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PETITIONER: PADMAVATI R. SARAIYA AND OTHERS

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX BOMBAY CITY-1

DATE OF JUDGMENT: 22/09/1964

BENCH: SIKRI, S.M. BENCH: SIKRI, S.M. SUBBARAO, K. SHAH, J.C.

CITATION:  1965 AIR 1263            1965 SCR  (1) 307

ACT:   Income-tax  Act (11 of 1922), ss. 16(2), 49AA  (and  Indo- Pakistan agreement dated 10th December, 1947-Scope of.

HEADNOTE:     The assessee was a share-holder in a company carrying on business  both in India and Pakistan.  It declared  dividend out  of  the profits accruing to it in both  the  countries. For  the  following  year,  having  declared  the   dividend similarly,  the company also passed a resolution  that  half the amount of the dividend was payable on or after a certain date  and the balance was payable "within two  months  after remittances   from  Pakistan  became  free".   On  the   two questions,  namely  :  (i)  whether  the  assessee,   having received  the Pakistan portion of the  dividend-income,  was entitled  to  any relief under the provisions of  the  Indo- Pakistan  Agreement dated 10th December, 1947, entered  into between  the  two  countries to  avoid  double  taxation  in pursuance  of s. 49AA of the Income-tax Act, 1922, and  (ii) whether  the entire amount of dividend including the  moiety payable  later could be included in the total income of  the assessee,  the High Court answered the first,  against,  and the  second, in favour of, the assessee.  Both the  assessee and the Commissioner appealed to the Supreme Court. HELD:     The appeals should be dismissed. (i)  Articles  IV  and VI of the Agreement  show  that  each Dominion  could  make an assessment under its own  laws  and regardless of the Agreement.  The only restrictions  imposed were on the liberty to ’retain the tax and the obligation to allow certain abatements, if the conditions mentioned in the Agreement  were satisfied.  As no certificate of  assessment in Pakistan had been produced before the income-tax  officer as required by Art.  VI(b), the assessee was not entitled to any relief. [313D,G; 314A]. (ii) As the dividend due to the assessee was not credited to any separate account of the assessee so that he could, if he wished,  draw it, it must be held that the Pakistan  portion of  the  dividend had not been credited or paid  within  the meaning of s. 16(2) of the Act and so, could not be included in the total income of the assessee. [315B-C]. J.   Dalmia v. Commissioner of Income-tax, Delhi, 53  I.T.R.

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83, followed.

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 704 to 715 of 1963. Appeals from the judgments and orders dated March 17.  1958, of  the Bombay High Court in Income-tax Reference No,,.  41, 42, 43, 57, 58, 5 9, 69, and 77 of 1957. A.   V.  Viswanatha Sastri, T. A. Ramachandran J.. B.  Dada- chanji,   O.  C.  Mathur  and  Ravinder  Nairain,  for   the appellants  (in C.A. Nos. 704, 706, 707, 709, 710, 711,  713 and 714 of 308 1963)  and respondents (in C.As. Nos. 705, 708, 713 and  715 of 1963). S.   V.  Gupte, Additional Solicitor-General,  R.  Ganapathy Iyer  and R. N. Sachthey, for the appellants (in  C.A.  Nos. 705,  708,  712, and 715 of 1963) and respondents  (in  C.A. Nos. 704, 706, 707, 709, 710, 711, 713 and 714 of 1963). The Judgment of the Court was delivered by Sikri  J. This judgment will dispose of 12 appeals from  the judgments of the High Court of Bombay, dated March 17, 1958, whereby the High Court answered the questions referred to it partly in favour of the assessee and partly in favour of the Department.   The four questions answered by the High  Court are:               "  I. Whether the initiation of  action  under               section 34 for the purpose of bringing to  tax               the  net dividend income of Rs. 579  (suitably               grossed) was valid ?               2.    Whether  the  said ’P.  portion  of  the               dividend income’ forms part of the  assessee’s               total  income  as  that  term  is  defined  in               section  2(15) of the Indian Income  Tax  Act,               1922 ?               3.    Whether having regard to the  provisions               of  the Indo-Pakistan Agreement, the  assessee               is  entitled to any ’relief’ on the  said  ’P.               portion of dividend income’?               4.    D.  Whether  the  other  moiety  of  the               dividend  of  Rs.  1,71,992  declared  by  the               Company  on 14-10-1952 is properly  includible               in  the  total income of the assessee  of  the               previous  year  S.Y. 2008 for  the  assessment               year 1953-54 ?" (The  figures  in  these questions are in  respect  of  Shri Purshottamdas Thakurdass.) In  C.A. 709/63 and C.A. 713/63 questions 1, 2 and 3  arise. Only  questions 2 and 3 arise in C.A. 710/63,  C.A.  711/63, C.A.  704/63, C.A. 707/63, C.A. 714/63, and  706/63.   Ones- tion’D’  arises  in C.A. 712/63, C.A. 705/63,  C.A.  708/63, C.A. 712/63 and C.A. 715/63.  The appeals involving question ’D’  are  by  the Commissioner of  Income  Tax  and  appeals involving questions I to 3 are by assessees. It  will be convenient to give the facts in the case of  the assessee,   the   late   Shri   Purshottamdas    Thakurdass, hereinafter   referred  to  as  Assessee  ’A’.   He  was   a shareholder in Narandas Rajaram,                             309 Ltd., which carries on business both in India and  Pakistan. Profits  accrued  to  it both in India  and  Pakistan.   The company declared dividend out of the above profits.  In  the case   of  Assessee  ’A’,  the  portion  of   the   dividend

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attributable  to  the  profits  that  accrued  in   Pakistan amounted  to Rs. 2,722 for the assessment year 1949-50.   On May  20, 1952, the I.T.O. included this sum of Rs. 2,722  in the  total income but held that no income tax  or  super-tax was  payable  in  respect of this amount.   The  Income  Tax Officer reopened the assessment of 1949-50 because  Assessee ’A’ was a shareholder in Industrial Corporation Ltd., and an order had been passed under s. 23A of the Indian Income  Tax Act, 1922 (hereinafter referred to as the Act) in respect of this  Corporation.  As a result of this order, Rs.  579  was deemed  to  have accrued to him.  But in  his  re-assessment order,  dated  January  17, 1955,  the  Income  Tax  Officer brought  to  charge not only the said Rs. 579 but  also  the said  sum  of Rs. 2,722, i.e., the Pakistan portion  of  the dividend received from Narandas Rajaram Ltd.  The  Appellate Assistant  Commissioner upheld the assessment order both  in respect  of Rs. 579 and Rs. 2,722.  The  Appellate  Tribunal also upheld the order.  The Appellate Tribunal then referred the  first three questions to the High Court but refused  to refer the following question:               "Whether on the facts and circumstances of the               case,  the  relief allowed in  the  assessment               under   section  23(3)  on  that  portion   of               dividend  income from Narandas Rajaram  &  Co.               Private  Ltd., which is attributable  to  the,               income of the Company arising in Pakistan  can               be withdrawn while making re-assessment  under               section 34(1) (b)?" Assessee ’A’ took out a notice of motion for a reference  of the said question. The  High  Court,  by its judgment  dated  March  17,  1958, answered the three questions against the Assessee.  The High Court  also  directed the Appellate Tribunal  to  refer  the above  question  hereinafter  to  be  referred  to  as   the "Supplementary  Question" which the Appellate  Tribunal  had declined to refer.  On the Appellate Tribunal referring  the said  question, the High Court by its judgment  dated  April 14, 1960, answered the question in favour of the assessee. On  February 7, 1961, the High Court granted  the  necessary certificate  to  Assessee ’A’.  The Commissioner  of  Income Tax, sup./64-7 310 however,  did  not appeal against the judgment of  the  High Court on the supplementary question. For  the assessment year 1952-53, the net dividend  received by  Assessee ’A’ from Narandas Rajaram & Co., Ltd.  was  Rs. 1,12,867  out  of which Rs. 23,167 was attributable  to  the profits  of  that company which accrued  in  Pakistan.   The I.T.O.  charged  this  sum to tax  and  the  assessment  was confirmed  both by the Appellate Assistant Commissioner  and the Appellate Tribunal.  Two questions were referred to  the High Court.  The second question is the same as question No. 3  reproduced in the beginning of the judgment.   The  first question  was in substance the same as question No.  2.  The High  Court  on July 10, 1959, granted  the  certificate  of fitness under S. 66A(2) of the Act. The  fourth question ’D’ arose in the case of  Assessee  ’A’ for the   assessment   year  1953-54  under  the   following circumstances. On   October   14,   1952,   the    following resolution was adopted at the ordinary  general  meeting  of Narandas Rajaram & Co. Ltd.               "Dividends,  as  mentioned below, be  and  are               hereby  declared  out of the  profits  of  the               Company:

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             (a) A dividend of 4 per cent on ’A’ Preference               Shares  and  4  per  cent  on  ’B’  Preference               Shares.               (b)   A  dividend  of  32  per  cent  free  of               income-tax  on  the  Ordinary  Shares  and   a               consequential additional dividend at the  rate               of  13  per  cent free of  income-tax  on  ’B’               Preference Shares.               (c)   A  moiety of the amount of the  dividend               be paid to the share-holders on and after 16th               October,  1952  whose  names  appear  on   the               Register  of  the Company as on  6th  October,               1952,  and the other moiety be  postponed  for               payment  within  two months from the  date  on               which  remittances from Pakistan  become  free               and the moneys are actually received." The certificate issued by the company under s. 20 of the Act also  stated  that half of the amount of  the  dividend  was payable  on or after October 16, 1952, and the  balance  was payable  "within  2 months after remittances  from  Pakistan become  free".  The Income Tax Officer included  the  entire amount of Rs. 1,71,992 in the total income of Assessee  ’A’. Both the Appellate Assistant Commissioner and the  Appellate Tribunal confirmed this.  On an application of Assessee ’A’, the Tribunal referred three questions; the first question is Question ’D’, the second question is 311 similar  to  the  question No. 2 and the  third  similar  to question No. 3, reproduced in the beginning of the judgment. The  High Court answered question ’D’ in the negative  (i.e. against  the Commissioner of Income Tax) and the others,  as in  the others references, against the assessee.   The  High Court  granted certificates under s. 66A(2) of the Act  both to the Assessee ’A’ and the Commissioner of Income Tax. It is not necessary to give the facts in the cases of  other assessees  for, apart from the amount of dividend  involved, the facts are similar. It  is  not necessary to discuss the first  question,  which raises the point of the validity of proceedings under s.  34 of  the Act, because it is common ground that it has  become academic.  This common ground is based on the fact that  the Commissioner  of  Income Tax has not  appealed  against  the judgment  of the High Court, dated April 14, 1960.  By  this judgment  the  High  Court had  answered  the  supplementary question in favour of the Assessee ’A’. Regarding the second question, Mr. Viswanatha Sastri rightly concedes  that  the Pakistan portion of the  dividend  forms part of the assessee’s total income, as defined in s.  2(15) of  the  Act.   The  High Court  had  followed  its  earlier judgment  in the Commissioner of Income-Tax, Bombay City  v. Shanti  K. Maheshwari(1).  We hold that the High  Court  was right in answering this question against the Assessee ’A’. The next question involves the interpretation of s. 49AA  of the  Act, as it existed at the relevant time, and the  Indo- Pakistan  Agreement  dated December 10,  1947.   Mr.  Sastri contends  that on the true interpretation of  the  agreement each  Dominion is entitled to charge only on the  proportion of income allotted to it under the Agreement.  The reply  on behalf  of the Revenue is that each Dominion is entitled  to assess an assessee on the total income in the normal way but it  has  to  allow an abatement subject  to  the  conditions mentioned in the agreement being satisfied.               Section 49AA was in the following terms :               "The  Central  Government may  enter  into  an               agreement with Pakistan or the United  Kingdom

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             for  the  avoidance  of  double  taxation   of               income,  profits and gains under this Act  and               under  the  corresponding  law  in  force   in               Pakistan or the united Kingdom and may, by (1)  (1958) 33 I.T.R. 313. 312 .lm15 notification in the official gazette, make such provision as may be necessary for implementing the agreement." In pursuance of this section, agreement for the avoidance of double  taxation  of  income was entered  into  between  the Government  of the Dominion of India and the  Government  of the  Dominion  of Pakistan.  The following portions  of  the agreement  are  relevant for disposing of the  point  argued before us.               "Article   IV.   Each  Dominion   shall   make               assessment  in the ordinary way under its  own               laws;  and,  where either Dominion  under  the               operation of its laws charges any income  from               the  sources  or  categories  of  transactions               specified in column 1 of the Schedule to  this               Agreement  (hereinafter  referred  to  as  the               Schedule)  in excess of the amount  calculated               according  to  the  percentage  specified   in               columns  2 and 3 thereof, that Dominion  shall               allow  an abatement equal to the lower  amount               of tax payable on such excess in either  Domi-               nion as provided for in Article VI.               Article  VI.  (a)  For the  ’purposes  of  the               abatement to be allowed under Article IV or V,               the tax payable in each Dominion on the excess               or  the doubly taxed income, as the  case  may               be,  shall  be  such  proportion  of  the  tax               payable in each Dominion as the excess or  the               doubly taxed income bears to the total  income               of the assessee in each Dominion.               (b)   Where  at the time of assessment in  one               Dominion, the tax payable on the total  income               in the other Dominion is not known, the  first               Dominion shall make a demand without  allowing               the abatement, but shall hold in abeyance  for               a period of one year (or such longer period as               may  be allowed by the Income-tax  Officer  in               his discretion) the collection of a portion of               the  demand equal to the estimated  abatement.               If  the  assessee produces  a  certificate  of               assessment  in the other Dominion  within  the               period  of  one  year  or  any  longer  period               allowed   by  the  Income-tax   Officer,   the               uncollected  portion  of the  demand  will  be               adjusted against the abatement allowable under               this  Agreement;  if no  such  certificate  is               produced,  the  abatement shall  cease  to  be               operative and the outstanding demand shall  be               collected forthwith.                             313                         THE SCHEDULE                       (See Article IV) Source  of  income  or  nature  of  transaction  from  which income is drived (1) Percentage  of  income which each Dominion  is  entitled  to charge under the Agreement(2) Remarks(3) 1. (8.) Dividends 2.By  each  Dominion  in proportion to the  profits  of  the

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company chargeable by each Dominion under this Agreement. 3. 50 percent of the profits by the dominion in which  goods are sold. 4.  Relief in respect of any excess income-tax deemed to  be paid  by the share-holder shall be allowed by each  Dominion in  proportion to the profits of the company  chargeable  by each under this Agreement. It seems to us that the opening sentence of Art.  IV of  the Agreement that each Dominion is entitled to make  assessment in  the ordinary way under its own laws clearly  shows  that each  Dominion  can  make an assessment  regardless  of  the Agreement.   But a restriction is imposed on  each  Dominion and the restriction is not on the power of assessment but on the liberty to retain the tax assessed.  Article IV  directs each Dominion to allow abatement on the amount in excess  of the  amount  mentioned in the Schedule.  The scheme  of  the Schedule  is to apportion income from various sources  among the  two Dominions.  In the case of Dividends each  Dominion is  entitled to charge "in proportion to the profits of  the company  chargeable by each Dominion under this  agreement." This  refers us back to the other items.  For  instance,  in respect of goods manufactured by the assessee partly in  one Dominion and partly in the other, each Dominion is  entitled to charge on 50% of the profits.  But the Schedule does  not limit the power of each Dominion to assess in the normal way all  the income that is liable to taxation under  its  laws. The  Schedule  has  been inserted only for  the  purpose  of calculating the abatement to be allowed. Article  VI  also leads to the same conclusion.  For  if  no assessment could be made on the amount on which abatement is to be allowed, there could be no question of making a demand without allowing the abatement and holding in abeyance for a period  the collection of a portion of the demand  equal  to the estimated abatement. 314 it is common ground that no certificate of assessment in the other  Dominion  has  been produced before  the  Income  Tax Officer.   We agree with the High Court that the  answer  to this question is in the negative. The  other  question that remains is question ’D’,  set  out above.  The High Court approached the question in the  light of the decision of the Bombay High Court in Commissioner  of Income  Tax  v. Laxmidas Mulraj Khatau(1).  It came  to  the conclusion  that  the resolution created only  a  contingent liability, and, therefore, the dividend could not be said to have  been paid in the previous year of the assessment  year 1953-54.   Mr.  Gupte,  the  learned  Additional  Solicitor- General, has urged that this view is wrong but that in  view of  the  recent  decision  of this Court  in  J.  Dalmia  v. Commissioner of Income Tax, Delhi(2), it is not necessary to decide  this  point  as this Court had  dissented  from  the decision  in Commissioner of Income Tax v.  Laxmidas  Mulraj Khatau(1).   He,  however, urged that the  amount  had  been credited within the meaning of s. 16(2) of the Act.  He said that the profit and loss Account of the Company was  debited with  Rs. 5,85,000, that being the total amount of  dividend declared.   The corresponding credits, he points  out,  were given as follows:               "To seventh Dividend Account   (being      the               amount payable to               shareholders)   Rs.  5,74,144-4-0               To Income-tax Reserve Account  (being      the               amount of income-tax deducted   on    dividend               warrants)  Rs.10,500-0-0               Non  resident shareholders’  supertax  Account

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             (being  the amount of super-tax deducted  from               the    dividend   payable   to    non-resident               shareholders)   Rs.  355-12-0" Subsequently,  after  making payment, the  seventh  dividend account showed a credit balance of Rs. 2,92,500 representing a moiety of the dividend that remained to be paid out of the total dividend declared of Rs. 5,85,000. We  are  unable to accept the contention.  In J.  Dalmia  v. Commissioner  of Income Tax, Delhi(2) Shah J., speaking  for the Court had observed: (1)  (1948) 16 I.T. R. 248. (2) (1964) 53 I.T.R. 83.                             315 .lm15 "In  general,  dividend may be said to be  paid  within  the meaning  of  s.  16(2)  when  the  Company  discharges   its liability  and makes the amount of dividend  unconditionally available to the member entitled thereto". This condition must also be fulfilled in case a dividend  is credited.   In other words, the credit must be in such  form that  the  dividend  is  unconditionally  available  to  the member. It will be noticed that the dividend due to the assessee has not  been credited to any separate account of the  assessee, so  that he could, if he wished, draw it.  Before  the  High Court it was never suggested that the dividend was  credited or distributed. Accordingly  we  hold  that  the  Pakistan  portion  of  the dividend has not been credited or paid within the meaning of s. 16(2) of the Income Tax Act.  The answer to the  question is, therefore, in the negative. In  the result, all the appeals fail.  All the parties  will bear their own costs in this Court. Appeals dismissed. 316