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R.R. Khandelwal Vs. Commissioner of Income-tax, Bombay City Ii - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 14 of 1962
Judge
Reported in[1965]58ITR14(Bom)
ActsIncome Tax Act, 1922 - Sections 16(2)
AppellantR.R. Khandelwal
RespondentCommissioner of Income-tax, Bombay City Ii
Appellant AdvocateS.P. Mehta, Adv.
Respondent AdvocateG.N. Joshi, Adv.
Excerpt:
direct taxation - dividend - section 16 (2) of income tax act, 1922 - whether dividend income was assessed on basis of date of declaration of dividend in previous year or on basis of date of receipt of such dividend - dividend said to be paid within meaning of section 16 (2) when company discharges its liability and makes amount of dividend available to members. - indian succession act (39 of 1925), section 63: [s.b. sinha & cyriac joseph, jj] will validity - deceased, was a very wealthy person - he floated several companies - he left behind his daughters, s and j - he was suffering from various diseases including some neurological ones - for his treatment, he used to frequently visit united states of america accompanied by his wife and daughter - by reason of a will, he is said to..........were declared. in his return for the year 1953-54 which was filed on 2nd october, 1953, the assessee declared a total income of rs. 58,746. in the assessment made on february 16, 1954, however, his total income was computed at rs. 1,28,773. 2. in the return filed by the assessee in the next year 1954-55 (accounting period being october 19, 1952, to november 6, 1953), the assessee had included an income of rs. 60,090.52 np. as receipts from the dividend, giving details thereof as per annexure 'a' attached to the statement of the case. on the scrutiny of this return, the income-tax officer took the view of that the said dividend income of rs. 60,090.52 np. could not be assessed in the year 1954-55, because the said dividends were not declared in the relevant accounting period of the.....
Judgment:

Tambe, J.

1. This is a reference under section 66(1) of the Indian Income-tax Act at the instance of the assessee. We are here concerned with the assessment year 1953-54, the relevant accounting period being October 31, 1951, to October 18, 1952. The assessee has been taxed in the status as an individual. The assessee derives income from dividends on shares. The assessee has been taxed from the year 1948-49. Throughout from 1948-49 to 1953-54, the income from dividend received by the assessee had been assessed in his hands on the basis of receipt, i.e., on the dividend actually received by him irrespective of the dates on which the dividends were declared. In his return for the year 1953-54 which was filed on 2nd October, 1953, the assessee declared a total income of Rs. 58,746. In the assessment made on February 16, 1954, however, his total income was computed at Rs. 1,28,773.

2. In the return filed by the assessee in the next year 1954-55 (accounting period being October 19, 1952, to November 6, 1953), the assessee had included an income of Rs. 60,090.52 nP. as receipts from the dividend, giving details thereof as per annexure 'A' attached to the statement of the case. On the scrutiny of this return, the Income-tax Officer took the view of that the said dividend income of Rs. 60,090.52 nP. could not be assessed in the year 1954-55, because the said dividends were not declared in the relevant accounting period of the assessment year 1954-55 but were declared in the accounting period relevant to the assessment year 1953-54. On the basis of this information, the Income-tax Officer gave a notice under section 34(1)(b), calling upon the assessee to show cause why the assessment should not be re-opened inasmuch as the aforesaid income of Rs. 60,090.52 nP. had escaped assessment in 1953-54.

3. In response to the notice, the assessee submitted a return on 11th April, 1958, disclosing the income at Rs. 1,28,773, i.e., the amount which already had been computed by the Income-tax Officer in completing the original assessment for the year 1953-54. Along with the return, he filed a note stating that the aforesaid dividend income of Rs. 60,090.52 nP. was not received by him during the accounting year 1953-54 and, therefore, could not be assessed in that year. The note also raised another contention, namely, that there was no information before the Income-tax Officer enabling him to reopen the assessment under section 34(1)(b). These contentions were not accepted by the Income-tax Officer and the Income-tax Officer brought to tax the said amount of dividend of Rs. 60,090.52 nP. in the assessment year 1953-54.

4. The assessee took an appeal before the Appellate Assistant Commissioner, and before the Appellate Assistant Commissioner two contentions to be taxed in the year it was declared but was liable to be taxed only in the year in which it was received. The said income was not received in the accounting period and therefore was not taxable. In the alternative, it was contended that in the event the said amount of Rs. 60,090.52 nP. was liable to be taxed in the year 1953-54 should be excluded inasmuch as the declaration of dividend in respect of those amounts was not made during the account period relevant to the assessment year 1953-54. Both these contentions were overruled by the Appellate Assistant Commissioner and the appeal was dismissed. The assessee then took a further appeal to the Tribunal, and before the Tribunal, three contentions were raised. The first contention raised related to the validity of the action under section 34(1)(b). The argument raised on behalf of the assessee was that the Income-tax Officer had no information in his possession on the basis of which he could have re-opened the assessment under section 34(1)(b). The Tribunal found that the Income-tax Officer had initiated action under section 34(1)(b) on the basis of the information contained in the return filed on February 2, 1955, for the assessment year 1954-55, and it is only on the scrutiny of that return that the Income-tax Officer came to the conclusion that the dividends were really assessable in the year 1953-54. The income being assessable in the assessment year 1953-54, it was clear that it had escaped assessment. On this view of the matter, the first contention was rejected. The second contention raised was that on a true construction of the relevant provisions of law, the said amount of Rs. 60,090.52 nP. was not taxable in the year 1953-54, on the basis of the declaration of the dividends during the relevant accounting period for that year. The argument on behalf of the assessee was that the dividend was taxable only in the year in which it was received and not in the year it was declared. The argument was founded on sub-section (2) of section 16 of the Act as it then stood. In the alternative, it was argued that even assuming that the dividend income was taxable in the year it was declared, the assessee had throughout maintained his books of account on the basis of receipts and has been filing returns on the basis of receipts. This system of accounting has been accepted by the Income-tax Officer and has not been found to be one not disclosing the true state of affairs under section 13 of the Act. The Income-tax Officer, therefore, was not competent to include it in the assessment year 1953-54. Relying on the decision of this court in Commissioner of Income-tax v. Laxmidas Mulraj Khatau and Purshotamdas Thakurdas v. Commissioner of Income-tax, the Tribunal rejected this contention also. Lastly, it was contended that, at any rate, the dividend income of Rs. 4,028 should be excluded from the income already computed and brought to tax in the original assessment, inasmuch as the declaration in respect of that amount was not in the accounting period for the relevant assessment year 1953-54. The Tribunal took the view that the amount already having been brought to tax in the original assessment, it was not open to the Income-tax Officer to exclude it in the assessment under section 34. On this view, the Tribunal dismissed the appeal. On an application made by the assessee, the Tribunal has referred to us the following three question :

'(1) Whether the proceedings initiated by the Income-tax Officer under section 34(1)(b) of the Income-tax Act are vali

(2) Whether the dividend income was rightly assessed on the basis of the date of declaration of dividend in the previous year irrespective of the date of receipt of dividend by the assesse

(3) If the answer to question No. 2 is in the affirmative, whether relief is due to the assessee in the sum of Rs. 4,028 being dividends declared in the earlier year but received during the previous year and already assessed under section 23(3 ?'

5. It is not necessary to deal with the third question inasmuch as no arguments were advanced on this question in view of the decision of this court in Commissioner of Income-tax v. A. D. Shroff.

6. Turning to the first question, it is the argument of Mr. Trivedi, learned counsel appearing for the assessee, that there was no information within the meaning of section 34(1)(b) in the possession of the Income-tax Officer enabling him to re-open assessment under section 34(1)(b). The assessee had been, from the year 1948-49, submitting his returns on the basis of receipts declared. The assessee had been taxed on that basis. The decision of this court had been reported in 16 I.T.R. 248 (Khatau's matter) in 1948 and must have been within the knowledge of the Income-tax Officer from that year. The Income-tax Officer has now only changed his opinion, after a lapse of about 6 years, as to the basis of taxation of these dividend amounts. Such a course is not open to the Income-tax Officer. On the facts found, it is not possible for us to accept this contention raised on behalf of the assessee. It is true that from the year 1948-49 the assessee has been filing his return on the basis of the receipts. But that is altogether a different thing; it does not mean that the Income-tax Officer at the time he brought the income to tax in those years knew that the dividends declared during the accounting period in those years had not been included in the return. On the other hand, the fact found is that it is only on the scrutiny of the return filed by the assessee for the next assessment year 1954-55 that the Income-tax Officer for the first time knew that the dividend income shown in the return for the year 1954-55 was in respect of the dividends which were declared not in the accounting period relevant to the earlier assessment year, i.e., 1953-54. It has not been found as a fact that at the time of making assessment for the year 1953-54 the Income-tax Officer had knowledge that the dividends declared during the accounting period relevant to the assessment year 1953-54 were not included in the return. That being the position, on the facts found, it is clear that it is only while proceeding to assess the income for the assessment year 1954-55 that the Income-tax Officer for the first time knew this fact. Now, it is clear that if the dividend income is liable to be taxed in the hands of the assessee in the year it was declared, then clearly the said income of Rs. 60,090.52 nP. had to be brought to tax in the assessment year 1953-54. It had escaped assessment in that year. In our opinion, therefore, the action taken under section 34(1)(b) was not beyond the competence of the Income-tax Officer. The Tribunal, therefore, was right in rejecting the contention of the assessee in this respect.

7. Our answer to the first question will have, therefore, to be against the assessee.

8. Turning to the second question, in view of the recent decision of their Lordships of the Supreme Court in J. Dalmia v. Commissioner of Income-tax, it is not possible to answer the question without calling for a supplementary statement of the case.

9. Now, according to the assessee, the dividend income is liable to be brought to tax only in the year it is received by the assessee and not in the year it has been declared. Reliance on behalf of the assessee is placed on the provisions of sub-section (2) of section 16 of the Act, as it then stood, and the decision of this court in Purshotamdas Thakurdas v. Commissioner of Income-tax. The contention on behalf of the revenue, on the other hand, is that on a true construction of sub-section (2) of section 16, the dividend income is liable to be brought to tax only in the year the dividend is declared.

10. Reliance is placed on the decision of this court in Commissioner of Income-tax v. Laxmidas Mulraj Khatau. The controversy thus relates to the true construction of sub-section (2) of section 16 as it then stood. Section 12(1A) provided that 'Income from other sources shall include dividends'. The material part of sub-section (2) of section 16 provide :

'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 paid, credited or distributed to him...'

11. We are here concerned only with the true import of the word 'paid'. As already stated, the claim on behalf of the assessee was 'paid' means actually received by the assessee. In other words, the dividend income could be brought to tax only in the year it has been actually received by the assessee. In Khatau's case, this court did not accept this view. The facts in that case wer : On 18th October, 1941, the company declared a dividend out of the profits of the year ended 30th June, 1941. The dividend was made payable on and after 3rd November, 1941, and it was paid on that day. The accounting year of the assessee, who was a shareholder in the company, commenced from 21st October, 1941, and ended on 8th November, 1942. The Income-tax Officer sought to bring this dividend income to tax in the assessment year 1943-44. The contention raised on behalf of the assessee, however, was that the dividend income was not liable to be taxed in that year, but could have been brought to tax in the earlier year, i.e., 1942-43, inasmuch as the dividend had been declared on 18th October, 1941. The contention raised on behalf of the assessee was that on the declaration of the dividend, the shareholder became the creditor of the company. The dividend had been declared on 18th October, 1941, and it was on that day that the said income had accrued or arose to the assessee in that case. This court held that as soon as the dividend was declared on 18th October, 1941, the dividend became the income of the assessee, and, therefore, the dividend income received by the assessee on 3rd November, 1941, was the dividend income of the assessee in the year 1942-43, and not of the assessment year 1943-44. Repelling the contention raised on behalf of the revenue that the word 'paid' means received, the learned Chief Justice observe :

'It is impossible to give a literal construction to the expression 'paid' used in this sub-section. If a literal construction were to be given, then it would amount to this that until the dividend warrant was actually cashed and the dividend amount was actually realised it cannot be stated that the dividend was paid to the shareholder..... I think the proper construction to give to that word is when the dividend is declared then a liability arises on the part of the company to make that payment to the shareholder and with regard to the shareholder when the income represented by that dividend accrues or arises to him. The mere fact that the actual payment of the income if deferred is immaterial and irrelevant.'

12. The aforesaid decision was considered by this court in Purshotamdas Thakurdas v. Commissioner of Income-tax. The facts in that case wer : A company which carried on business both in India and Pakistan during S. Y. 2007 made profits which accrued to it both in India and Pakistan. On October 14, 1952, the company declared dividend for that year, and the resolution provided that the moiety of the amount of the dividend be paid to the shareholders on or after October 16, 1952, and the other moiety be postponed for payment within two months from the date on which remittance from Pakistan became free and the moneys are actually received. The dispute related to the moiety of dividend which were to be paid two months after the remittances from Pakistan. The contention of the department was that these dividends were liable to tax in the assessment year 1953-54, inasmuch as the said dividends had been declared in the accounting period relevant to that year. On the other hand, the contention on behalf of the assessee was that inasmuch as these dividends had never been paid to him, he was not liable to tax. On behalf of the department, reliance was placed on the aforesaid decision of this court in Khatau's case in support of its contention that the date of declaration of the dividend was the date on which the dividend was 'paid' to the assessee within the meaning of section 16(2). In negativing this contention, the learned Chief Justice at page 211 of the report observe :

'But Mr. Joshi's difficulty, for which he can have no answer, is that a declaration of dividend is not made the test of taxability by the legislature. It is difficult to understand why, if the intention of the legislature was that no other circumstances should be considered except the declaration of dividend, the legislature should have indulged in circumlocution and instead of using the simple expression 'to be the income of the previous year in which it was declared' should have used the words 'in which it is paid, credited or distributed'. Therefore, one thing is clear from the language used by the legislature that it did not intend to equate 'paid' with 'declared' in every case.'

13. Considering the facts of this case, it was held that though the dividend was declared, the declaration was a contingent declaration depending on the contingency of the receipt of money from Pakistan; the date of declaration was not the date on which the dividend was paid to the assessee. It is true that the facts of this case are distinguishable from the facts in Khatau's case. But one thing is clear that the impression that had been created by Khatau's case was that the date of declaration of the dividend by a company was the date on which the dividend was 'paid' to the assessee within the meaning of section 16(2). The decision in Purshotamdas's case however made it clear that it is not in each and every case that the date of declaration would be date of payment. Each case would have to be decided on the facts of the case. Both the decisions were considered by their Lordships of the Supreme Court in J. Dalmia's case and it was observe :

'The test applied by Chagla C.J. that because the dividend becomes due to the assessee who has the right to deal with or dispose of the same in any manner he likes, it is taxable in the year in which it is declared, cannot be regarded as correct. The expression 'paid' in section 16(2) it is true does not contemplate actual receipt of the dividend by the member. In general, dividend may be said to be paid within the meaning of section 16(2) when the company discharges its liability and makes the amount of dividend unconditionally available to the member entitled thereto.'

14. Now the facts of this case have not been investigated keeping in view the aforesaid principle laid down by their Lordships. In fact, the said decision was not available to the Tribunal at the time it decided the appeal. As already stated, the rival contentions were according to the assessee the date of receipt was the date of payment, an according to the assessee the date of receipt was the date of payment, and according to the department, the date of declaration was the date of payment. The Tribunal relying on the decision in Khatau's case has held that the date of declaration was the date of payment. None of the rival contentions has been accepted by their Lordships of the Supreme Court. On the other hand, the test laid down by their Lordships is that the dividend may be said to be paid within the meaning of section 16(2) when the company discharges its liability and makes the amount of dividend unconditionally available to the members entitled thereto. At what point of time this position had emerged in this case will have to be ascertained. In our opinion, having regard to the principle laid down by their Lordships of the Supreme Court, the second case will have to be recast to bring out the controversy between the parties, and we therefore reframe the question in the following manne :

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the said dividend income of Rs. 60,090.52 nP. was assessable in the assessment year 1953-5 ?'

15. It may also be stated that in view of the decision of this court in Purshotamdas's case Mr. Trivedi did not advance any argument on the other aspect of the question, namely, that the assessee having maintained the account on receipt basis the Tribunal was not justified in holding that the provisions of section 13 do not control the provisions of section 16(2).

16. In the result, our answer to the first question is in the affirmative. Answer to the third question will be in the negative. As regards the second question as reframed, we direct the Tribunal to forward supplemental statement of the case, in the light of the observations hereinbefore made, on the material already on record.

17. Order as to costs will be made when the final judgment is given.


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