the shares. Section  16  of  the Indian Income-tax Act  deals  with  the exemptions  and exclusions in determining the total  income. The expression, "total income" is defined in S. 2 (1,5):  it means "total amount of income, profits and gains referred to in sub-section (1) of section 4, computed in the manner laid down  in this Act".  Section 16, insofar as it is  relevant, provides               "(1)  In  computing the, total  income  of  an               assessee-               (a)   any   sums  exempted  under  the   first               proviso  to, subsection (1) of section 7,  the               second  and third provisos to section 8,  sub-               sections (2), (3), (4) and (5) of section  14,               section 15, section 15B and section 15C  shall               be  included,  and  any  sum  exempted   under               section 15A shall also be included except  for               the purpose of determining the rates at  which               income-tax (but not super-tax) is payable by               the assessee to whom the exemption is given;               (b)   when the assesee is a partner of a firm,               then,  whether the firm has made a  profit  or               loss, his share (whether a net profit or a net               loss)  shall  be  taken to be  any  s  salary,               interest,  commission  or  other  remuneration               payable  to him by the firm in respect of  the               previous    year   increased   or    decreased               respectively  by his share in the  balance  of               the  profit  or loss of, the  firm  after  the               deduction of any interest, salary,  commission               or  other remuneration payable to any  partner               in respect of the previous year:                Provided . .. .. ..               "(c) all income arising to any person by               virtue  of  a  settlement   or   disposition               whether               577               revocable or not, and whether effected  before               or  after  the  commencement  of  the   Indian               Income  tax  (Amendment)  Act,  1939  (VII  of               1939),  from assets remaining the property  of               the settlor or disponer, shall be deemed to be               income  of  the settlor or disponer,  and  all               income  arising to any person by virtue  of  a               revocable  transfer of assets shall be  deemed               to be income of the transferor;               Provided . . . . . . . . .               (2) For the purposes of inclusion in the total               income  of an assessee.any dividend  shall  be               deemed  to be income of the previous year  in:               which it is paid, credited or distributed,  or               deemed to have been paid, credited or  distri-               buted  to him, and shall be increased to  such               amount.  if income-tax (but not super-tax)  at               the rate applicable to the total income of the               company without taking into account any rebate

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             allowed or additional. income-tax charged  for               the  financial year in which the  dividend  is               paid,  credited or distributed or  deemed’  to               have been paid, credited or distributed,  were               deducted therefrom, be equal to the amount  of               the dividend               Provided . . . . . .               (3)   In  computing  the total income  of  any               individual 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  in-               directly 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  in-               directly  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               578               transfered otherwise than for adequate  consi-               deration 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 included   in  the,  total  income  of  the   assessee   for determining the rate applicable.  Sub-sections (1) & (3)  of s. 16 provide that certain income which does not accrue  ,or arise to the assessee or which is not received as income  by him  is deemed to be part of his total income.   These  sub- sections  deal  with inclusion of the specified  classes  of income  in  the  computation  of  total  income.   The  only difference  between  the  two clauses  is  that  sub-s.  (1) applies.  to  all assessees, whereas sub--; (3)  applies  to individuals  only.   But  sub-s. (2)  does  not  direct  the inclusion  of any item of income in the computation  of  the total  income of an assessee to whom it does not  accrue  or arise: it is only a processing clause applicable in  respect of  dividend  income.   In terms it provides  that  for  the purpose  of inclusion of dividend in the total income of  in assessee,  dividend  shall  be deemed to be  income  of  the previous year in which it is paid, credited or  distributed, or  deemed to be paid, credited or distributed, and  further that the dividend shall be increased, or as it is  sometimes called "grossed up" by adding thereto the income-tax  deemed to  have  been  paid  by  the  company  on  behalf  of   the shareholder..   The  sub-section  in  the   first   instance designates  the year in which the dividend income is  to  be included  in the total income.  Therefore dividend  will  be included: in the income of the assessee in the year in which it is paid, credited or distributed, or be deemed to be paid, credited  or  distributed.  Since the same  income  can  not be  taxed twice over, dividend income will be taxed  in  the

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hands of  the  real  owner  of the shares and  in  the  year designated by s.    16(2).   But  by virtue of.  the  second part of s. 16(2), dividend may be  grossed  up only  if  the registered shareholder is the real owner of the shares.   If the  registered holder is not the real owner of  the  shares i.e.  he  is  a trustee or benamidar  for  the  real  owner, dividend  income cannot be grossed up when including  it  in the  total income’ of the real owner.  But sub-s. (2) of  S. 16 does not operate as an exemption from the pale of  either S.  3  ’or  s. 4(1) of the Act: nor  does  it  provide  that liability  to  tax  arises  only when  the  person  by  whom dividend is received from the company is the real owner  ,of the shares.  Sub-section (5) of s. 18 also does not lead  to that  result.  The clause provides that deduction made by  a company and paid to the account of tie Central  Government in  accordance with the provisions of S. 18 and any  sum  by which  a dividend has been increased under sub-s. (2) of  s. 16 shall 579 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 therefore.  Insofar as it deals with  dividend  which is "grossed up", sub-s. (5) of  s.  18 forms  a corollary to s. 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 shares. The  authorities of this Court which have interpreted s.  16 (2)  may be reviewed.  In Howrah Trading Company’s case  (1) 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 "shareholder" in respect ,of such shares within the  meaning of  s.  18(5)  of the Income-tax  Act,  notwithstanding  his equitable right to receive dividend on such shares.  Such  a person was therefore held not entitled to have the  dividend income grossed up under s. 16(2) of the Act by the  addition of  the income-tax paid by the company in respect  of  those shares,  and to claim credit for the tax deducted at  source under  s. 18(5) of the Act.  In that case the  only  dispute which arose was with regard to "grossing up".  The  dividend income  was included in the total income of the  person  who was the real owner of the shares, though the shares were not registered in his name.  In Income-tax Officer, North Satara v.  Arvind N. Mafatlal & Others (2) it was  held,  following the  judgment in Howrah Trading Company’s’ case  (1),  that, the registered shareholder alone is entitled to the  benefit of the credit for tax paid by the company under s. 18(5) and the  corresponding  "grossing up" under s. 16(2).   In  that case shares belonging to a firm registered under the Income- tax  Act  were held in the names of three  partners  of  the firm.   The Income-tax Officer sought to treat the  dividend from the shares as income of the firm and to "gross up"  the dividend  by  adding the income-tax paid.  This  Court  held that  the  only persons who were entitled to be  treated  as shareholders  to whom the provisions of ss. 16(2) and  18(5) were  attracted  were the three partners.  The  judgment  of this  Court in Commissioner of Income-tax, Bombay City II  v Shakuntala  and  others (3)does not  support  any  different rule.   That  was a case in which a Hindu  undivided  family held certain, shares in a company in the names of  different

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members  of the family.  The Income-tax Officer applied  the provisions  of  s. 23A of the Indian Income-tax  Act,  1922, before  it  was  amended  in  1955,  and  ordered  that  the undistributed portion of the distributable income of the (1) [1959] Supp. 2.S.C.R. 448. (2) (1962) Supp. 3 S.C.R. 455: 45 I.T.R. 271. (3) [1962] 2 S.C.R. 871 : 43 I.T.R. 352. 580 company  shall be deemed to be distributed.  In  proceedings for  ,assessment the amount of deemed income appropriate  to the  shares  of  the family was ordered  by  the  Income-tax Officer to be included in the income of the family.  It  was held  that  the expression "shareholder" in S.  23A  of  the Indian  Income-tax Act meant the shareholder  registered  in the books of the company.  Therefore the amount  appropriate to  the  shares  had to be included in  the  income  of  the members of the family in whose names the 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 S. 23A.  The  Court  in  Shakuntala’s case(1) was dealing with notional income.  The amounts which were  no distributed by the company, but which by virtue  of an order under s.   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  s.   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 S. 23A, the expression  shareholder"  meant only the registered shareholder and not an equitable  owner. The decision has no bearing on the true interpretation of S. 16(2). Reliance  was  placed by counsel for the  appellant  on  the following   observations  made  by  Hid4yatullah,   J.,   in delivering  the  judgment of this Court  in  Howrah  Trading Company’s case (2)               "The  words of section 18(5) must  accordingly               be  read  in  the  light  in  which  the  word               "shareholder" has been used in the  subsequent               sections, and read in that manner, the present               assesses, notwithstanding the equitable  right               to  the  dividend,  was  not  entitled  to  be               regarded as a "shareholder" for the purpose of               section  18(5) of the Act.  That  benefit  can               only go to the person who, both in law and  in               equity, is to be regarded as the owner of  the               shares and between whom and the company exists               the  bond  of membership and  ownership  of  a               share in the share capital of the company." It was said by counsel for the appellants that by the use of the expression "benefit can only go to the person who,  both in law and in equity, is to be regarded as the owner of  the shares", it was laid down that dividend may be taxed only in the  hands of a person who is "in law as well as in  equity" the shareholder.  But thew observations are not  susceptible of  any  such meaning.  Hidayatullah, J., in that  case  was seeking  to explain that dividend income cannot be  "grossed up" in tho hands of the real owner of shares (1) [1962] 2 S.C.R. 871:43 I.T.R. 352. (2) [1959] Supp. 2 S.C.R. 448. 581 if the shares are registered in the name of another  person. He did not say that the real owner of shares cannot be taxed

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in  respect of dividend received by him, if the  shares  are registered in the name of another person. We are unable to accept the argument of counsel for the  ap- pellants that because the dividend income in respect of  the shares.  cannot  be "grossed up", and credit  for  tax  paid cannot be obtained by the appellants, the appellants are not liable to be taxed in respect of dividend received by  them. There is, no provision in the Act which, supports this plea, and  the  scheme  of  the Act lends  no  countenance  to  an expedient which may lead to gross evasion of tax. The appeal therefore fails and is dismissed with costs. Appeal dismissed. 582