M. S. MENON C.J. - This is a reference by the Income-tax Appellate Tribunal, Madras Bench, under section 66 (1) of the Indian Income-tax Act, 1922. The assessment year with which we are concerned is 1952-53. The question referred reads as follows :
'Whether, on the facts and circumstances of the case, the dividend income of Rs. 24,216 deemed to have been distributed to the assessees wife and minor children under section 23A is assessable in the hands of the assessee under section 16 of the Income-tax Act, 1922 ?'
Sub-section (3) of section 16 of the Indian Income-tax Act, 1922, provides that in computing the total income of any individual for the purpose of assessment there shall be included so much of the income of a wife or minor child of such individual as arises directly or indirectly 'from assets transferred directly or indirectly to the wife by the husband otherwise than for adequate consideration or in connection with an agreement to live apart' and 'from assets transferred directly or indirectly to the minor child, not being a married daughter, by such individual otherwise than for adequate consideration.' Under section 23A of the Income-tax Act, 1922 - before it was amended by the Finance Act of 1955 - it was open to the Income-tax Officer in certain eventualities to make an order that the undistributed portion of the assessable income of company, 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 shareholders.
The words used in section 16 (3) are 'so much of the income of a wife or minor child of such individual as arises directly or indirectly'. It is not possible to say that what is deemed to be an income for the purpose of section 23A by virtue of a legal fiction is an income which arose directly or indirectly within the meaning of section 16 (3) of the Act. In Commissioner of Income-tax v. Phirozshaw Pallonji Mistry the Bombay High Court dealt with the matter as follows :
'....... section 16 (3) permits inclusion of the income of a wife in the income of her husband for purposes of assessment only if such income arises directly or indirectly from assets transferred to the wife by the husband otherwise than for adequate consideration; on other words, such inclusion is permissible only where the income of the wife actually arises directly or indirectly. Where, by a mere fiction, the income is deemed to have been received but which has not in fact been received, in our judgment, section 16 (3) can have no application. There is no warrant for the submission that the expression, as arises directly or indirectly, in clause (a) of sub-section (3) of section 16 is to be equated with the expression deemed to have been distributed in section 23A (1).'
It has also to be noted that under section 23A the fictional income is included in the total income of the wife or minor child, whereas under section 16 (3) it has to be included not in their total income but of the husband or the father as the case may be. In George N. Houry v. Commissioner of Income-tax, the Privy Council had to deal with a similar situation.
Section 22 of the East African Income-Tax (Management) Act, 1952, provided that the undistributed portion of the total income of the deemed to panies, subject to a limit of 60 per cent., of such income, should be deemed to have been distributed as dividend amongst the shareholders of the company if the Commissioner of Income-tax made an order to that effect, and that the proportionate share thereof of each shareholder shall be included in the total income of such shareholder for the purpose of that Act; and section 24 :
'Where, by virtue or in consequence of any settlement to which this section applies and during the life of the settlor, any income is paid to or for the benefit of a child of the settlor in any year of income, the income shall be treated for all the purposes of this Act as the income of the settlor for that year and not as the income of any other person.'
The Privy Council said :
'The two sections are independent charging provisions and the charges which they impose are mutually exclusive....... It is not merely that there is to be a notional payment of dividend; it is also that each shareholders share of the dividend is to be included in his total income for the purposes of the Act. The dividend then must go into the into the total income of the child who owns the shares, and for the purpose of taxation it is to be treated as his income. Such an enactment would be blankly inconsistent with the enactment contained in section 24 that whatever is paid to or for the benefit of a child is to be treated for all the purposes of the Act as the income of the father and not as the income of any other person if paid in this section were to include what is deemed to be paid by the earlier section. It appears to their Lordships to be the unavoidable conclusion that in construing section 24 the income paid within the meaning of that section and as such attributed to the father cannot include income deemed to be distributed by virtue of section 22 and as such attributed to the child.'
In the light of what is stated above, we must answer the question referred in the negative, that is, against the department and in favour of the assessee. We do so with costs; advocates fee Rs. 150.
A copy of this judgment under the seal of the High Court and the signature of the Registrar will be sent to the Appellate Tribunal as required by sub-section (5) of section 66 of the Indian Income-tax Act, 1922.
Question answered in the negative.