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 as
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
Girdharlal, for carrying on the business of Messrs. Mangoomal Kishanchand. Under
the deed of partnership 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 and 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 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 Officer 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 that the dividend from
the shares 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
section 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 shares, and not the Hindu undivided family. Reliance in support of this
contention was placed upon section 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.
In our judgment the contention is wholly without
substance. Under section 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 section 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 are brought into the taxable
territories during such year, or if such person is not residing in the taxable
territories during such year, accrue or arise, or are deemed to accrue or arise
to him. By sub-section (3) of section 4 any income, profits or gains falling
within the clauses (i) to (xxii) are not liable to be included in the total
income of the person receiving them. Tax being charged by section 3 upon
dividend income and not being excluded under section 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 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 arise to the
real owner of the shares.
Section 16 of the Indian Income-tax Act, 1922, deals with
the exemptions and exclusions in determining the total income. The expression
" total income " is defined in section 2(15) : 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, in so far as it
is relevant, provides :
" In computing the total income of an assessee--
(a) any sums exempted under the first proviso to
sub-section (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 assessee is a partner of a firm, then,
whether the firm has made a profit or a loss, his share (whether a net profit or
a net loss) shall be taken to be any 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 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 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 :
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 indirectly, 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 indirectly 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 transferred otherwise than for adequate
consideration 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) and (3) of section 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-section
(1) applies to all assessees, whereas sub-section (3) applies to individuals
only. But sub-section (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 an 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 cannot be taxed twice over, dividend income will be taxed in the hands of
the real owner of the shares and in the year designated by section 16(2). But by
virtue of the second part of section 16(2),
