S.T. Desai, J.
1. These six references arise out of assessments made on the six assessees who are shareholders of Messrs. Cawasji Jehangir and Co. Ltd. The assessment year is 1948-49. An order was made under Section 23A (1) in the matter of M/s. Cawasji Jehangir and Co. Ltd.- whom we shall refer to as the Company' - by the InCome-tax Officer in respect of the previous year, which was 1946. The total income of the company was determined at Rs. 20,63,016/. What the company had done was that out of this amount it had taken a sum of Rs. 7,86,900/- directly to the general Reserves and not to the profit and loss account and no part of the same was distributed as dividend. The dividend same was distributed as dividend. The dividend declared amounted to Rs. 4,34,768/- This was less then 60 per cent. of the assessable income of the company for that previous year as reduced by the amounts of income-tax and super-tax payable by the company in respect of the same. In making the order of assessment on the company the Income-tax Officer determined the undistributed portion of the assessable income of the company of that previous year as computed for income-tax purposes and reduced by the amount of income-tax, and super tax payable by the company in respect thereof. This will appear from the following figures.
Total income finally determined.
Rs. 20,63,0 16 /-Less: Tax payable:Rs. 8,03,115/-
Rs. 12,59,901/-Less: Dividend declared by the company.Rs. 4,34,768/-
The sum of Rs. 7,86,900/- was brought to tax in the hands of the company under Section 12B as 'capital gains.' Having determined under Section 12B as 'capital gains.' Having determined the figure of Rs. 8,25,133/- as pointed out by us above the proportionate share thereof was included by the Income-tax Officer in the total income of each share-holder for the purpose of assessing his total income. Suitable grossing up was done as required by Section 16 (2). Having done that, the Income-tax Officer computed the total income of the six share-holders by including a sum of Rs. 6,31,527/- (as Section dividend) in the case of 'the Executors and Trustees of late Sir Cawasji Jehangir, 1st Bart.' and a sum of Rs. 1,26,305/- in the case of each of the five other share-holders.
2. The contention of the assessees before the Income-tax Officer and the Appellate Assistant Commissioner was that the portion of Section 23A dividend attributable to capital gains in the hands of the company should be taxed in the hands of the share-holders also at the taxed in the hands of the share-holders also at the rate appropriate to 'capital gains' as indicated in Section 17 (6) of the Act. The Income-tax Officer as well as the Appellate Assistant Commissioner negatived that contention. The mater was carried in appeal by the assessees to the Tribunal and the Tribunal also dismissed that contention. The view taken by the Tribunal was that Section 23A dividend that is included in the total income of an assessee share-holder cannot be dissected as urged on behalf of the assessees for the purpose of determining the income-tax and super-tax payable by them on the 'deemed dividend income.' The assessees have now come before us on these references.
3. The question which we are called upon to determine is:
'Whether the Section 23A dividend of Rs. 6,31,527/- can be dissected into two parts in the ratio of Rs. 7,86,900/-. Rs. 20,63,016/- for the purpose of determining the amount of income-tax and super-tax payable by the assessee share-holder on his total income and if so, whether that smaller portion of Rs. 6,31,527/- is liable to be taxed at the rates applicable to 'capital gains' as laid down in Section 17 (6) of the Income-tax Act, 1922.'
We may state that the same question of law arises in the case of all the share-holders, the only difference being that in the case of one share-holder, the amount is Rs. 6,31,527/- and in the case of other Rs. 1,26,305/- each.
4. Two contentions have been pressed before us by Mr. Palkhiwala, learned counsel for the assessees. The first contention is that the actual distribution of dividend by the company out of the capital gains would be capital gains in the hands of the share-holders. We shall presently examine this argument. It will suffice here to observe that the argument in effect seeks to establish an equivalence between the capital gains of the company and the between the capital gains of the company and the capital gains of the share-holders. The second contention urged before us by learned counsel for the assessee is that under Section 23A it is not the income of the company which is deemed to have been distributed among the share-holders but it is the income as computed in the hands of the company that is distributed.
5. Before examining the arguments it will be convenient to refer to the relevant sections. Section 12B has now been recast. We are concerned with the old section, the relevant part of which ran as under:
'12B. Capital Gains: (1) The tax shall be payable by an assessee under the head 'Capital gains' in respect of any profits or gains arising from the sale exchange or transfer of a capital asset effected after the 31st day of March 1946 and before the 1st day of April 1948; and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange or transfer took place....'
Section 17(7). as it stands today is different. The old sub-section with which we are concerned in these references was as follows:
'17(7). Where the total income of a company includes any income chargeable under the head 'Capital gains', the super-tax payable by the company in any year shall be reduced by an amount computed on that part of its total income which consists of such inclusion at the rate of super-tax (excluding the rate of additional super-tax, if any) specified in the case of a company by the Annual Central Act fixing the rate of tax for that year.'
It will be seen that in this section the legislature is laying down a rule in respect of the total income of a company. Section 17(6) as it stands today is different. The relevant part of the old sub-section with which we are concerned in these references, was as under:
'17(6). Where the total income of an assessee, not being a company includes any income chargeable under the head 'capital gains', the tax, including super-tax, payable by him on this total income shall be (i) income-tax and super-tax payable on his total income as reduced by the amount of such inclusion, had such reduced income been his total income....'
Clause (ii) has been altered. It relates to rates. Section 23A as it stands today has also been recast. the material part of the section as it stood before its amendment by the Finance Act, 1955, was as under:
'23A. Power to assess individual members of certain companies: (1) Where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company up to the end of the sixth month after its accounts for that previous year are laid before the company in general meeting are less than sixty per cent. of the assessable income of the company of that previous year, as reduced by the amount of income-tax and super-tax payable by the company in respect thereof he shall, unless he is satisfied that having regard to losses incurred by the company in earlier years or to the smallness of the profit made, the payment of a dividend or a larger dividend then that declared would be unreasonable, make with the previous approval of the Inspecting Assistant Commissioner an order in writing that the undistributed portion of the assessable income of the company of that previous year as computed for income-tax and super-tax payable by the company in respect thereof shall be deemed to have been distributed as dividends amongst the share-holders as at the date of the general meeting aforesaid, and thereupon the proportionate share thereof of each share-holder shall be included in the total income of such share-holder for the purpose of assessing his total income. xxxxx'
It is not very necessary to set out of the provisos and the explanation to Sub-section (1) of Section 23A.
6. The material words of the section quoted above are
'where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed by any company ..... are less than sixty per cent. of the assessable income of the company of that previous year, as reduced by the amount of income-tax, and super-tax payable by the company in respect thereof he shall..... make ..... an order in writing that the undistributed portion of the assessable income of the company of that previous year as computed for income-tax purpose..... shall be deemed to have been distributed as dividends amongst the share-holders..... and thereupon the proportionate share thereof of each share-holder shall be included in the total income of such share-holder for the purpose of assessing his total income.'
Therefore, it is laid down in terms express and explicit that for the purpose of assessing the total income of the assessee his proportionate share of the undistributed income of the company is to be deemed to have been paid to and received by him as dividend. The question is whether there is anything in the language of the section which suggests that what is chargeable to the company as part of its total income that the head of 'capital gains' is also quoad a share-holder chargeable not merely as dividend under the head of 'income from other sources' as stated in Section 6 (v) but to be split up and partly chargeable as capital gains' and partly chargeable as dividend income.
7. Now, it is argued that on a proper reading of the relevant sections, the actual distribution of dividends by a company out of the capital gains would be capital gains in the hands of the share-holders. Mr. Palkhiwala has drawn our attention to a decision of the Supreme Court in the case of Bacha F. Guzedar v. Commissioner of Income tax, Bombay : 27ITR1(SC) . It is said that the Tribunal was in error in placing too much reliance on certain observations in that case. We shall presently quote them. The argument is that the 'ratio decidendi' of that case was quite different because in that the Supreme Court was dealing with ' agricultural income' under Section 4(30 (viii). An attempt is made to show that there is nothing in the observations made by Their. Lordships in that case which goes counter to the submission urged before us and which submission if analysed requires an equivalence to be established between the capital gains of a company and the capital gains of the share-holders of that company. Now we agree with Mr. Palkhiwala that in that case the Supreme Court was not dealing with any question Section 23A. There are, however, some general observations of Their Lordships in that case, which, if we may respectfully say so, throw light and afford guidance on the question of the nature of the rights of a share-holder vis-a-vis the company in the context of income-tax law. As page 5 (of that report ITR): (at p. 77 of AIR), it is observed as under:
'That a share-holder acquires a right to participate in the profits of the company may be readily conceded but it is not possible to accepte the contention that the share-holder acquires any interest in the assets of the company. The use of the word assets' in the passage quoted above cannot be exploited to warrant the inference that a share-holder, on investing money in the purchase of shares, be comes entitled to the assets of the company and has any share in the property of the company. A share holder has got no interest in the property of the company though he has undoubtedly a right to participate in the profits if and when the company decides to divide them.... It is true that the share-holders of the company have the sole determining voice in administering the affairs of the company and are entitled as provided by the articles of association, to declare that dividends should be distributed out of the profits of the company to the share-holders but the interest of the share-holder either individually or collectively does not amount to more then a right to participate in the profits of the company. The company is a juristic person and is distinct from the share-holders. It is company which owns the property and not the share-holders.....'
The Tribunal has relied on this decision in support of its conclusion that the capital gains of the company under Section 12B are not the capital gains of the share-holders.
8. The argument of counsel ran that the observations quoted by us immediately above were made in a somewhat different context and that they are not applicable to the facts of this case. It was emphasized that the decision turned on the construction of the expression 'agricultural income.' We shall accept for the purpose of these references the argument of learned counsel that the question of law before us it not covered by the decision of the Supreme Court in the case of Mrs. Bacha F. Guzdar v. Commissioner of Income-tax, Bombay.
9. It is not necessary to examine this argument of Mr. Palkhiwala in any details since, as we understand, it. it is the second contention on which the assessees seem to rely much more in these references. There are a number of answer to this argument. One is to be found in the language of Sub-section (6) and (7) of Section 17. The relevant parts of, which we have already quoted. The capital gains' are considered and had to be considered separately in the case of the company and in the case of an assessee who is not a company in these two sub-sections.What is more important is the language of Section 12B. The tax payable by an assessee under the head of 'capital gains' relates to the assessee and it relates to the capital gains of the assessee in respect of any profits or gains arising from the sale, exchange or transfer of capital assets of the assessee himself. If the assessee is a company, the capital gains are the gains of the assessee company; if the assessee is an individual share-holder, the capital gains are the capital gains of the individual share-holder. There is nothing in the language of Sub-sections (6) and (7) of Section 17 or in the language of Section 12B which lends slightest support or countenances the suggestion that an equation can possibly be established between the capital gains of a company and the dividends which the assessee is deemed to have received by the operation of Section 23A. They are apart.
10. The other arguments of Mr. Palkiwala is founded on Section 23A. It was stated that under that section it is not the income of the company which is deemed to have been distributed amongst the share-holders, but it is the income as computed in the hands of the company that is distributed amongst the share-holders. So far, there is no difficulty. But the difficulty of the assessee arises when he practically chooses to ignore the most important pat of Section 23A which brings into the assessment of the share-holders a notional income. It is by fictio juris that the undistributed income of the company as computed in accordance with the requirements of the section, it is be deemed to have been distributed as dividends amongst the share-holders as at the date of the general meeting referred to in the section and it is the proportionate share of the undistributed income of the assessable income of the company computed as aforesaid that is to be included in the total income of the share-holders for the purpose of assessing their total income. Learned counsel for the assessees has further submitted that the right principles governing the nature of dividends generally, and in any event having regard to the language of Section 23A are that the impress of capital gains remains on the notional gains and it is only the notional gains which are distributed which is to be deemed to have been received which is to be deemed to have been received by the share-holders although they have in fact not received the dividend that is included in their total income and, therefore, says Mr. Palkhiwala, the impress of capital gains must continue to attach to what is deemed to have been distributed as dividends amongst the share-holders. In this context, also, learned counsel has stressed that the decision of the Supreme Court to which we have already made reference requires to be distinguished because in that case the Court had to consider the actual distribution and not a notional distribution. It is also stated that the notional distribution cannot change the character or nature of the income. The argument is that a share-holder is entitled to identify himself with the company and that his individual income must be understood as a species of the income made by the company. It is then stated that the crucial words in Section 23A are as computed for income-tax purpose.' These words, it is urged , have a dual meaning; (1) the quantum as computed and (2) the nature and the head of computation. It is impossible for us to a acquiesce in this line of reasoning. We have to construe. Section 23A and to see if there is anything in the language or phrasing of any part of that section which permits an assessee share-holder to take advantage of the provisions relating to assessment of capital gains on the income of a company in the manner and in at the rate laid down in the relevant provisions.
11. It has so often been emphasized that as far as possible nothing can be read and nothing can be implied in a taxing statute. We have to look fairly ate the language used. The indispensable starting point and the first step is to examine the words of the provision under consideration. When we examine the words of the provision itself, we find nothing in it which may even remotely be said to suggest that the assessee is entitled to say that when he is deemed to have received dividend by the fiction of law incorporated in Section 23A (1), he is entitled to identify himself with the company or to assert an equivalence between his income and the income of the company or the mode or method of assessing his income and the income of the company. True, we have to remember that we are dealing with a fictio juris.
12. Now, in the judgment of the Tribunal, we find that Mr. Palkhiwala, who appeared before the Tribunal had also urged that full effect must be given to the legal fiction that is created by Section 23A. The Tribunal states in its judgment: 'We are unable to accept this contention.' We do not agree with the Tribunal that full effect should not be given to the legal fiction. We wholly agree with Mr. Palkhiwala in the suggestion made by him before the Tribunal that full effect must be given to the legal fiction incorporated in Section 23A. However, it is the legal fiction which is the main difficulty of the assessees and it is the effect of that legal fiction which Mr. Palkiwala has very valiantly tried to struggle against. We must now examine the submission made before us. The submission now is that the legal fiction is not to be applied in this case will all its effect because there are words in the section itself which retard or prevent the legal fiction having full force. What we are concerned with however, is not the argument that was urged before the Tribunal but the argument which has been pressed before us.
13. The words that something will be deemed to have been done for the purpose of incorporating a legal fiction have been considered by Courts in some very recent decisions both in England and in India. There is passage in the judgment of Lord Asquith of Bishopstone in East End Dwellings Co. Ltd. v. Finsbury Borough Council, (1952) AC 109, which has taken very short time to become locus classicus. His Lordship observed in that case:
'If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it.... The statue says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs.'
In a very recent judgment given by Their Lordships of the Supreme Court in M.K. Venkatachalam v. Bombay Dyeing and . : 34ITR143(SC) , Mr. Justice Gajendragadkar in delivering the judgment of the Court cited these observations in support of the view taken on the construction of similar words. Now, it is clear from the language of Section 23A that we are dealing with an imaginary state of affairs as real. The dividend income which is not paid to nor received by the shareholders is to be deemed for the purpose of assessment to have been distributed as dividend to the shareholders along with other shareholders and it is to be included in their total income for the purpose of assessing their total income. We have not to permit our imagination to boggle and have to continue to imagine as real the consequence and incidents of that putative state of affairs, and the putative state of affairs is that dividend is deemed to have been declared and received by the shareholders. Therefore, we have to take it that dividend was in fact received by the share holders, and if the dividend was in fact received by the shareholders the only consideration that remains is can a shareholder who has received dividend in respect of the profits of a company say that the dividend which he has received is to be split up into a number of heads for the purpose of assessment in arriving at his total income. Can he say that a part of that dividend income is income from 'capital gains' and a part of that dividend income is dividend income assessable under the head 'other sources'? The answer to this seems to us to be obvious. There is as we have already mentioned not he remotest suggestion in any relevant section which can lend support to the proposition canvassed before us. The shareholder and the company are separate entities. Section 17(6) with which are more concerned clearly postulate an income of the assessee chargeable under the head 'capital gains'. It is extremely difficult for us to see how it can be said that in the present case the assessee shareholder himself became chargeable under the head of 'capital gains.' We have gone beyond the stage of the initial fiction and we are at this stage dealing with Section 17(6) because the income has for the present purpose to be treated as income already paid to and received by the assessee and it is that income which is to be charged to tax. 'Capital gains', to go back once again to Section 12B, is a head which relates to tax payable by an assessee in respect of any profit or gain arising form the sale exchange or transfer of a capital asset effected by the assessee. Mr. Palkhiwala has not been able to point out to us to what property of the shareholders it was that was sold or exchanged or transferred to the general reserves of the company, and the argument of mr. Palkhiwala can only succeed if we hold that it was the income or to be more precise the property of the shareholders themselves which was transferred to the general reserves of the company. The argument has not been taken by learned Counsel to that extreme position and rightly. Obviously there were no profits or gains which could be said to have arisen to the assessees from the sale, exchange or transfer of a capital asset belonging to them to the general reserves of the company.
14. The attempt, therefore,has been to show that there are words in Section 23A which prohibit the Court from applying the legal fiction with its inevitable corollaries and what is stated is that the key words are 'as computed for income tax purpose.' These words, is said refer not merely to the quantum of the undistributed profits deemed to have been distributed amongst the shareholders but to the nature and heads of computation mentioned in Section 6 which relates to the heads of income chargeable to income-tax. We have negatived this argument. There is nothing in the language of Section 28A which prohibits or retards the consequences and incidents of the notional income being treated as real for the purpose of taxing the shareholder. By the supposition of law in Section 23A a proportionate undistributed income of the company has for his purpose become the dividend income of the assessees. The argument is not cogent when it asks us to impose a supposition about capital gains on that supposition of law. There is no warrant in the language of the relevant provisions to subjoin or tack a fiction upon a fiction.
15. In the result both the arguments pressed before us on behalf of the assessee must fail. Our answer to the question will be in the negative.
16. Assessee to pay the costs.
17. Answer in the negative.