1. These three References raise a common question and it is whether certain amounts received by the respective assessees as dividends from a foreign company are assessable under the Indian Income-tax Act.
2. The facts are identical in the three cases and we shall refer to those in T.C. No. 107 of 1960. The assessee is a merchant at Colombo. He held 2,125 shares in a company called 'Avra, Limited' which has its registered office in Colombo. During the accounting year relevant to the assessment year 1954-55, the assessee received as dividend a sum of Rs. 10 per share and this amount of Rs. 21,250 so received by him was remitted to the taxable territory. The Income-tax Officer brought this amount to tax. Before him this amount was claimed to be exempt on the ground that it was paid out of the capital profits of the company. But the Income-tax Officer held that no material had been placed before him as to the nature of the capital profits nor the period during which such profits had been made by the company. He accordingly proceeded to apply Section 2(6-A)(a) of the Indian Income-tax Act and held that this amount was assessable as dividend under the Act. An appeal was taken to the Appellate Assistant Commissioner. Before the Appellate authority also it was not established how this amount represented capital profits. In the view of the Appellate Assistant Commissioner, this was a revenue receipt includible in the taxable income of the assessee. A further appeal to the Tribunal also failed. The Tribunal expressed its view that in so far as the sums invested in the purchase of the shares by the assessee was concerned, that represented his capital and that sum had been invested for the purpose of earning profits. The Tribunal stated that what the assessee, received from the company was the profits of the company and while in the hands of the company they might be capital profits, in the hands of the assessee, they were merely profits. The Tribunal also repelled the contention of the assessee that the Ceylon company not being a company within the meaning of the Indian Income-tax Act the sum received from that company was not a dividend within the meaning of the Act. While it accepted the contention that the expressions 'company' and ' dividend ' were to be viewed according to the laws of that country, in so far as the profit that was received by the assessee and was remitted to the taxable territory was concerned, it represented only the fruit of the capital invested by the assessee. The order of assessment was thus upheld.
3. On the application of the assessee under Section 66(1) of the Act, the following questions were referred for the determination of this Court.
4. T.C. No. 107 of 1960 and T.C. No. 111 of I960:
Whether the sum of Rs. 21,250 received by the assessee was assessable as dividend under the Indian Income-tax Act?
5. T.C. No. 112 of 1960:
Whether the sum of Rs. 27,450 received by the assessee was assessable as dividend under the Indian Income-tax Act?
6. Before us it has been stated that during the period 1st July, 1949 to 30th June, 1953, the Avra Company sold a mill and certain other properties in Ceylon. A net profit of Rs. 1,28,324-15 nP. was derived from the sale of these items. At a meeting of the directors of the company, it was resolved to declare a 10 per cent, dividend on the paid-up capital. In pursuance of this resolution, dividend warrants were issued. According to the warrants, no deduction of income-tax was made, apparently for the reason that the company was not liable to pay income-tax on the profits of which the dividend formed part. It is not denied that the three assessees received the sums of Rs. 21,250, Rs. 21,250 and Rs. 27,450 on the shares held by them.
7. It is contended by Mr. S. Narayanaswami, learned Counsel for the assessee, that this is a capital profit which is not liable to tax. Apart from other contentions which will be referred to, reliance is placed in this regard upon the Explanation of Section 2(6-A), which reads:
The expression 'accumulated profits' wherever it occurs in this clause shall not include capital gains arising before the 1st day of April, 1946 or after the 31st day of March, 1948, and before the 1st day of April, 1956.
We are unable to understand how this Explanation would at all be applicable. In so far as the assessee is concerned, it cannot be pretended that it was a capital gain in his hands. Before however the Explanation is reached, the applicability of the main part of the section will have to be examined. Learned Counsel for the assessees does not deny. that the definition of dividend ' as it appears in the Act is an inclusive one and that it does not exclude the ordinary notion of a dividend. The definition as it appears extends the connotation of dividend to include items of distribution by a company of amounts which may not be strictly comprehended in the expression 'dividend '. The fact that the company received any capital profits is immaterial in so far as any distribution by way of dividend by that company to the shareholder is concerned. The shareholder gets a declared dividend of Rs. 10 per share. No authority has been cited before us to show that the distribution of such capital profits is opposed t6 the law of the land where the company is situate and by which law that company is controlled. It is true that a certain proceeding from the Chartered Accountants of the company has been filed to show that the sums out of which the dividend was distributed was treated as capital profits arising from the disposal of properties belonging to it. It is however seen that the records do not disclose nor has the assessee been able to state the nature of the business of the company. For all that we know, these properties might have formed the trading assets of the company, a disposal of which would not yield capital profits but only income of a revenue nature. But that is however immaterial for our purpose. It is not the character of the income in the hands of the company that we are concerned with, but its character in the hands of the shareholder recipient thereof, in whose hands it is undoubtedly receipt of a revenue nature. The decision of the House of Lords in Inland Revenue Commissioners v. Trustees of Reid (1949) 17 I.T.R. 49, is ample authority in support.
8. The next contention is that the assessment of this receipt as dividend cannot be supported in law, for, so argued learned Counsel, the dividend as defined relates to the distribution by a company; the company is itself defined in Section 2(5-A) and no part of the definition of the company as it appears in the Act, would include this foreign company. It is true that the definition of a company, as it appears in the Act, may not take in the Avra Company in Ceylon. It does not however appear to us that Avra Company can be regarded as not being a company. In Dreyfus v. Commissioners of Inland Revenue 14 T.C 560, Lord Hanworth, M. R., observed, at page 575:
Now it is to be remembered that no company which is registered or incorporated in a foreign country can bring over its law and be for all purposes a company over here. By the comity of nations we do recognise the incorporation of other legal entities in other countries, but a company registered in a foreign country is of course a foreign company. It is only by that comity that we accept the conditions which are imposed by foreign law, and to take a simple illustration of that.... you may have a body to which recognition is given in the English Courts by reason of the status which it has reached in the foreign Courts. You may, on the other hand, have some indicia from a foreign country which are not recognised over here, because they are merely matters of the lex fori and in our law matters of procedure are governed by our own lex fori.
This passage only indicates that where a company has been incorporated in a foreign country, Courts of another country will recognise the factum of such incorporation and that though for certain purposes that body may not be recognised as a company, subject to all implications of the law in the latter country, the comity of nations compels a recognition of such incorporation and the conditions imposed by that foreign law on that body. This passage is no doubt not directly relevant, but it has been referred to by the learned Counsel for the Department only for the purpose of establishing that though the foreign company is not a company within the meaning of the Company Law of India, its corporate character must nevertheless be recognised. Reference was also made by the learned Counsel for the Department to certain passages in ' Modern Company Law ' of Gower wherein emphasis has been placed upon the fact that the English Law will always recognise a foreign company as a corporate body if it is duly incorporated according to the laws of a foreign State.
9. Mr. Ranganathan, for the Department, referred also to South Indian Planting and Commercial Representation Fund v. Commissioner of Income-tax (1957) 32 I.T.R. 503 : A.I.R. 1958 Mad. 338. That was a case of an association and the decision was that the surplus of the receipts of the assessee over the expenditure was income assessable from other sources under Section 12 of the Act. Basing himself on analogy, learned Counsel suggests that even if the foreign company is not a company within the meaning of the Indian Income-tax Act, the shareholders of that company might be regarded for the purpose of the Indian Income-tax Act as constituting an association of persons and the profits distributed to them by the company as income from other sources taxable in the hands of the shareholders. It is not necessary for us to decide the question on the basis of any analogy. The question that was before the Tribunal was clearly whether the receipt of the amount from the foreign company, in whatsoever a manner the foreign company might have acquired that income, was or was not income which was taxable under Section 12 of the Act in the hands of a member of the company. The description of this amount as 'dividend' arose solely for the reason that the assessee so described it and on the basis of his position as a shareholder of the foreign company and on which footing the foreign company purported to distribute this amount to the assessee. But the question undoubtedly was what was the nature of this receipt in the hands of the shareholder, whether it was of a revenue nature or of a capital nature. That was the limited question which was posed by the assessee before the taxing authorities and the Tribunal, and it seems to us that the real question for decision is whether the sum received in the circumstances stated above by the assessee, though received from a foreign company, is assessable as profits under the Indian Income-tax Act. Mr. Narayanaswami, for the assessees, however contended that it is not open to us to re-frame the question in this manner. We are not satisfied that this objection has any validity. It has been decided by the Supreme Court in Commissioner of Income-tax, Bombay v. Scindia Steam Navigation Com party, Ltd. : 42ITR589(SC) that where a question of law is or is not raised before the Tribunal but the Tribunal deals with it, that will also be a question arising out of its order. We have already pointed out that the Tribunal specifically dealt with the question that this amount must be regarded as profits received by the assessee, whatever may be the manner of his connection with the company from which he received it and whatever might be the nature of the receipt in the hands of the company itself. Whether or not it was income taxable in the hands of the assessee was the point principally decided by the Tribunal and it seems to us therefore that the reference to the amount as dividend in the question as framed by the Tribunal is not at all significant. The real question at issue and one that properly arises from the order of the Tribunal is; whether the sum received by the assessee from a foreign company is assessable as profits under the Act. For the reasons that we have already set out, we answer the questions in the affirmative and against the assessees. The Department will be entitled to its costs. Counsel's fee Rs. 100 in each case.