1. This is a reference under sub-section (1) of section 66 of the Indian Income-tax Act (hereinafter referred to as the Act). We are concerned with the assessment year 1948-49, the relevant previous year being the year ending on 31st March, 1948.
2. One Mr. Henry Gannon died testate on 13th May, 1945, leaving behind his will of date 18th November, 1942, and considerable property. The national Bank of India in England was under the will appointed as executors. The will was probated by the National Band of India in England. The deceased had left behind some estate in India. The National Bank of India, therefore, gave power of attorney to one Mr. James Anderson, the assessee in this case. The assessee applied to this court under section 241 of the Indian Succession Act and was granted letters of administration with a copy of the will annexed to the estate of the deceased in British India. The letters of administration were granted on 14th August, 1946. The deceased, Mr. Gannon, possessed 2,674 shares of a private limited Indian company known as Gannon Dunkerley & Co. Ltd. (hereinafter referred to as the 'company'). By clause 5 of the will the deceased had bequeathed 450 out of the 2,674 shares to six legatees mentioned in the will. In the course of administration the assessee handed over the share certificates as well as the transfer deeds in respects of the 450 shares to six legatees. As regards the remaining 2,224 shares a tripartite agreement was reached between the National Bank of India Ltd., as the executors of the will of the deceased, the company and one Mr. Morarka. There were certain other parties to this agreement but we are not concerned with them here. Under this agreement, the executors agreed to sell the said 2,224 shares to Mr. Morarka and the company consented to it. Clause 5 of the agreement provided that the completion of the purchase and sale of the shares to be purchased and sold under the agreement shall be completed within three months from the date of the agreement and the transferor, i.e., the executors, shall respectively on or before that date furnish to the purchasers transfers duly signed by the transferors with the relative certificates, failing which the company shall be entitled to proceed in the manner authorised by article 22 and to enter in the register the name of the purchaser as the holder of the shares, if any, in respect of which any of the transferors is in default and to hold the purchase monies relating thereto in trust for such defaulting transferor. The price agreed to be paid by Mr. Morarka was Rs. 1,240 per share. The executors, as regards the holding of the 2,224 shares of the late Mr. Gannon were to receive Rs. 27,57,760 on handing over the share certificates and transfers duly signed in favour of the purchasers. The relevant share certificates and the transfer deeds were hand over to the purchaser, Mr. Morarka, on October 12, 1946, and the assessee received the sale price. The sale of the shares effected resulted in capital gains. The sale of these shares was the subject-matter of an assessment for capital gains in the assessment years 1947-48 and 1948-49 when sums of Rs. 20,13,738 and Rs. 1,51,963 respectively were brought to assessment under section 12B of the Income-tax Act. The names of the transfers, however, were not brought on record in the share register of the company. The shares continued to stand in the names of the previous owner, viz., the late Mr. Henry Gannon. For the assessment years 1946-47 and 1947-48 the Income-tax officer concerned applied the provisions of section 23A of the Act and by his order dated the 26th March, 1953, ordered that the undistributed portion of the assessable income of the company of the relevant previous year as computed for income-tax purposes and reduced by the amount of income-tax and super-tax payable by it in respect thereof shall be deemed to have been distributed as dividends among the shareholders as at the date of the relevant annual general meetings held on May 26, 1947, and December 22, 1947, respectively. The net dividend income thus deemed to have been distributed in respect of the said 2,224 shares amounted to Rs. 61,051 as on May 26, 1947, and Rs. 3,73,099 as on December 22, 1947. Two days after making this order, i.e., on 28th of March, 1953, the Income-tax Officer issued a notice under section 34(1) (b) of the Act to the assessee calling upon him to deliver a return of his total income and total world income assessable for the assessment year ending 31st March, 1949, as in his view the assessee's income assessable to ending 31st March, 1949, had escaped assessment and he, therefore, proposed to reassess the said income that has escaped assessment. A notice was addressed to 'Mr. James Anderson, administrator to the estate of the late Mr. Henry Gannon, C/o. The National Band of India Ltd., Mahatma Gandhi Road, Bombay'. The assessee, after obtaining some adjournments, filed a return on October 13, 1953, where under he returned an income of Rs. 2,56,602. It is to be noticed that, in the return filed, the assessee had not included the aforesaid deemed dividend income amounting to Rs. 61,051 and Rs. 3,73,099; total Rs. 4,34,150. Before the Income-tax Officer the assessee objected to the addition of the said amount of Rs. 4,34,150 to his income on various grounds. The Income-tax Officer, however, over ruling the objections raised by the assessee, added the said amount of Rs. 4,34,150 to the assessee's income. After grossing up the dividend income, the Income-tax Officer reassessed the total income of the assessee under section 34(1) (b) of the Act at Rs. 8,88,093. Against this order of the Income-tax Officer, the assessee took an appeal to the Appellate Assistant Commissioner. The assessee, inter alia, contended before the appellate authority that the shares were sold in 1946; that the department had already collected capital gains tax on the same and that would clearly establish that the shares had already been sold and, therefore, the assessment was wrongly made. The assessee further contended that at any rate the dividend income cannot be added to his assessment, as the shares stood in the name of the late Mr. Henry Gannon and the assessment, if at all it can be made, should have been made on this on this person and not on the administrator. The assessee also contended that the notice that was issued to the assessee as an administrator to the late Mr. Gannon was not rightly issued and the assessment made was null and void. The Appellate Assistant Commissioner found that the shares, no doubt, were sold in the year 1946; the shares, however, continued to stand in the name of the late Mr. Gannon. Relying on the case of Shree Shakti Mills Ltd., he held that the assessee was liable to be assessed in respect of the aforesaid deemed dividend income. In this view of the matter, the Appellate Assistant Commissioner dismissed the appeal. A second appeal was taken by the assessee to the Income-tax Appellate Tribunal and before the Tribunal the following seven contentions were raised :
(1) That the income from dividends should be taxed only in the hands of the beneficial owner and not the registered shareholder;
(2) that the decision of the Bombay High Court in Shree Shakti Mills Ltd. v. Commissioner of Income-tax is erroneous and in any event does not apply to the case of a deceased shareholder;
(3) that it is only Mr. Gannon that can be assessed and that section 24B has no application to a case of notional dividend deemed to be received by a deceased shareholder;
(4) that the proceedings are bad as the notice and the assessment order were issued to, and made on, respectively in the name of Mr. James Anderson, administrator to the estate of Mr. Gannon;
(5) that the estate has been fully administered and as the appellant, if at all, could be made liable only to the extent of the assets available, the assessment cannot be made as the estate is not capable of bearing the charge;
(6) that in any event the company being a party to the agreement dated August 14, 1946, was bound to complete the sale and the appellant cannot be made to suffer because of the fraud played on him by the company; it cannot also be said that the rectification remedy was open to the appellate as in fact no notice of any meeting or the declaration of any dividend was issued to the appellant; and
(7) that capital gains tax having been levied and collected clearly established the completed sale and thereafter the appellant cannot be made liable to tax in respect of the same source of income.
3. The Tribunal took the view that, as the provisions of section 24B were applicable to the facts of the present case, any error in addressing the assessee in the notices is not a matter of any substance and that the assessment was properly made. As regards the contention of the appellant that the tax on capital gains having been levied on the assessee, it was not open to the department to assess him in respect of the deemed dividend income, the Tribunal observed :
'We see the force of the assessee's argument and we also admit that the equities are with the assessee. Equity and income-tax are, however, said to be strangers. We have to administer the law as it stands. Under section 23A artificial income is created and is deemed to be the income of the shareholder in spite of the fact that it neither accrues nor is received by the shareholder. It is not possible for us to distinguish the authority referred to hereinabove and relied upon by the department. In these circumstances, we are compelled to reject the contentions of the assessee.'
4. In this view of the matter, the appeal of the assessee was dismissed by the Tribunal. On an application made by the assessee under sub-section (1) of section 66 of the Act, the Tribunal, raising the following two questions, has submitted a statement of the case to this court. The questions referred to us are :
'(1) Whether, on the facts and in the circumstances of the case, the assessment made on Mr. James Anderson, administrator to the estate in India of Mr. Henry Gannon (deceased), is valid in law ?'
If the above question is answered in the affirmative :
(2) Whether, on the facts and in the circumstances of the case, the dividends of Rs. 61,051 and Rs. 3,73,099 deemed to have been distributed as on May 26, 1947, and December 22, 1947, respectively under section 23A of the Income-tax Act assessable in the hands of the applicant ?'
5. Mr. Kolah contends that the aforesaid deemed dividend income deemed to have been distributed as on May 26, 1947, and December 22, 1947, under section 23A of the Indian Income-tax Act might be the income of the late Mr. Henry Gannon. That income cannot be assessed in the hands of the assessee by resorting to the provisions of section 34(1) (b) of the Act. Deemed dividend income cannot be added or clubbed together with the income received by the assessee from the estate of Mr. Gannon in the assessment year 1948-49. The notice issued to the assessee under section 34(1) (b) is, therefore, invalid in law and consequently the assessment made on the assessee in respect of the said deemed dividend income under section 34(1) (b) if the Act is bad in law. Mr. Kolah referred to us an unreported decision of the Supreme Court in Civil Appeals No. 125, 231 and 447 of 1960, decided on 18th July, 1961.
6. Mr. Joshi, on the other hand, contends that the shares stood in the name of the late Mr. Gannon and the estate of Mr. Gannon vested in the assessee on August 14, 1946. Had Mr. Gannon not died the deemed dividend income would have been included in the income of Mr. Gannon. Section 24B of the Act makes the administrator liable to pay tax in respect of this income. In the assessment year 1948-49 the assessee had been assessed only in respect of the income of the estate received by him. The deemed dividend income was the income was the income of that year. That income, therefore, can be added or clubbed to the income of the assessee of that year. The notice issued on the assessee was in his representative capacity as representing the estate of the deceased and was, therefore, proper. He referred us to the decisions in Maharaja of Patiala v. Commissioner of Income-tax and Commissioner of Income-tax v. James Anderson. According to Mr. Joshi the decision of the Supreme Court to which our attention was drawn by Mr. Kolah has no application to the facts of the present case. In that case the registered shareholder was alive at the time the order under section 23A was made. That decision, therefore, has no application to a case where under section 23A of the Act. On the death of a shareholder, the shares held by him vest in his administrator from the date of his death. The administrator is the owner of those shares. Any dividend that is declared subsequent to the death of the registered shareholder is payable to the administrator; if any bonus share are issued, they are delivered to the administrator; if any liability remains in respect of the unpaid shares, that can be recovered from the administrator. The deemed dividend income, therefore, is the income of the assessee, who is the administrator of the estate in India of the late Mr. Gannon. That income can, therefore, be added to the other income from the estate of the deceased received or recovered by the assessee.
7. In our opinion the first question will have to be answered in favour of the assessee. If we may, with respect, say the error that had crept in the assessment made on the assessee in respect of the deemed dividend income and in the order of the Tribunal, has arisen as a result of not keeping in view the distinction and material difference in respect of the income, profits and gains of the deceased derived by him from whatever sources, which were either received or deemed to have been received by him or accrued or arose to him or are deemed to accrue or arise to him within meaning of the Act, and the income of the estate of the deceased subsequently to the death of the deceased, that is, received or deemed to have been received by the administrator or accrued or arose to the administrator or deemed to accrued or arise to the administrator within the meaning of the Act. The liability of the administrator to be assessed and pay tax in respect of the income of the deceased arises under section 24B of the Act, while the liability of the administrator to be assessed and pay tax in respect of the income of the estate of the deceased either received or recovered by him arises under the general provisions of the Act, apart from those of section 24B of the Act. There is a difference as regards the extent of liability of the administrator to pay tax in respect of the income of the deceased and the income of the estate of the deceased arising after the death of the deceased. Sub-section (I) of section 24B is the substantive provision as regards the tax on the income of a deceased person payable by his representative. It reads :
'Where a person dies, his executor, administrator or other legal representative shall be liable to pay out of the estate of the deceased person to the extent to which the estate is capable of meeting the charge the tax assessed as payable by such person, or any tax which would have been payable by him under this Act if her had not died.'
8. It will be noticed that the liability of the executor, administrator or other legal representatives of the deceased created by this sub-section relates to the tax that was payable by the deceased : the tax which, in fact, had been ascertained in his lifetime in an assessment or the tax which would have been payable by the deceased in respect of his income, if he had been alive. The liability to pay the said amount of tax is limited only to the extent of the estate of the deceased person. In other words, in an assessment in respect of the income of the deceased, the administrator is not personally liable. Sub-sections (2) and (3) related to the procedure to be followed in an assessment relating to the income of the deceased on which he would have been liable to pay tax had he been alive. On a reading of these sub-sections, it would be clear that the real assessee in respect of this income is the deceased person; the executor, administrator or other legal representative of the deceased is only treated as if he is an assessee for the purpose of the completion of the assessment. It is common knowledge that section 24B was inserted by section 11 on 11th September, 1933, by an amending Act to get over the effect of certain decisions wherein it had been held that, where a person dies after the commencement of a financial year but before his income for that year had been assessed to tax, his estate is not liable to pay the tax.
9. Now, as already stated, the liability of the administrator to be assessed and pay tax in respect of the income of the estate arising or accruing subsequent to the date of the death of the deceased arises under the general provisions of law. Sections 3 and 4 of the Income-tax Act fasten a liability on every person to pay income-tax on the total income, profits and gains derived by him from whatever source. The liability arises when the income is received or deemed to have been received within the meaning of the Act. If a person is a resident, the liability is there, even if the income, profits and gains are not received but have accrued whether in the taxable territories or outside the taxable territories. If the person is not a resident, the liability is in respect of income that has accrued or deemed within the taxable territories in addition to the income received or deemed to have been received by him. It is under these provisions that the administrator's liability in respect of the subsequent income arises. The liability is not limited only to the extent of the estate in his hands; the liability is a personal liability.
10. In Executors of the Estate of J. K. Dubash v. Commissioner of Income-tax, the difference between these two kinds of assessments have been clearly stated by the Supreme Court in the following terms :
'As already pointed out, their liability to pay the tax on the profits earned after the testator's death arises under section 10(1) and, being that of assessees carrying on the business, is personal to them, although as between them and the estate they would be entitled to be indemnified in respect of the tax paid; while their liability to pay tax on the profits earned during the testator's lifetime arises under section 24B and, being that of legal representatives of the testator, is limited 'to the extent to which the testator's estate is capable of meeting the charge'.'
11. It is true that the case with which their Lordships of the Supreme Court were dealing was a case in which the executors were carrying on the business as directed under the will of the deceased, but that fact would make no difference. The principle stated in the case would be equally applicable to the facts of the present case. At page 189 of the report it is observed by Patanjali Shastri J. :
'The Income-tax Act directs its attention primarily to the person who receives the income, profits or gains rather than to the ownership or enjoyment thereof.'
12. Further the following observations of Lord Cave have been cited with approval :
'The fact is that, if the Income-tax Acts are examined, it will be found that the person charged with tax is neither the trustee nor the beneficiary as such, but the person in actual receipt and control of the income, which it is sought to reach.'
13. The view taken by the learned Chief Justice is also the same. At page 186 it is observed :
'... on the day of the death of the deceased the estate including the business got vested in the executors, and the executors carried on the business within the meaning of section 3 read with section 10 of the Act and as such became personally liable as assessee.'
14. This court in dealing with the liability of the assessee to pay the tax on the capital gains made by the assessee by selling the shares has also pointed out the difference between the two kinds of assessments. In Commissioner of Income-tax v. James Anderson, the learned Chief Justice observed :
'Section 24B casts a liability upon the executor or the administrator to pay which the testator would have been liable to pay if he had not done so. But section 24B does not limit the liability of the administrator or the executor only to the cases referred to in section 24B. An administrator or the executor is as much an assessee under the Act as any other individual and if he carries on business or makes profit or receives dividends or makes capital gains, he is as much liable to pay tax as any other individual.'
15. Keeping this distinction in view, the facts of this case will have to be approached. We are here concerned with the alleged liability of the assessee to pay tax in respect of the deemed dividend income deemed to have been distributed as on May 26, 1947, and December 22, 1947, as a result of the other made under section 23A of the Act on March 26, 1953. The shares stood in the name of the late Mr. Gannon. It has to be seen whether the deemed dividend income is, in law, the income of the assessee, i.e., the income of the estate of the deceased accruing or deemed to be accruing to the assessee. Now, it is well settled that the deemed dividend income deemed to have been distributed as a result of an order made under section 23A of the Act is only fictional or notional income. The income, in fact, is never received by the person to whom the income is supposed to have been distributed. It has to been by whom this fictional or national income is in law deemed to have been received. The question came to be considered by their Lordships of the Supreme Court in the aforesaid unreported decision (Civil Appeals Nos. 125, 231 and 447 of 1960). The facts were that 1,842 shares in a company called the Cotton Export and Import Limited belonged to a Hindu undivided family and the family was the beneficiary of those shares. The shares, however, stood in the individual names of Nanalal Haridas, who was the karta of the family; 877 shares stood in the name of Tribhuvandas Haridas, another member of the family, and 150 shares in the joint names of Nanalal Haridas and Tribhuvandas Haridas. The company was a private limited company in which the public had no interest. An order under section 23A was made against the company. The proportionate amount of dividend of 1,842 shares, after being grossed up, came to Rs. 54,307. This amount, the Income-tax Officer added to the income of the joint family. The joint family challenged the adding up of this amount to its income. It claimed that the dividend deemed to have been distributed under section 23A should be assessed in the hands of the shareholders, that is, the members of the family in whose names the shares stood registered in the books of the company and not in the hands of the Hindu undivided family though it was the beneficiary of these shares. This contention of the Hindu joint family was negatived by the income-tax authorities but was upheld by this court. An appeal from the decision of this court was taken to the Supreme Court on special leave obtained by the Commissioner of Income-tax. The view taken by this court was upheld by the Supreme Court and the appeal was dismissed. On behalf of the Commissioner of Income-tax it was contended before their Lordships of the Supreme Court that the expression 'shareholder' in section 23A means the person who owns the share irrespective of the circumstance, whether that person is registered in the books of the company as a shareholder or not. It was also contended that the legal fiction created by section 23A must be carried to its logical conclusion. The legal fiction created is that profits must be deemed to have been distributed as dividend amongst the shareholders as at the date of the general meeting. This fiction must be carried to its logical conclusion by holding that the dividend had been actually distributed and received by the beneficial owner, viz., the Hindu undivided family. Both these contentions were negatived by their Lordships of the Supreme Court and in repelling them it has been observed :
'The section does not talk of the beneficial owner of the share. It talks of the shareholder only. Section 18(5) of the Act deals with grossing up of dividend and two expressions occur therein : 'owner of the security' and the 'shareholder'. So far as the expression 'owner of the security' is concerned it may perhaps include a beneficial owner; but it has been decided by this court that the expression 'shareholder' in section 18(5) means the shareholder registered in the books of the company. As we have earlier said, no good reason exists as to why the expression 'shareholder' in the section 23A shall not have the same meaning.... The fiction enacted by the Legislature must be restricted by the plain terms of the statute.'
16. It is true that in the case with which there Lordships were dealing, the registered shareholders were at the material time alive, but the decision has not turned on that fact. On the other hand, the rule laid down is that the fiction created has to be restricted to the plain terms of that section and the deemed dividend income deemed to have been distributed among the shareholders would be deemed to be the income and deemed to have been received by those persons in whose names in the books of the company the shares are registered. The aforesaid observation of their Lordships are, in our opinion, a complete answer to the contentions raised by Mr. Joshi. It is, therefore, not possible to hold that the deemed dividend income is deemed to have been received by the assessee as on May 26, 1947, and December 22, 1947. If at all it could be deemed to have been received by anybody on those dates, it could only be by the late Mr. Gannon and none else. We would like to make it clear that we do not hold that the said deemed dividend income was, in law, deemed to have been received by Mr. Gannon on those dates. We would only examine the case on such an assumption.
17. Assuming then that the deemed dividend income was the income of the late Mr. Gannon and assuming that Mr. Gannon's estate was liable to pay any tax in respect in respect thereof, the procedure that should have been followed by the income-tax department was not the procedure followed by them but should have been altogether a different procedure. As already stated, deemed dividend income could, if at all, be the income of the deceased, Mr. Gannon. It is deemed to have been nationally received by him on May 26, 1947, and December 22, 1947. It is an admitted position that Mr. Gannon died in the year 1945 and in the assessment year 1948-49 he could have no income. The question of adding the said deemed dividend income by the reopening an assessment of his income of that year and making a reassessment thereof, therefore, did not and could not arise. It is true that proceedings for a fresh assessment could be started under section 34 but then for effecting an initial assessment of an escaped income under section 34, the notice that has to be issued is a notice under sub-clause (a) of sub-section (1) of section 34 of the Act. Further, assuming that the notice under section 34(1) (a) could have been issued on the assessee with the aid of section 24B, the notice should have been for the assessment of the escaped income of the deceased and not for reassessment of the escaped income of the assessee, i.e., income received by the assessee from the estate of the deceased. In other words, the notice should have been for calling upon the assessee to file a return of the income of Mr. Gannon and not the income of the assessee. We already pointed out the difference between and assessment of an administrator in respect of the income of the deceased and an assessment of an administrator in respect of the income of the estate of the deceased received by him in the course of the administration of the estate subsequent to his death. What the department has done is reopening the assessment of the assessee by a notice under section 34(1) (b) of the Act in respect of income of the estate of the deceased received by the assessee in the assessment year 1948-49 and adding the deemed dividend income to that income of the assessee by way of reassessment. This, as already pointed out, was not permissible to the income-tax authorities to do under the Act. It is obvious that as a result of this assessment the rate of tax, at which tax has been levied, is much higher than the rate at which the assessee might have been liable to pay tax had proper steps been taken. Further, by this reassessment, the liability cast on the assessee to pay the tax is a personal liability, which, in law, is not permissible in respect of the income of the deceased.
18. In our opinion, therefore, the notice issued under section 34(1) (b) of the act to the assessee and the consequent reassessment is bad in law.
19. The decision in Maharaja of Patiala v. Commissioner of Income-tax to which our attention was drawn by Mr. Joshi has, in our opinion, no application to the facts of the present case. The facts of the case were : the late Maharaja, who had income from property and business in British India, died on March 23, 1938. On November 23, 1938, the Income-tax Officer, Bombay, sent printed notices under sections 22(2) and 38 of the Income-tax Act addressed to the Maharaja of Patiala, requiring him to make a return of his income from all sources for the assessment years 1937-38 and 1938-39. The return was made under the authority of the then Maharaja, but it was made in respect of the income of the late Maharaja. A contention was raised that the notice was bad inasmuch as the notices were issued in the name of the then living Maharaja and without disclosing that the notices were issued in the capacity as representing the estate of the late Maharaja. In view of the fact that the return made was of the income of the late Maharaja, it was held that though the notice was bad, inasmuch as the notice was not in accordance with the provisions of law bad, it did not materially affect the assessment. The facts of this case, however, are different. The notice issued to the administrator under section 34 of the Act did not mention that he was required to deliver a return in respect of the income of the deceased. On the other hand, he was called upon to make a return of his income relating to the assessment year 1948-49. The deemed dividend income has been added by the Income-tax Officer to the income of the assessee. These being the facts of the case, it is difficult to hold that the issuance of a notice under section 34(1) (b) was a mere irregularity not affecting the merits of the case.
20. For the reasons stated above, our answer to the first question is in the negative.
21. In view of our answer to the first question, the second question does not survive. The assessee will be entitled to his costs. No order on the notice of motion.
22. First question answered in the negative.