M.S. Menon, J.
1. The petitioner is a share-holder of Messrs. Mackar Pillai and Sons Ltd., Alwaye, and the respondents, the Income-tax Officer, Alwaye Circle, Alwaye, and the Appellate Assistant Commissioner of Income-tax, Trivandrum. The controversy relates to the assessment year 1954-55. During the relevant year of account the petitioner received a dividend of Rs. 1,000 from the company above, mentioned. The company itself had no income during the period concerned and was not assessed to Income-tax under the Indian Income-tax Act, 1922.
2. Ext. P is the order of the 1st respondent (Income-tax Officer) dated 25-6-1955. He said :
'As the company has not been taxed for 1953-54 no rebate is admissible to the shareholders on dividends'.
3. The petitioner took up the matter in appeal before the 2nd respondent (Appellate Assistant Commissioner); but without success. Ext. P1 is the order in appeal dated 28-9-1956. The relevant portion of the appellate order reads as follows:
'This is an appeal against the Income-tax officer refusing to increase the dividend as provided by Section 16(2) and giving credit for the tax paid by the company on such dividend under the provisions of Section 18(5) of the Income-tax Act.
The appellant is a shareholder in a company known as M/s Mackar Pillai and Sons Ltd., Alwaye. She received a dividend of Rs. 1000 on 7th August 1953. The dividend was declared in a general Body Meeting held on 11th July 1953.
As a matter of fact the company was not assessed to tax as it had no income at all. The Income-tax officer did not therefore gross up the dividend under Section 16(2) of the Income-tax Act. Consequently no credit was given under Section 18(5) of the Indian Income Tax Act.
Mr. Velu Pillai argues that the dividend was declared out of profits of the company of earlier years which were subjected to tax that the provisions of Section 16(2) laid down that the grossing up of the dividend should be done at the rate applicable to a company & that the Income-tax officer was not correct in interpreting the provisions of the section in such a manner that the dividend income should not be grossed up merely because the company was not assessed to tax for the financial year in which the dividend is paid, credied or distributed.
I am unable to agree with the argument of the Chartered Accountant. The wording of Section 16(2) is quite clear. It reads:
16 (2)..... and shall be increased to such amount as would, if income-tax, but not super tax, at, the rate applicable to the total income of the company for the financial year..... in which the dividend is paid, credited or distributed'. The grossing up has to be done at the rate applicable to the income of the company. If no tax is payable by the company the question of grossing up does not arise. The appeal is dismissed.'
4. It is agreed that the dividend was Paid from the accumulated profits of the company and that the said profits had borne income-tax under the Indian Income-tax Act, 1922. Details, however, are not available as to when the profits were earned or the rate at which the tax was paid and it is submitted that those details are unnecessary for the disposal of this petition.
5. The provisions on which the learned counsel for the petitioner relies in support of his contentions are Sections 16(2), 18(5) and 49B of the Indian Income-tax Act, 1922.
6. Section 16(2) provides;
'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, and shall be increased to such amount as would, if income-tax (but not super-tax) at the rate applicable to the total income of the company (without taking into account any rebate allowed or additional income-tax charged) for the financial year in which the dividend is paid, credited or distributed or deemed to have been paid, credited or distributed, were deducted therefrom, be equal to the amount of the dividend: 'Provided that when any portion of the profits and gains of the company out of which such dividend has been paid, credited or distributed or deemed to have been paid, credited or distributed was not liable to income-tax in the hands of the company, the increase to be made under this section shall be calculated upon only such proportion of the dividend as the amount of the profits and gains of the company liable to income-tax bears to the total profits and gains of the company'
and Section 18(5) (omitting the provisos):
'Any deduction made and paid to the account 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 share-holder, as the case may be, and credit shall be given to him therefor on the production of the certificate furnished under Sub-section (9) or Section 20, as the case may be, in the assessment, if any made for the following year under this Act'.
7. Chagla, C. J., dealt with Sections 16(2) and 18(5), in Commr. of Bombay Income-tax Bombay City v. Blundell Spence and Co. Ltd. : 21ITR28(Bom) (A) as follows;
'A company pays tax on its profits, and having paid tax it distributes dividends to its share-holders. 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 dividend from a company of which he is a shareholder, that dividend constitutes his income and he would have to pay tax on that income without any relief whatsoever. But in order to avoid tax being paid on the same amount both by the company and by the share-holder, the Income-tax Act has provided certain machinery which gives relief to the share-holder, 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 he 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.
Then we come to Section 18(5) and that sub-section provides for the relief to the assessee. The assessee's income haying 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 assessment, if any, made for following year under the Act.'
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 the legal fiction is introduced that the company pays the tax on the dividend of the shareholder on his behalf'.
8. To the same effect is the following extract from the judgment of Rajagopala Ayyangar J. in Chiadmbaram Chettlar v. Commr. of Income Tax. Madras : 31ITR405(Mad) (B) :
'The normal rule of law is that each person pays tax on his income or profits. A company is a unit under the Indian Income-tax Act as much as an individual and when a company pays tax on its income, it is paying it as a unit liable to tax and on its own behalf. When the individual who is a shareholder in a company receives a dividend, he gets that as part of his income and on that he, as another unit of assessment, has to pay the tax. But this position, however, ignores and correct-ly ignores, the fact that the income on which tax is paid by a company is the source for the moneys for the payment of dividend to shareholders so that when it pays tax on that income in a sense it is with the income of the shareholders that the tax is paid.
This assuredly leads to a certain amount of injustice in the same income suffering tax twiceby reason of the company being treated as a juralentity distinct from the shareholders who are itsproprietors and it is in order to remedy this stateof affairs that the group of sections we have mentioned above were introduced into the Income-taxAct by the amendment effected in 1939. Section 16(2)provides for the grossing up of dividend income.The scheme of the relief granted is that the income received by way of dividend is treated notmerely as the amount of the dividend actually received but the amount of that dividend plus theincome-tax paid by the company on that portionof the company's income represented by the dividend.
That in brief is the grossing up effect by Section 16(2) of the Act. Section 18(5) provides the machinery by which the addition made under Section 16(2) is treated as tax paid by the assessee so that when the rate of tax payable by the assessee is less than the rate of tax paid by the company the assessee gets relief in regard to this difference'.
9. In Sampath Iyengar's commentary on the Indian Income-tax Act, 1922, Volume 2, page 650, he has stated that:
'If the fund out of which the dividend is paid has borne tax in the hands of the company, the fact that it has not been subjected to tax in the dividend year would not prevent the grossing up. Thus, it may be that the dividend is declared out of reserve funds which have borne tax in the previous years, or from out of a portion of the taxed profits of a company which was set aside for a time to meet some contingencies and later the contingencies not arising, is distributed as dividend. In these instances though the company may not be paying tax in the dividend year in respect of the particular dividend fund still as the fund has nevertheless paid tax in a prior year, the dividends in the hands of the shareholder shall have to be grossed up'
'In this last event the Act is silent in regard to the rate to be applied for the grossing up. Section 16(2) talks of the rate 'applicable to the total income of the company .....for the financial year in which the dividend is paid, credited or distributed'. The proviso thereto deals only with a case where the dividend fund was not liable to income-tax in the hands of the company. It does not deal with a case where the dividend fund bore a rate of income-tax different, from the rate applicable for the year of declaration and distribution.
Section 20 dealing with the dividend certificate mentions that such certificate shall contain an undertaking that the company has paid or will pay income-tax on the profits which are being distributed'. This is an ambiguous phrase and perhaps the words 'has paid' are capable of applying to the situation under discussion. The form of Dividend Certificate in Rule 14 of the Income-tax Rules adverts to both the situations under discussion here, namely, (1) the profit fund of the year bearing no charge due to set off Or carry forward of losses, or deduction of depreciation allowance and (2) the dividend being distributed out of profits or accumulated profits of earlier years to be specified 'which have been/have not been, subjected to tax'.
This last requirement of the specification of the previous years out of the profits of which the dividend is declared and distributed gives the clue to the intention of the Legislature that the rate applicable for grossing the dividend is the rate which the particular divided fund suffered. This subject is a matter of major importance and deserving to be clarified by the Act itself in unambiguous terms''.
10. The submissions of the learned counsel for the petitioner are the same as those made by the commentator in the passages extracted above. I must say, however, that I find it difficult to accept the process of reasoning adopted by counsel and commentator. In order to effect a grossing up under Sub-section (2) of Section 16 there should be a rate of tax applicable to the total income of the company 'for the financial year in which the dividend is paid, credited or distributed or deemed to have been paid, credited or distributed' and if no such rate is available -- as in this case -- it must follow that the grossing up under Section 16(2) is impossible and that as a result Section 18(5) will not come into operation at all.
For the application of Section 49B also there must be a rate of tax 'applicable to the total income of the company for the financial year in which the dividend has beer, paid, credited or distributed or is deemed to have been paid, credited or distributed'.
11. No such rate being available in this case I must hold that the orders impugned, Exts. P and P. 1, are correct and that this petition be dismissed. Order accordingly. No costs.