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PETITIONER: MESSRS.  HOWRAH TRADING CO., LTD,

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME-TAX, CALCUTTA

DATE OF JUDGMENT: 26/03/1959

BENCH: HIDAYATULLAH, M. BENCH: HIDAYATULLAH, M. SINHA, BHUVNESHWAR P. KAPUR, J.L.

CITATION:  1959 AIR  775            1959 SCR  Supl. (2) 448  CITATOR INFO :  R          1961 SC1019  (8)  F          1963 SC 493  (4)  R          1964 SC1761  (9)  RF         1966 SC 719  (5)  RF         1966 SC1583  (3,7,8)  RF         1973 SC 651  (7,8)  RF         1974 SC1728  (17)  R          1985 SC 520  (21)

ACT: Income-tax-Assessee  acquiring  shares by  blank  transfers- Receipt  of dividend on such shares-If assessee entitled  to grossing  up  of  dividend  income and  to  credit  for  tax deducted at source-Indian Income-tax Act, 1922 (XI of 1922), ss. 16(2) and 18(5).

HEADNOTE: The  assessee  acquired shares in  certain  companies  under "blank transfers " without getting the transfers  registered with  the companies and it received dividends in respect  of these shares.  It claimed that the dividend income should be grossed up under s. 16(2) Income-tax Act and that it  should be  allowed  credit under s. 18(5) for the tax  deducted  at source on the dividend in the hands of the companies. Held, that, the assessee was not entitled to the benefits of ss.  16(2) and 18(5) as its name was not in the register  of members  of  the companies.  The benefit of s.  18(5)  could only go to a shareholder; and a shareholder in that  section meant  the same thing as in the Indian Companies Act,  1913, i. e., a " member having his name on the register. The scheme of the Indian Companies Act, 1913, shows that the words " member ", " shareholder " and " holder of a share  " have  been  used interchangeably.  The words  "holder  of  a share"  are really equal to the word "shareholder"  and  the expression " holder of a share " denotes only a person  who, as  a shareholder, has his name entered on the  register  of members. In re Wala Wynaad Indian Gold Mining Company, (1882) 21  Ch. D.  849, Shree Shakti Mills Ltd. v. Commissioner of  Income- tax, [1948] 16 I.T.R. 187, jaluram Bhikulal v.  Commissioner of Income-tax, [1952] 22  I. T.R. 491, Arvind N. Mafatlal v.

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Incometax  Officer, [1957] 32 I.T . R. 350, Bikaner  Trading Co.  v.  Commissioner of Income-tax, [1953] 24  I.T.R.  419, referred to. - A  company when it pays income-tax does not do so on  behalf of the shareholders, but the shareholders get the benefit of such  payment.   The rates of income-tax applicable  to  the company  are,  in  most instances,  higher  than  the  rates applicable to individual shareholders and by the process  of grossing up the recipient of the dividend gets some benefit. Cull  v.  Inland Revenue Commissioners, (1940) A.C.  51  and Inland  Revenue Commissioners v. Blott, (1921) 2  A.C.  171, referred to. 440 In   blank  transfers  the  transfer  deed  signed  by   the transferor  is  handed  over with the  share  scrip  to  the transferee  who  may complete the transfer by  entering  his name  and  applying to the company for registration  of  his name.  The company only recognises those persons whose names are  on the register of members and they alone  are  legally entitled  to the dividend declared.  In the case of a  blank transfer  equities  exist  between the  transferor  and  the transferee  and  the  transferee has a right  to  claim  the dividend from the transferor who holds it in trust for  him, but the company is only liable to the transferor and not  to the  transferee.  Though the transferee is clothed  with  an equitable ownership he is not a full owner, since the  legal interest  vis-a-vis  the  company  still  outstands  in  the transferor.

JUDGMENT:    CIVIL  APPELLATE  JURISDICTION: Civil Appeal  No.  65  of 1956. Appeal from the judgment and order dated August 31, 1954, of the Calcutta High Court in Income-tax Ref.  No. 57 of 1953. N.   C. Chatterjee and B. P. Maheshwari, for the appellant. K.   N.  Rajagopala Sastri, R. H. Dhebar and D.  Gupta,  for the respondent. 1959.  March 26.  The Judgment of the Court was delivered by HIDAYATULLAH,  J.-Messrs.  Howrah  Trading  Company,   Ltd., Calcutta (hereinafter called the assessee) obtained on April 28,  1955,  a  certificate under s.  66A(2)  of  the  Indian Income-tax  Act from the Calcutta High Court, to  appeal  to this  Court against the judgment dated August 31,  1954,  in Income-tax  Reference No. 57 of 1953.  The Divisional  Bench (Chakravarti,  C. J., and Lahiri, J.) in the judgment  under appeal merely followed their earlier judgment delivered  the same  day  in  Income-tax Reference No. 22  of  1953,  since reported as Hindustan Investment Corporation v. Commissioner of  Income-tax (1).  It is the latter judgment  which  gives the reasons for the decision. The  facts  of the case have been  stated  with  sufficient fulness, yet briefly, in the statement of the case submitted by  the Income-tax Appellate Tribunal (Calcutta  Bench)  and may be conveniently set out in its own words: (1)  [1955] 27 I.T.R. 202. 57 450 "  The applicant had received sums of Rs. 3,831, Rs.  6,606, Rs. 7,954 and Rs. 8,304 in the four assessment years,  1944- 45,  1945-46, 1946-47 and 1947-48 as income from  dividends. The  shares  in respect of which this  dividend  income  was received were the property of the Applicant but in the books of  the various companies these stood in the names of  other

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persons.  It appears that these shares were purchased by the Applicant from other persons under a blank transfer but  the transfers   had  not  been  registered  with   the   various companies.   The  Applicant’s  claim  in  these   income-tax proceedings was that these shares although not registered in the  name  of  the  applicant  were  the  property  of   the applicant.  It was further claimed that this dividend income should  be grossed up under s. 16(2) and credit for the  tax deducted should be allowed to the Applicant under s. 18(5)." The  Income-tax Officer did not accept this claim,  and  the appeals  of  the  assessee were rejected  by  the  Appellate Assistant Commissioner of Income-tax, Calcutta, " A "  Range and  by the Appellate Tribunal.  The Tribunal,  however,  on being  moved,  referred the following question to  the  High Court: "  Whether in the facts and circumstances of this case,  the Applicant (the assessee) was entitled to have this  dividend income  grossed up under section 16(2) and claim credit  for tax deducted at source under section 18(5) of the Income-tax Act?  " The  High Court answered the question in the negative,  thus affirming the decisions of the Department and the  Appellate Tribunal. The assessee contends that the decision of the High Court is erroneous,  and  that it is entitled to  have  the  dividend income I grossed up’ under s. 16(2) and also to claim credit for tax deducted at source, under s.18(5) of the  Income-tax Act. The relevant sections are as follows: " 16(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                       451 paid, credited or distributed to him, and shall be increased to  such amount as would, if income-tax (but not  super-tax) at  the rate applicable to the total income of  the  company without taking into account any rebate 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: (proviso omitted). 18 (5):   Any deduction made and paid to the account of  the Central Government in accordance with the provisions of this section  and any sum by which a dividend has been  increased under  sub-section (2) of section 16 shall be treated  as  a payment  of incometax or super-tax on behalf........ of  the shareholder and credit shall be given to him therefor on the production  of the certificate  furnished  under.....section 20 ...... in the assessment, if any, made for the  following year under this Act: (proviso omitted). 49B(1):   Where  any  dividend has been  paid,  credited  or distributed  or  is deemed to have been  paid,  credited  or distributed to any of the persons specified in section 3 who is  a shareholder of a company which is assessed to  income- tax  in  the taxable territories or elsewhere,  such  person shall,  if the dividend is included in his total income,  be deemed  in  respect of such dividend himself  to  have  paid income-tax  (exclusive of super-tax) of an amount  equal  to the sum by which the dividend has been increased under  sub- section (2) of section 16." It was contended in the High Court that inasmuch as s. 16(2) referred to an I assessee, the assessee company was entitled to have the dividend ’grossed up’ by the addition of income- tax paid by the various companies at source and consequently

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to  have  the benefit of the credit allowed  under  the  two remaining  sections.  In the opinion of the High  Court,  an assessee  whose name was not in the register of  members  of the  companies  was  not entitled to the  benefit  of  these provisions.   The learned Judges of the High Court  were  of the opinion that the word " shareholder " in 452 s.18(5)  had the same signification as the word "  member  " used in the Indian Companies Act; and that the assessee  was not qualified to be considered as a shareholder, even though by  a blank transfer it had ,purchased the relevant  shares. In our opinion, the High Court was right in its conclusion. A company when it pays income-tax, does not do so on  behalf of the shareholders.  It is itself chargeable under the Act, In  Cull  v. Inland Revenue Commissioners  (1),  Lord  Atkin stated  the law (which in substance is also the law  in  our country) thus: 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.........  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." When  the  company pays its own income-tax  and  declares  a dividend  from the balance of its profits, it  deducts  from such dividend a proportionate part of the amount of the  tax paid by it.  This principle is explained in another  English case, and it is substantially also the law in this  country. In Inland Revenue Commissioners v. Blott (2), Viscount  Cave stated the law in these words: "  Plainly, a company paying income-tax on its profits  does not pay it as agent for its shareholders.  It pays as a tax- payer, and if no dividend is declared, the shareholders have no  direct  concern  in  the  payment.   If  a  dividend  is declared,  -the  company  is entitled to  deduct  from  such dividend  a  proportionate  part of the amount  of  the  tax previously  paid  by  the company; and, in  that  case,  the payment   by   the  company  operates  in  relief   of   the shareholder.    But  no  agency,  properly  so  called,   is involved." The  share-holders, however, get the benefit of the  payment of the tax by the company.  Though under (1)  [1940] A.C. 51, 56 ; (1939) 22 Tax Cas. 603, 636. (2)  [1921] 2 A.C. 171, 201.  453 s.16(2)  of  the  Act  their  dividend  is  increased  by  a proportionate amount of tax paid by the company, the payment of  the  tax by the company is deemed tinder ss.  18(5)  and 49B(1)  to  be payment by the shareholders.   The  rates  of income-tax applicable to the company are, in most instances, higher   than  the  rates  applicable  to   the   individual shareholders, and by this process of ’grossing up’, as it is commonly  called,  the recipient of the dividend  gets  some benefit. The  position  of a shareholder who gets dividend  when  his name stands in the register of members of the company causes no difficulty whatever.  But transfers of shares are common, and they take place either by a fully executed document such as  was  contemplated  by Regulation 18 of Table  A  of  the Indian  Companies  Act 1913, or by what are known  as  blank transfers’.   In  such  blank transfers,  the  name  of  the transferor  is entered, and the transfer deed signed by  the transferor is handed over with the share scrip to the trans-

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feree,  who,  if he so chooses, completes  the  transfer  by entering  his  name  and then applying  to  the  company  to register  his  name in place of the previous holder  of  the share.   The company recognises no person except  one  whose name  is on the register of members, upon whom  alone  calls for unpaid capital can be made and to whom only the dividend declared  by  the company is legally  payable.   Of  course, between the transferor and the transferee, certain  equities arise  even  on the execution and handing over of  ’a  blank transfer’,  and  among these equities is the  right  of  the transferee  to claim the dividend declared and paid  to  the transferor  who  is treated as a trustee on  behalf  of  the transferee.   These  equities,  however, do  not  touch  the company, and no claim by the transferee whose name is not in the register of members can be made against the company,  if the  tranferor retains the money in his own hands and  fails to pay it to him. A  glance at the scheme of the Indian Companies  Act,  1913, shows  that  the  words " member ", " shareholder  "  and  " holder  of a share " have been used interchangeably in  that Act.   Indeed,  the opinion of most of the  writers  on  the subject is also the same. 454 Buckley  on  the Companies Act, 12th Edition, page  803  has pointed  out that the right of a transferee is only to  call upon  the  company  to register his name and  no  more.-  No rights arise till such registration ,takes place. Section  2(16) of the Indian Companies Act, 1913, defines  " share  "  as  " share in the share capital  of  the  company Section  5  deals  with the  mode  of  forming  incorporated companies,  and in the case of companies limited by  shares, the  liability of the members is limited to the amounts,  if any, unpaid on the shares respectively held by them.  By  s. 18,  Table A is made applicable to companies, unless by  the Articles  of  any  company the terms of Table  A  have  been excluded  or  modified.  Regulation 18 of Table A  reads  as follows: "  The  instrument of transfer of any share in  the  company shall be executed both by the transferor and transferee, and the transferor shall be deemed to remain holder of the share until the name of the transferee is entered in the  register of members in respect thereof.  " The words " holder of a share " are really equal to the word shareholder and the expression " holder of a share  denotes, in so far as the company is concerned, only a person who, as a  shareholder,  has  his name entered on  the  register  of members.    A   similar  view  of  the   Companies   Clauses Consolidation  Act, 1845, was taken in Nanney v.  Morgan(1). The learned Lord Justices held that under s. 15 of that Act, the  transferee  bad not the benefit of a legal  title  till certain  things  were done, which were indicated  by  Lopes, L.J., in the following passage: "  Therefore the transferor, until the delivery of the  deed of  transfer  to  the  secretary,  is  subject  to  all  the liabilities and entitled to all the rights which belong to a shareholder  or  stockholder, and, in my opinion  until  the requisite  formalities are complied with, he  continues  the legal  -proprietor  of the stock or shares subject  to  that proprietorship  being  divested,  which it  may  be  at  any moment, by a compliance with the requisite formalities. (1)  (1888) 37 Ch.  D. 346, 356. 455 The same position obtains in India, though the completion of the  transaction by having the name entered in the  register of members relates it back to the time when the transfer was

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first made.  See Nagabushanam v.   Ramachandra Rao (1). During  the  period  that the transfer  exists  between  the transferor and the transferee without emerging as a  binding document upon the company, equities exist between them,  but not between the transferee and the company.  The  transferee can  call  upon the transferor to attend the  meeting,  vote according  to his directions, sign documents in relation  to the  issuance of fresh capital, call for  emergent  meetings and  inter  alia,  also compel the transferor  to  pay  such dividend  as he may have received.  See E. D. Sassoon &  Co. Ltd.  v.  Patch-(2)  approved in Mathalone  v.  Bombay  Life Assurance  Co. Ltd. (3 ). But these rights though  they,  no doubt,  clothe the transferee with an equitable  ownership-, are  not  sufficient to make the transferee  a  full  owner, since  the  legal  interest  vis-a-vis  the  company   still outstands  in the transferor; so much so, that  the  company credits the dividends only to the transferor and also  calls upon him to make payment of any unpaid capital, which may be needed.  The cases in Black v. Homersham (4) or Wimbush,  In re Richards v. Wimbush (5) hardly advance the matter further than  this.  The position, therefore, under the Indian  Com- panies  Act,  1913,  is quite clear that  the  expression  " shareholder " or " holder of a share " in so far as that Act is  concerned, denotes no other person except a " member  ". The  question that arises in the present case is whether  by reason  of  ss.  16(2) and 18(5) the  assessee,  who  was  a transferee on a blank transfer’ is entitled to the  benefits of the grossing up of the dividend income.  Learned  counsel for  the  assessee strenuously contends  that  the  assessee being an owner in equity of the shares and thus also of  the dividend is entitled to this benefit.  He refers to the  use of the word I assessee in s. 16(2).  The Department, on the (1)  (1922) I.L.R. 45 Mad. 537. (3)  [1954] S.C.R. 117. (2)  (1922) 45 Bom.  L.R. 46. (4)  (1878-79) L. R. 4 Ex.  D. 24. (5) [1940] 1 Ch.  D. 92. 456 other hand, says that the dividend can be increased under s. 16(2) and credit allowed under s. 18(5) if the assessee is a ’shareholder’,  because the benefit of s. 18(5) can go  only to  the  shareholder, i. e., a person with his name  on  the register  of members, and not to a person holding an  equity against  such shareholder.  The assessee contends  that  the word  "  shareholder " includes even a person  who  holds  a share  as  a  result  of a  blank  transfer,  and  does  not necessarily  mean a member of the company, whose name is  on the register of members. Authorities  on this point are not wanting, and  indeed,  in the  judgment of the Calcutta High Court they have all  been referred to.  They are all against the assessee.  See  Shree Shakti Mills Ltd. v. Commissioner of Income-tax (1), Jaluram Bhikulal  v.  Commissioner  of  Income-tax  (2),  Arvind  N. Mafatlal v. Incometax Officer (3) and Bikaner Trading Co. v. Commissioner of Income-tax (4). The  question  that falls for consideration is  whether  the meaning  given  to the expression "shareholder" used  in  s. 18(5) of the Act by these cases is correct.  No valid reason exists why " 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.  In In re Wala Wynaad Indian Gold Mining Company (5), Chitty, J., observed: " I use now myself the term which is common in the Courts, I a shareholder’, that means the holder of the shares.  It  is the  common term used, and only means the person  who  holds

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the shares by having his name on the register.  " Learned   counsel  for  the  assessee  cited  a  number   of authorities  in which the ownership of the dividend  was  in question, and it was held that the transferee whose name was not registered, was entitled to the dividend after  transfer had  been  made.  These cases are  Commissioners  of  Inland Revenue  v. Sir John Oakley (6), Spence v. Commissioners  of Inland Revenue (7) (1)  [1948] 16 I.T.R. 187. (3)  [1957] 32 I.T.R. 350. (5)  (1882) 21 Ch.  D. 849, 854. (2)  [1952] 22 I.T.R. 490. (4)  [1953] 24 I.T.R. 419. (6)  (1925) 9 Tax Cas. 582, (7) (1941) 24 Tax Cas. 311. 457 and others cited at page 367 in Multipar Syndicate, Ltd.  v. Devitt (1). No one can doubt the correctness of the proposition in these cases, but from an equitable right to compel the  transferor to give up the dividend to the transferee, to a claim to the dividend by him as a " shareholder " against the company  is a wide jump.  In so far as the company is concerned, it does not even issue the certificate under s. 20 of the Income-tax Act  in the name of an unregistered transferee but  only  in the  name of the transferor whom it recognises, because  his name is borne on its books.  Section 20 lays down: " The principal officer of every company shall, at the  time of  distribution  of  dividends,  furnish  to  every  person receiving  a dividend a certificate to the effect  that  the company has paid or will pay income-tax on the profits which are being distributed, and specifying such other particulars as may be prescribed.  " The  meaning of s. 20 as also of s. 18(5) is clear  if  they are  read  with s. 19A, under  which  information  regarding dividends has to be supplied by the company when demanded by the Income-tax Officer.  It lays down: "  The principal officer of every company ... shall,  on  or before  the  15th day of June in each year, furnish  to  the prescribed  officer  a  return in the  prescribed  form  and verified  in the prescribed manner of the names and  of  the addresses,  as  entered  in  the  register  of  shareholders maintained  by  the company, of the shareholders to  whom  a dividend or aggregate dividends exceeding Such amount as may be  prescribed in this behalf has or have been,  distributed during the, preceding year and of the amount so  distributed to each such shareholder.  " (Italics supplied). Section  19A makes it clear, if any doubt existed,  that  by the term " shareholder " is meant the person whose name  and address  are  entered in the register of  "  shareholders  " maintained  by  the  company.  There  is  but  one  register maintained by the Company.  There (1)  (1945) 26 Tax Cas. 359. 58 458 is  no  separate register of " shareholders "  such  as  the assessee  claims to be but only a register of "  members  ". This  takes us immediately to the register of  members,  and demonstrates that even for the purpose of the Indian Income- tax Act, the words ’,member and " shareholder " can be  read as synonymous. The words of s. 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 assessee,   notwithstanding  the  equitable  right  to   the

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dividend, was not entitled to be regarded as a "shareholder" for  the purpose of s. 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. In  view of this, we are satisfied that the answer given  by the  Calcutta  High  Court  on the  question  posed  by  the Tribunal was correct. The appeal fails, and is dismissed with costs. Appeal dismissed. 459