1. The assessee is a company registered in the United Kingdom and is a non-resident company. In the year of account, which is from November 1, 1945, to October 31, 1946, and which is relevant for the assessment year 1947-48, it received a net dividend of Rs. 1,40,000 from the Elephant Oil Mills Co., in which the company held 7,000 shares on which this dividend was declared. The Income-tax Officer grossed up the dividend income by adding to it the tax payable in the United Kingdom at 9 shillings per pound sterling, which amounted to Rs. 1,14,546, and Indian income-tax which amounted to Rs. 59,112. On this grossing up, the Income-tax Officer came to the conclusion that the dividend income of the assessee was Rs. 3,13,658. The Appellate Assistant Commissioner took the view that to the sum of Rs. 1,40,000 only Rs. 59,112 should be added and the gross dividend of the assessee should be Rs. 1,99,112. The Tribunal agreed with the Appellate Assistant Commissioner, and the Commissioner has now come before us on a reference made by the Tribunal.
2. Now, before we look at the scheme of the Income-tax Act, certain principles must be borne in mind. A company pays tax its profits, and having paid tax it distributes dividends to its shareholders. In law, the company is the assessee and it is the company that pays the tax. It would not be true to say that the company pays the tax on behalf of its shareholders. But for certain sections of the Income-tax Act, to which I shall presently draw attention, when an assessee receives dividends from a company, of which he is a shareholder, that dividend constitutes his income and he would have to pay tax on that i ncome without any relief whatsoever. But in order to avoid tax being paid on the same amount both by the company and by the shareholder, the Income-tax Act has provided certain machinery which gives relief to the shareholder, and that machinery is provided in Section 16(2) and Section 18(5). Section 16(2) provides for the grossing up of dividend income. The scheme of that sub-section is that a person's income is not really the dividend which receives from a company, but it is the dividend plus the tax paid by the company relating to that dividend. Therefore, by grossing up, you ascertain the real income of the assessee as far as dividend is concerned. Now, when we turn to Section 16(2), it provides that the grossing up must be on the basis of the income-tax payable by the company on its total income. It is clear that this section can only apply to the income-tax paid by the company in India and at the rate laid down in the Finance Act : it cannot possibly apply to a tax paid by a company outside India. Then we come to Section 18(5), and that sub-section provides for the relief to the assessee. The assessee's income having been grossed up, relief would have to be given to him in the amount which was already paid for tax by the company, and Section 18(5) provides that '... any sum by which a dividend has been increased under sub-section (2) of Section 16 shall be treated as a payment of income-tax on behalf... of the shareholder... and credit shall be given to him therefor in the on behalf.. of the shareholder... and credit shall be given to him under the Act'. (I am only quoting the relevant portion of the section.) Therefore, it is by this section that relief is given to the shareholder in his assessment in respect of the amount which has been increased under sub-section (2) of Section 16. The increase under Section 16(2) would affect the rate at which the assessee would have to pay income-tax or super-tax. But relief is given in respect of the actual amount of tax already paid by the company, and it is by this section that legal fiction is introduced that the company pays the tax on the dividend of the shareholder on his behalf. If this scheme is borne in mind, then it is clear that both the Appellate Assistant Commissioner and the Tribunal were right in coming to the conclusion that the amount of tax paid in respect of the dividends in the United Kingdom has no bearing whatever as far Sections 16(2) and 18(5) are concerned. And unless the Commissioner satisfies us that this case falls under some provision of the Income-tax Act, on grossing up would be permissible at all. If the only section which permits grossing up is Section 16(2), then, as I pointed out, under that section the grossing up can only be in the manner indicated in that sub-section. And that grossing up relates only to the adding to the dividend of a shareholder the tax payable by the company, of which he is a shareholder in India, on the total income of the company. Therefore, there is no provision whatever in the Income-tax Act for adding to the dividend of a shareholder the tax paid by the company outside India.
3. Now, reliance was placed by Mr. Joshi on Section 49B. Frankly, I must confess that that section does present some difficulty, because that section deals with the case of refund and it provides for refund and it provides for refund on the basis that income-tax on the company 's dividend in deemed to have been paid by the shareholder, and relief is intended to be given to the shareholder of a company which is assessed to income-tax not only in India hut also elsewhere. This provides Mr. Joshi with an argument that the scheme of the Income-tax Act is that you take into consideration not only the assessment of a company to income-tax in India but also assessment of a company to income-tax elsewhere. And Mr. Joshi says that, as in this case the company whose dividends are in question was assessed to income-tax not only in India but also in the United Kingdom, we must, in grossing up, take into consideration the tax paid by the company in the United Kingdom. Now, fortunately, we are not called upon to consider Section 49B. As I said before, that section deals with a question of refund, and here we are not dealing with a case of refund : we are dealing with a case where the assessee is entitled to credit in respect of the tax paid by the company under Section 18(5). Section 16(2) and 18(5) constitute self-contained provisions with regard to grossing up of divided income and with regard to relief to be given to an assessee in respect of that grossing up. Section 49B deals with an altogether different matter, and that is a case where a refund is asked for by the assessee. This is not a case where the assessee is asking for any refund under Section 49B, and, therefore, Section, 49B does not fall for interpretation at our hands.
4. I would, therefore, answer the question put to us in the negative.
5. The Commissioner to pay the costs.
6. I agree.
7. Reference answered in the negative.