1. By this application the assessee requires the Appellate Tribunal to refer three questions of law which are said to arise out of the Tribunal's order dated 31st May, 1962, in I.T.A. No. 9602 of 1960-61 to the High Court of Mysore at Bangalore. Inasmuch as, in our opinion, a question of law does arise out of the Tribunal's order we accordingly state an agreed case and refer it to the High Court under section 66(I).
2. There were three Hindu undivided families, viz. (i) the assessee family of Seth Kishand chand Lunidasingh Bajaj, (ii) family of Seth Purushotham Bajaj, and (iii) family of Seth Parmanand Bajaj.
3. The Kartas of these three families entered into a partnership for carrying on business as bankers, by name Messrs. Mangoomal Lunidasingh and Sons. On May 1, 1956, this firm was dissolved and certain items of money lending assets were allotted to the respective kartas. On May 16, 1956, the assessee family started a new business in the name of Messrs. Mangoomal Kishanchand in money-lending with the assets obtained on the dissolution of the firm mentioned above. In the books started on May 16, 1956, certain items of shares and securities standing in the name of Kishanchand Lunidasingh Bajaj, the karta, were incorporated. The said shares and securities represented the investments made by the family of which the said K. L. Bajaj was the karta. The karta of the assessee family has seven sons. Two of the said sons by name Shamsudar and Giridharlal released themselves from the joint family in consideration of receipt of Rs. 2 lakhs each. A partnership was thereafter formed between the karta of the assessee family and the said two sons. This was evidenced by a deed of partnership dated August 23, 1956.
4. The business of the partnership was to be that of bankers, shroffs, merchants, commission agents and such other business as the parties may, from time to time, agree upon. The divided sons had each 1/7 the share in the firm while the karta of the assessee family had 5/7 the share. There was no mention in the partnership deed as to the items which formed part of the partnership property. The books which are maintained by the assessee family up to August 22, 1956, were continued thereafter without any change up to June 29, 1957.
5. On June 30, 1957, credit was given to Kishanchand's share account and shares purchase account was debited. The dividend and income from the securities had been credited in the books of the firm.
6. It was claimed in the course of the assessment for the assessment year 1959-60 (previous year ending June 25, 1958), that the said shares and securities did not belong to the assessee family, though they stood in the name of Seth Kishanchand as before and the said shares had become the property of the firm of which the karta of the assessee family was a partner.
7. The Income-tax Officer held that at no time were the shares and securities the property of the firm; that the two partners did not have any right over the income derived from these assets and that the assessee was the real and legal owner of the shares and securities. . .
8. There was an appeal to the Appellate Assistant Commissioner, when it was contended that the shares and securities had been sold to the firm and, therefore, the income therefrom should not be included in the hands of the assessee family and that steps were being taken to transfer the shares and securities in the name of the firm.
9. The Appellate Assistant Commissioner pointed out that in the return of the income for the assessment year 1958-59 filed on June 29, 1957, the dividend income from the shares had been included and that that return related to a period subsequent to the formation of the firm and that even in the dividend warrant accompanying the return for the 1959-60 endorsement had been made to the effect that the shares were the property of the family. In these circumstances he held that the income from the shares was rightly included. . .
10. There was a further appeal to the Tribunal where it was contended that the dividend income from shares could be assessed only in the hands of the person who is not only the legal owner of the shares but also the equitable owner thereof; and in support of this submission, reliance was placed on the decision of the Supreme Court in Howrah Trading Co. Ltd. v. Commissioner of Income-tax :
The Tribunal held that in Indian law there was no distinction between equitable and legal estate and that the legal owner is the person who will be recognised by law except for certain purpose of enforcing obligation in the nature of trust. The Tribunal came to the conclusion that the assessee family was the shareholder on the books of the company and that the assessee family was the legal there of, its right therein not having been divested in any manner know to law and that the assessment as made by the authorities was proper. The order of the Tribunal is annexure 'C' and forms part of the case.
11. The question of law is :
'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 ?'
K.S. Hegde, J.
12. Prima facie the income contemplated in section 3 of the Indian Income-tax Act, 1922 (to be referred to hereinafter as the 'Act'), is the real income and not the nominal income. Broadly speaking, it is something that 'comes in '. Under section 2(6C) income includes dividend. Therefore, if there are no provisions in the 'Act' to the contrary, there would be no difficulty in holding that the dividend income with which we are concerned in this case is that of the Hindu undivided family of the petitioner.
13. But, Sri K. Srinivasan, the learned counsel for the assessee, resisted the above conclusion on the basis of sections 18(5), 23A and 16(2) of the 'Act'. According to him, under the Act divided income is deemed to be the income of the 'shareholder', whoever may be the real owner of the shares in question. We have to see whether this contention is sound. Section 23A confers power on the Income-tax Officer to assess companies to tax on their undistributed income in certain cases. The income-tax paid by a company in pursuance of an order under section 23A is deemed to have been paid on behalf of its shareholders. When dividend is deemed to have been distributed under section 23A, the shareholders can gross up that dividend as provided under section 16(2).
14. section 18(5) specifically says that :
'18. (5) Any deduction made and paid to the amount of the Central Government in accordance with the provisions of this section and 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 or super-tax on behalf of the person from whose income the deduction was made, or of the owner of the security or of the shareholder, as the case may be, and credit shall be given to him therefor on the production of the certificate furnished under subsection (9) of section 20, as the case may be, in the assessment, if any, made for the following year under this Act. ' Provisos to that sub-section are not relevant for our present purpose.
15. Sub-section (9) of section 18 says that 'every person deduction income-tax or super-tax in accordance with the provision of sub-sections (3), (3A), (3B) or (3D) shall, at the time of payment of the sum from which tax has been deducted, furnish to the person to whom such payment is made a certificate to the effect that income-tax or super-tax has been deducted, and specifying the amount so deducted, the rate at which the tax has been deducted, and such other particulars as may be prescribed.'
15. Section 20 provides :
'20. The principal officer of every company shall, at the time distribution of dividends, furnish to every person receiving a dividend a certificate to the effect that the company has paid or will pay income-tax on the profit which are being distributed, and specifying such other particulars as may be prescribed'.
16. Interpreting the effect of section 18(5) read with section 16(2), the Supreme Court held in Howrah Trading Co. Ltd. v. Commissioner of Income-tax that a person who has purchased shares in an company under a blank transfer and in whose name the shares have not been registered in the books of the company is not a 'shareholder' in receipt of such shares within the meaning of section 18(5) of the 'Act', notwithstanding his equitable right to the dividend on such shares, and is not, therefore, entitled to have this dividend income grossed up under section 16(2) of the 'Act' by the addition of the Income-tax paid by the company in respect of those shares, and claim credit for the tax deducted at source under section 18(5) of the 'Act'. In the body of the judgment, this is what Hidayatullah J., who spoke for the Bench, observed :
'A glance at the scheme of the Indian Companies Act, 1913, shows that the words 'member', 'shareholder' and 'holder of a share' have been used interchangeably in the Act. Indeed, the opinion of most of the writers on the subject is also the same. Buckley on the Companies Acts, 12th edition, page 803, has pointed out that the right of a transferee is only to call upon the company to register his name and no more. No rights arise till such registration takes place.
Section 2(16) of the Indian Companies Act, 1913, defines 'share' as 'share in the share capital of company'. Section 5 deals with the mode of forming incorporated companies, and in the case of companies limited by shares, the liability of the members is limited to the amounts, if any, unpaid on the shares respectively held by them. By section 18, Table A is made applicable to companies, unless by the articles of any company the term of Table A have been excluded or modified. Regulation 18 of Table A reads as follows :
'The instrument of transfer of any share in the company shall be executed both by the transferor the transferee, and the transferor shall be deemed to remain holder of the share until the name of the transferee is entered in the register of members in respect thereof.' The words 'holder of share' are really equal to the word 'share-holder'. and the expression 'holder of a share' denotes, in so far as the company is concerned, only a person who, as a shareholders, has his name entered on the register of members. A similar view of the Companies Clauses Consolidation Act, 1845, was taken in Nanney v. Morgan . The learned Lords Justice held that under section 15 of that Act, the transferee had not the benefit of a legal title till certain things were done, which were indicated by Lopes L.J. in the following passage :
'Therefore the transferor, until the delivery if the deed of transfer to the secretary, is subject to all the liabilities and entitled to all rights which belong to a shareholder or stockholder, and, in my opinion, until the requisite formalities are complied with, he continues the legal proprietor of the stock or shares subject to that proprietorship being divested, which it may be at any moment, by a compliance with the requite formalities.'
The same position obtains in India, though the completion of the transaction by having the name entered in the register of members relates it back to the time when the transfer was first made. See Nagabhushanam v. Ramachandra Rao'
17. This position was reiterated by the Supreme Court in Income-tax Officer, North Satara v. Arvind N. Mafatlal. Therein their Lordship held that it is only the registered shareholder who is entitled to the benefit of the credit for tax paid by the company under section 18(5) as well as the corresponding grossing up under section 16(2); where shares were held by three partners of a firm but it appeared that the shares were really held by these persons for the firm itself, the only persons who were entitled to be treated as shareholders to whom the provisions of section 16(2) and 18(5) were attracted were the three partners, in spite of the fact that they were benamidars for the firm.
18. From these decision, I do not think that we will be justified in drawing the conclusion that for all purposes under the Act dividend income realised by a benami shareholder should be treated as his own income and not that of the real owner of the shares which have yielded the dividends in question. It is because of the language of section 18(5) read with section 23A and 16(2), the courts have to come to the conclusion that the benefit of the grossing up provision in section 16(2) is only available to a 'shareholder' and none else. That does not mean that the dividend as such cannot be treated as the income of the real owner of the shares.
19. In Commissioner of Income-tax v. Kalu Babu Lal Chand. the court had to consider the scope of the expression 'income' found in section 3. Therein, a Hindu undivided family of which R was the karta become interested in concern carried on by M and others in the name of India Electric Workers, the karta was one of the promoters of the company which he floated with a view to take over the India Electric Workers as a going concern; in anticipation of the incorporation of that company the karta of the family took over the concern, carries it on and supplied the finance at all stages out of the joint family fund and the finding was that he never contributed anything out of his separate property, if he had any; the articles of association of the company provided for the appointment as managing director of the very person who, as the karta of the family, had promoted the company; most of the shares of the company stood in the names of R and his brother and since the formation of the company more than ten years ago right up to the relevant accounting year the managing director's remuneration received by R was credited in the books of the Hindu undivided family. The court held that in the circumstances of the case, the managing director's remuneration received by R was, as between him and the Hindu undivided family, the income of the latter and should be assessed in its hands.
20. Similar was the view taken by the Bombay High Court in In re Haridas Purshottam., who delivered the judgment of the court in Commissioner of Income-tax v. Kaly Babu Lal Chand, observed thus in the course of the judgment. :
'If for the purpose of contribution of his share of the capital in the firm the 'karta' brought in monies out of the till of the Hindu undivided family, then he must be regarded as having entered into the partnership for the benefit of the Hindu undivided family and as between him and the other members of his family he would be accountable for all profits received by him as his share out of the partnership profits and such profits would be assessable as income in the hands of the Hindu undivided family.'
21. Proceeding further be observed :
'Vis a vis the company the managing director is undoubtedly the individual person who is appointed as such. The company is not concerned with the managing director's Hindu undivided family or the members there of, just as the outside partners know only the 'karta' in his individual capacity as their partner and are not concerned with his Hindu undivided family or it s members. The question whether the amount received by the 'karta' by way of managing director's remuneration in the one case or as
his share of profits in the partnership business in the other case is his personal income or is the income of his Hindu undivided family can not arise as between the company and the 'karta' as the managing director or between the outside partners and the 'karta' as a partner. Neither the company nor the outside partners, as the case may be, is or are interested in such a question. Such question can arise only as between the 'karta' and the members of his family and the answer to the question will depend on whether the remuneration or profit was earned with the help of joint family assets.'
22. The same view was again taken by the Supreme Court in Charandas Haridas v. Commissioner of Income-tax. Support for our conclusion is also available from the observation made by the Supreme Court in Commissioner of Income-tax v. Nandlal Gandalal. The learned authors of The Law and Practice of Income-tax, Sir Jamshedji B. Kanga and Sri N. A. Palkhivala, (fourth edition) dealing with the effect of the decision of the Bombay High Court in Shree Shakti Mills Ltd. v. Commissioner of Income-tax and Arvind Mafatlal v. Income-tax Officer, No rth Satara , have observed thus at page 500 :
'It is a matter of common knowledge that in a large number of bonafide cases shares are allowed by the beneficial owner to stand in the name of his banker or the agent for the sake of convenience. In all such cases, in the light of the above decision (Shree Shakti Mills Ltd's case 3), , the benefit of section 18(5) would be denied to the beneficial owner of shares, with the result that he would get no credit for the income-tax paid by the company while the amount equivalent to the net dividend received by him from his bankers would be included in his total income. To alleviate the hardship in such bona fide cases, suitable legislative intervention seems to be called for.'
23. The English law on the point accords with the view that I have taken. In registered notes of a limited company, the interest on which was payable half-yearly on the 31st May and 30th November, under deduction of income-tax sold them with the accrued interest under a contract of sale dated the 29th November, 1922; the transfer was not executed until the 14th December, 1922, and the company's books being closed from the 16th to the 30th November, for the purpose of paying the interest then due, the half year's interest on the notes in question was paid, less income-tax, to the vendor on or about the 1st December, and such net amount was handed over by him to the purchaser under the rule of the Stock Exchange; an assessment to super-tax was made upon the vendor for the year 1923-24 in respect of the gross amount of the half year's interest paid on the 30th November, 1922, but he contended that such interest did not form part of his income for super-tax (super-tax follows income-tax) and the Special Commissioners, on appeal, discharged the assessment. On a case referred to it, the High Court held that for super-tax purpose (the same will be true of the income-tax) the interest in question was not income of the vendor but of the purchaser.
24. The decision in Spence v. Commissioners of Inland Revenue also bears on the point. In that case the facts were as follows : In 1931 the appellant entered into a contract to sell certain shares, the transfer of the shares to the purchaser being completed in 1933; in 1939, the appellant, having successfully pleaded fraudulent misrepresentation on the part of the purchaser, obtained a decree where by the contract was reduced, the shares were re-transferred to the appellant, and the purchaser was ordered to pay him a lump sum being the difference between (i) the purchase price, which was repayable by the appellant with interest, together with a proportion of a loss suffered by the purchaser arising out of his possession of the shares, and (ii) a sum representing the dividends received by the purchaser while the shares stood in his name.
25. In the computation of th appellant's total income for purpose of surtax for the years 1936-37 to 1938-39, there were included amounts equal to the dividends received in those years by the purchaser of shares; on appeal, the appellant contended that those dividends when declared belonged to the purchaser and formed part of his income, and that the appellant had never in fact received the dividends, but had received under the decree a lump sum which could not be analysed into the elements taken into account in its ascertainment; the Special Commissioners decided that the effect of the decree was to revest the title to the shares and to the dividends in the appellant; they therefore confirmed the assessments. The court held that the amount of the dividends was properly included in the appellant's assessments to surtax.
26. From the foregoing, it is seen that for income-tax purpose what is relevant is the real income and not the nominal income. In other words, the person liable to pay tax on any item of income is the real owner and not the nominal owner.
27. The above principle is in no manner impaired by the provisions contained in section 18(5) read with section 16(2) of the 'Act', though those provisions have introduced some inconsistencies in the matter of the application of that principle.
28. For the reasons mentioned above, our answer to the question submitted to us that on the facts and circumstances of the case, the dividend income from the share standing in the name of Kishanchand Lunidasingh Bajaj shares acquired from the funds of the Hindu undivided family of which the said Kishanchand Lunidasingh Bajaj was the Karta was assessable in the hands of the assessee family.
29. The assessee to pay the costs of this reference. Advocate's fee Rs. 250.