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Commissioner of Income-tax Vs. Clive Insurance Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 138 of 1967
Judge
Reported in[1972]85ITR531(Cal)
ActsIncome Tax Act, 1922 - Sections 18(5), 49D and 49D(1); ;Income Tax Act, 1952 - Sections 184, 199 and 493
AppellantCommissioner of Income-tax
RespondentClive Insurance Co. Ltd.
Appellant AdvocateB.L. Pal and ;Suhash Ch. Sen, Advs.
Respondent AdvocateK. Roy and ;A.C.S. Chori, Advs.
Cases ReferredRitson v. Philips
Excerpt:
- a.n. sen, j.1. a question of some importance relating to the applicability of section 49d of the indian income-tax act, 1922, in the matter of granting relief to the assessee in respect of the dividend received by the assessee on its investment in shares in joint stock companies in england arises in this reference made under section 66(1) of the said act by the tribunal at the instance of the department.2. the question referred by the tribunal is :'whether, on the facts and in the circumstances of the case, the assessee could be said to have paid income-tax in u. k. by deduction or otherwise in respect of the net dividends of rs. 15,266 so as to be eligible for the relief contemplated by section 49d of the indian income-tax act, 1922?'3. two main contentions which have been urged and.....
Judgment:

A.N. Sen, J.

1. A question of some importance relating to the applicability of Section 49D of the Indian Income-tax Act, 1922, in the matter of granting relief to the assessee in respect of the dividend received by the assessee on its investment in shares in joint stock companies in England arises in this reference made under Section 66(1) of the said Act by the Tribunal at the instance of the department.

2. The question referred by the Tribunal is :

'Whether, on the facts and in the circumstances of the case, the assessee could be said to have paid income-tax in U. K. by deduction or otherwise in respect of the net dividends of Rs. 15,266 so as to be eligible for the relief contemplated by Section 49D of the Indian Income-tax Act, 1922?'

3. Two main contentions which have been urged and which fall for consideration in the instant reference, are :

'(1) Whether the sum deducted from the amount of dividend payable to the assessee constitutes payment of income-tax by the assessee by deduction or otherwise in accordance with the law of U.K. on the said dividend income received by the assessee?

(2) Whether in view of the provisions contained in Explanation (iii) in the said Section 49D, the assessee can claim any relief under the said section before actual assessment of the assessee in U.K.?'

4. It has also to be noted that a preliminary objection has been raised on behalf of the assessee as to the competence of the present reference.

5. For a proper appreciation of the contentions raised, it is necessary to consider the relevant facts. The facts material for the purpose of this reference appear from the relevant records and may be briefly indicated. The Clive Insurance Company Ltd., the assessee herein, is a company resident in India. The company carries on the business of general insurance. The assessee also derives income from its investments in U.K. The assessment year under reference is 1960-61, the relevant previous year being the calendar year 1959. During the relevant period the assessee earned income by way of dividend and interest from its, investments in U.K. In the assessment made in the year 1960-61 the Income-tax Officer did not in the first place grant any relief to the assessee in respect of the income derived from its investments in U.K. The assessee had claimed such relief under Section 49D of the Income-tax Act, 1922, in respect of the income received by the assessee by way of dividend and interest on its investments in U.K. The assessee had thereafter written to the Income-tax Officer for necessary relief under the said section and the Income-tax Officer made an order under Section 35 of the Indian Income-tax Act, 1922, granting relief to the assessee only in respect of the income earned by way of interest by the assessee on its U.K. securities. The Income-tax Officer,' however, did not give any relief in respect of the dividend income earned by the assessee on its investment in shares in U.K. The Income-tax Officer does not appear to have given any reason for his decision. The net dividend income of the assessee received on its investments in shares in U.K. in the relevant year came to Rs. 15,266 after deduction of tax of Rs. 9,881 in rupee figures therefrom. Against the decision of the Income-tax Officer refusing to grant any relief to the assessee in respect of the said dividend income of Rs. 15,266, the assessee preferred an appeal. The Appellate Assistant Commissioner held that the amount deducted from the dividend income was not paid to U.K. revenue and the net dividend of Rs. 15,266 did not suffer tax at both places and as such there was no question of granting any relief under Section 49D, In that view of the matter the Appellate Assistant Commissioner dismissed the said appeal of the assessee. The assessee thereafter preferred an appeal to the Income-tax Appellate Tribunal. The Tribunal accepted the assessee's claim and allowed the appeal preferred by the assessee. The Tribunal in its order proceeds to state :

'It is contended on behalf of the assessee that an actual assessment in U.K. is not a condition precedent to the admissibility of relief under Section 49D. For the department it is submitted that such an assessment is necessary. Section 49D provides :

(1) If any person who is resident in the taxable territories in any year proves that, in respect of his income which accrues or arises during that year without the taxable territories......he has paid in any country, with which there is no reciprocal arrangement for relief or avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country, whichever is lower (Underlined by us).

With reference to this provision we have only to see whether the assessee has paid by deduction or otherwise income-tax under the law in force in the foreign country. That the assessee had paid by deduction income-tax under the law in force in the foreign country is incapable of dispute. Thus, the assessee is entitled under Section 49D to the relief. The word 'entitled' underlined by us occurring in the provision shows that the assessee has got an indefeasible right. The extent of relief is also indicated in the same provision. The definition in Sub-clause (4) does not, in our opinion, run counter to the claim of the assessee. The error lies in understanding the word 'assessed' occurring in Explanation (iii) to Section 49D. The income-tax authorities appear to have understood the word 'assessed' as if it will take in only those cases where the tax has been imposed as a result of an assessment order. If the word 'assessed' is understood in the sense 'taxed' or 'suffered tax' there will be no difficulty in giving the assessee the relief claimed in this case. That the word 'assessed' means 'taxed' or 'suffered tax' in the context in which it occurs in Explanation (iii) appears to us to be clear. We, therefore, accept the assessee's claim and direct appropriate relief being given to the assessee.

On the application of the department, the Tribunal, on the above facts, has referred to the court the question which we have earlier set out.

It will be in the fitness of things to deal in the first place with the preliminary objection raised. It has been submitted on behalf of the assessee that the court should not entertain the present reference and should decline to answer the question referred. The said submission is based on two grounds, namely :

(i) The Tribunal has found as a fact that the assessee has paid income-tax by deduction in accordance with the law of U.K.

(ii) Whether assessment of the assessee in U.K. is a condition precedent or not to the claim of relief under Section 49D is a question which has not been referred by the Tribunal in the present reference.

Mr. Roy, the learned counsel appearing on behalf of the assessee, has argued that the Tribunal has clearly found that the assessee has paid income-tax by deduction in accordance with the law of U.K. and the said finding of the Tribunal is a finding of fact and the said finding is binding on the court. In support of his contention that the finding of the Tribunal, on the above question constitutes a finding of fact, Mr. Roy has referred to the decision of the Madras High Court in the case of Estate of VR. RM.S. Chockalingam Chettiar v. Commissioner of Income-tax, [1960] 40 I.T.R. 429 (Mad.) and has placed particular reliance on the following observations at page 440:

'In the present case, the Tribunal has held that the grant of letters of administration with will annexed in Malaya in respect of the properties in Malaya would hold good to that extent. The validity of a testamentary disposition in regard to immovable properties situate in a foreign country is a question relating to foreign law. Such a question would be a question of fact, and in view of the conclusion of the Tribunal that under the law in Malaya the letters of administration granted would be valid, no question either of the validity of the will or of the rights of the Hindu undivided family over the properties disposed of can at all arise.' Mr. Roy has contended that as to the decision of the Tribunal on the meaning to be given to the word 'assessed' in Explanation (iii), no question has been referred and the said decision, therefore, does not and cannot form any part of this reference. Mr. Roy has drawn our attention to Section 49D which may conveniently be set out in its entirety. Section 49D reads as follows :

'49D. Relief in respect of incomes accruing or arising outside the taxable territories.--(1) If any person who is resident in the taxable territories in any year proves that, in respect of his income which accrues or arises during that year without the taxable territories (and which is not deemed to accrue or arise in the taxable territories), he has paid in any country, with which there is no reciprocal arrangement for relief or avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in that country, be shall be entitled to the deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country, whichever is the lower. (2) The Central Government may, by notification in the Official Gazette, declare that the provisions of sub-section (1) shall also apply in relation to any such income accruing or arising in the United Kingdom and chargeable under this Act for the year ending on the 31st day of March, 1950, or for the year ending on the 31st day of March, 1951, or for the year ending on the 31st day of March, 1952.

(3) If any person who is resident in the taxable territories in any year proves that in respect of his income which accrues or arises to him during that year in Pakistan he has paid in that country, by deduction or otherwise, tax payable to the Government under any law for the time being in force in that country relating to taxation of agricultural income, he shall be entitled to a deduction from the Indian income-tax payable by him-

(a) of the amount of the tax paid in Pakistan under any law aforesaid on such income which is liable to tax under this Act also; or

(b) of a sum calculated on that income at the Indian rate of tax ; whichever is less.

(4) Sub-section (3) shall apply in relation to all assessments for the years subsequent to the year ending on the 31st day of March, 1948, and notwithstanding anything contained in Section 50, a claim for refund in respect of any of the years ending on the 31st day of March of the years 1949 to 1952 inclusive, may be entertained if made before the 31st day of March, 1957.

Explanation.--In this section,--

(i) the expression 'Indian income-tax' means income-tax and supertax charged in accordance with the provisions of this Act;

(ii) the expression 'Indian rate of tax' means the rate determined by dividing the amount of Indian income-tax after deduction of any relief due under the other provisions of this Act but before deduction of any relief due under this section, by the total income ;

(iii) the expression 'rate of tax of the said country' means income-tax and super-tax actually paid in the said country in accordance with the corresponding laws of the said country after deduction of all relief due, but before deduction of any relief due in the said country in respect of double taxation, divided by tbe whole amount of the income assessed in the said country;

(iv) the expression 'income-tax in relation to any country' includes any excess profits tax or business profits tax charged on the profits by the Government of that country and not by the Government of any part of that country or a local authority in that country.'

6. Mr. Roy has submitted that the relevant provisions of the said Section 49D applicable in the present case are contained in Sub-section (1) and in Explanation (iii). He has argued that Section 49D, in so far as the same is applicable in the instant case, has really two limbs or parts. According to Mr. Roy, the first limb or part contained in Sub-section (1) lays down the necessary requirements which the assessee has to fulfil to be entitled to any relief and the second part or limb which is contained in the Explanation prescribes the mode of computation or calculation of the amount of relief to which the assessee may be entitled.

7. Mr. Roy has contended that so far as the conditions laid down m the first part or limb, contained in Sub-section (1), are concerned, the Tribunal has found that the said conditions have been satisfied and the assessee has paid income-tax by deduction in accordance with the law of U.K. and it is the contention of Mr. Roy that this finding of the Tribunal is a finding of fact, bidding on this court. Mr. Roy further contends that so far as the Explanation prescribing the mode of computation of the quantum of relief is concerned, the Tribunal has given its interpretation and no question on this aspect of the matter has been referred. Mr. Roy, therefore, submits that the court should not entertain the reference and should decline to answer the question referred. On the question of the court's powers and duties, while deciding such a reference, Mr. Roy has referred to the decision of the Supreme Court in the case of Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd., : [1961]42ITR589(SC) . and also to the decision of the Supreme Court in the case of Commissioner of Income-tax v. Smt. Anusuya Devi, : [1968]68ITR750(SC) .

8. In the facts of the instant case, the finding of the Tribunal that the assessee has paid income-tax by deduction in accordance with the law in U.K. cannot, in our opinion, be considered to be a pure finding of fact which binds this court. Apart from the question as to how foreign law is to be proved, when any finding thereon may be considered to be a finding of fact, the finding in the instant case that the assessee has paid income-tax by deduction in accordance with the law in U.K. has necessarily to be arrived at not only on a proper construction of the English statute but also on an interpretation of judicial pronouncements. It may be noted that there is really no dispute with regard to the basic facts, namely, that the assesses received dividend in U.K. and sums have been deducted from the gross dividend amount? payable to the assessee in accordance with the provisions of the English Income-tax law. The question whether the sum so deducted from the dividend amount payable and paid to the assesses constitutes payment of income-tax in U.K. by the assessee in accordance with the law of U.K. has necessarily to be determined on a proper understanding of the English law which, in the facts of the present case, requires interpretation of the English statute and judicial decisions. Any finding which hag to be based on an interpretation of a statute and judicial decisions, cannot, in our opinion, be considered to be a pure finding of fact. The question of construction of statutes and also of interpretation of judicial decisions is, undoubtedly, a question of law. A finding on any question, even of fact, which must be based on such construction of law, must, therefore, be regarded as a mixed question of fact and law. A earlier view appears to have been expressed by the Delhi High Court in the case of Commissioner of Income-tax v. R.B. Jodhamal Kuthiala, [1968] 69 I.T.R. 598 (Delhi) [F.B.].. The Delhi High Court, after a review of various authorities, observed at pages 603-604 :

'Even in England it has been held that, where as expert states his opinion based upon his knowledge and practical experience of foreign law, he may refer to courts' decisions or treatises for the purpose of refreshing his memory but in such an event the court is at liberty to examine the law, decision or passage in question in order to arrive at its correct meaning. Such an ascertainment of the meaning would always remain a question of law. In any case, we have to ascertain the meaning of the word 'owner' in Section 9 of the Indian Income-tax Act, in the light of the facts found and that would, on any process of reasoning, be a mixed question of fact and law. So far as the contents of the law are concerned, there has been no controversy at the Bar and I hold that the interpretation of those contents, being a matter of law, it is open to us to interpret the same.'

9. The decision of the Madras High Court in the case of Estate of VR. RM.S. Chockalingam Chettiar v. Commissioner of Income-tax was noted by the Delhi High Court at page 603. The observations of the Madras High Court, relied on by Mr. Roy and quoted earlier, are to be read and understood in the light of the particular facts of that case and are not intended to lay down any general proposition of law. The said observations, in our opinion, cannot be construed to mean that any finding on any question of foreign law, howsoever come, constitutes invariably a question of fact. In the present case, we have to determine in the light of the facts found, namely, that sums have been deducted from the dividend amounts payable to the assessee, whether the sums, so deducted, constitute payment of income-tax by the assessee in accordance with the law of U.K.

10. The other contention raised by Mr. Roy that the interpretation given by the Tribunal of the expression 'assessed' in Explanation (iii) does not form any part of this reference is, in our view, not sound. The argument of Mr. Roy that Section 49D, in so far as the same is applicable to the present case, has two parts or limbs, (1) laying down the conditions which entitle the assessee to relief, and (2) prescribing the mode of computation of the quantum of relief, does not appeal to us. It is no doubt true that Sub-section (1) prescribes the requirements which must be satisfied to entitle an assessee to any relief. It is equally true that the Explanation lays down the mode or basis of computation of such relief. But, mere entitlement to relief, if the basis or mode of computing the same cannot be ascertained, becomes meaningless and does not serve the object of the section. In our opinion, Sub-section (1), which lays down the conditions, the fulfilment of which is essential to entitle an assessee to any relief, must be read along with the Explanation, which prescribes the mode of computation of such relief, to make the said section effective and meaningful. Unless the conditions laid down in Sub-section (1) are satisfied, Section 49D will have no application. Section 49D cannot operate and no relief thereunder can be given, unless the mode of granting relief as provided in the Explanation can be worked out and the basis for computing the quantum of such relief can be ascertained. There may be two parts or limbs, but both of them must operate together for a proper working of the section and for granting the necessary relief contemplated by the section. In the instant case, one of the mail) contentions of the department has been that unless the assessee has been assessed to income-tax in U.K., the assessee cannot be considered to have paid any income-tax in U.K. The question referred in the instant case, in our opinion, is wide enough to cover this aspect which clearly arises in this reference. The decisions of the Supreme Court in Commissioner of Income-tax v. Scindia Steam Navigation Co, and Commissioner of Income-tax v. Smt. Anusuya Devi, relied on by Mr. Roy, are of no avail in the facts of the instant case. We are, therefore, unable to entertain the preliminary objection.

11. Now, turning to the merits, the principal submission of the department before us has been that the assessee cannot be considered to have paid income-tax in U. K. on the dividend income received and the assessee is, therefore, not entitled to any relief under Section 49D. It has been contended before us that the sums deducted from the dividend income payable to the assessee in U. K. do not constitute payment of any income-tax in accordance with the law of U. K, It is the contention of Mr. Pal, the learned counsel for the department, that there cannot be any question of payment of income-tax by the assessee in respect of the dividend income received in U. K. as no income-tax is levied on the dividend income in U. K. The learned counsel has argued that in England a company is liable to be taxed on the entire profits earned by the company before declaration of any dividend at the appropriate rate and there is no further taxation on the amount, if any, which the company may declare as dividend after such taxation out of the profits earned. The learned counsel submits that under Section 184 of the English Income Tax Act, 1952, the company is authorised and entitled to deduct from the amounts payable to its members by way of dividend in the event of any dividend being declared and paid, at the standard rate and the sums so deducted by the company under the authority of the law are retained by the company by way of recoupment from its members of the amounts of tax paid by the company on its profits. The learned counsel has commented that the company may recover the entire amount, a smaller amount or a bigger amount from its members by way of such deduction from the amounts of dividend payable or paid to its members than the actual amount of income-tax paid by the company on its profits, and that the entire amount that the company so realises by such deduction is retained by the company for itself and is not paid to the revenue authorities. It is contended that in U. K. there is only one tax on the profits of the company and the company is liable to pay such tax on its profits to the revenue authorities. It is argued that the revenue authorities realise the entire amount of tax payable by a company on its profits and have really no concern with what the company may choose to do with the profits earned by the company after the tax has been realised in respect of such profits from the company and there is no further taxation on the said profits even when such profits are distributed among its members as dividend and the members of the company have no liability to pay any income-tax in respect of such dividend income received. The learned counsel contends that as there is no income-tax liability on any dividend income received by a member of a company in England and as the amounts which are recovered by the company from its members by way of deduction from the dividend payable to the members are realised under the authority of statute and appropriated by the company itself and are not paid to the revenue authority, there cannot be any question of payment of any income-tax by the assessee on the dividend income received by the assessee. It is, therefore, the contention of the learned counsel that the amounts so deducted cannot constitute payment of income-tax by the member on the income received by way of dividend. The learned counsel has drawn our attention to Sections 18(4) and 18(5) of the Indian Income-tax Act, 1922, and has pointed out that there is no section in the English Act corresponding to Section 18(5) of the Indian Act which provides that such deduction should be treated as payment of income-tax. It is the submission of the learned counsel that there is no such provision in the English Act, as under the English Act no income-tax is payable on any dividend income and the amounts that are deducted from the dividends payable to its members are deducted by the company under the authority of the statute and are not by way of any payment of income-tax by the members on their incomes received by way of dividend. Mr. Pal has drawn our attention to the certificate which was given to the assessee by the company and the said certificate reads :

'I hereby certify that the income-tax on the profits of the income, of which profits this dividend forms a portion, has been or will be duly paid to the proper officer for the receipt of taxes. This voucher will be accepted by the inland revenue authority as proof of the deduction of the tax in claiming the exemption from or return of income-tax.

H. E. Lofthouse,

Secretary.'

12. The learned counsel points out that the certificate which was treated by the Tribunal as proof of payment of income-tax by the assessee in U. K. clearly shows that income-tax on the profits of the company, of which profits the dividend forms a portion, has been or will be paid by the company whose liability it is and does not show any payment of any income-tax by the assessee in U, K. The learned counsel contends that the said certificate is no proof of payment of any income-tax by the assessee in respect of the dividend and can never be so, as under the English law the member has no liability for payment of any income-tax on any dividend income received by him. In short the contention of the department is that the deduction at source by the English Company from the dividend paid to its members does not and cannot constitute payment of income-tax in England by its members. In support of his contention Mr. Pal has referred to various authorities and it is interesting to observe that the decisions which have been referred to by Mr. Pal have also been relied on by the learned counsel for the assessee. We may, however, note that Mr. Pal places particular reliance on the decision in the case of Ritson v. Phillips, [1924] 9 T.C. 10 (K.B.). (P.C.). We shall consider these decisions later on.

13. Mr. Pal has further submitted that there cannot be any question of payment of any income-tax, unless an assessment has in fact been made. It is his submission that income-tax is one tax computed on the basis of the income of the person concerned in accordance with the relevant taxing laws of the country and there cannot be any question of payment of income-tax before assessment. Reference has been made to the following observations of Rankin J. in the case of Probhat Chandra Barua v. Emperor, A.I.R. 1924 Cal. 660, 670:

'Thus the income-tax is one tax, and income assessed under one Schedule cannot be assessed all over again under another That there is any legal presumption of a general character against ' double taxation ' in any wider sense is a proposition to which I respectfully demur as a principle for the construction of a modern statute.'

14, The learned counsel has submitted that in any event Explanation (iii) makes it quite clear that the income must be assessed in the foreign country before there can be any question of any relief under Section 49D. The learned counsel contends that the interpretation purported to have been given by the Tribunal in its order on the word 'assessed' used in Explanation (iii) cannot be accepted and the said word 'assessed' cannot be used in the sense 'taxed' or 'suffered tax'. It is his contention that the expression 'assessment' should be given its clear, ordinary and natural meaning and the ordinary meaning of the expression 'assessment' solves all the questions and fits in with the scheme of Section 49D. The learned counsel submits that the assessment order of any assessee in the foreign country will not only show that the income in respect of which any assessee claims relief has been taxed in the said foreign country where the income was received but will also enable the department to ascertain the rate of tax of the said country for granting necessary relief. It is his submission that the word 'assessed' used in the Explanation (iii) should be understood in its proper context and in support of this submission the learned counsel has referred to the decision of the Privy Council in the case of Seth Badridas Daga v. Commissioner of Income-tax, [1949] 17 I.T.R, 209 and to the decision of the Supreme Court in the case of A.N. Lakshman Shenoy v. Income-tax Officer, Ernakulam, : [1958]34ITR275(SC)

15. The learned counsel has argued that Section 49D which provides for relief to an assessee should be strictly construed against the assessee and in support of this contention the learned counsel has referred to the decision of the Orissa High Court in the case of Ramchandra Mardaraj Deo v. Collector of Commercial Taxes, Orissa, [1957] 31 I.T.R. 651 (Orissa) and has relied on the following observations at page 657 :

'It is now necessary to examine whether Mr. Patnaik's argument about the strict construction of a taxing statute in favour of a subject would apply in construing the various clauses of Sub-rule (2) of Rule 3 of the Orissa Agricultural Income-tax Rules, As already pointed out, those clauses deal with the deductions permissible out of the total agricultural income of an assessee for the purpose of assessing agricultural income-tax. It is well settled that the principle of strict construction of fiscal statutes will not apply in construing those provision's which deal with exemption from taxation because such exemption increases the burden on the other members of the community and should, therefore, be deprecated.'

16. Mr. K. Roy, learned counsel appearing on behalf of the assessee, has submitted that in the facts and circumstances of this case the decision of the Tribunal is perfectly justified and is right. The learned counsel has argued that the income in question of the assessee by way of dividend had accrued outside the taxable territory in U K. with which there is no reciprocal arrangement for relief or avoidance of double taxation. He contends that in respect of the said income of the assessee, the assessee has paid income-tax by deduction in U.K. in accordance with the law in force in U.K. Mr. Roy has drawn our attention to the copy of the dividend warrant which appears as annexure 'A' at page 4 of the paper book and points out from the said document that the gross dividend income payable to the assessee was 96-12-0 from which income-tax at the rate of 7sh. 9d. in the pound amounting to 37-8-8 has been deducted and a sum of 59-3-4 has been paid by way of net dividend. The learned counsel contends that the sum of 37-8-8 deducted from the dividend income of the assessee constitutes payment of income-tax by the assessee in U.K. in respect of his dividend income under the law in force in U.K. The learned counsel has argued that it may be true that in the English Income Tax Act there is no section corresponding to Section 18(5) of the Indian Act and it is the argument of the learned counsel that there is no specific provision in the English statute expressly declaring that the sums so deducted from the dividend income will constitute payment of income-tax of the shareholder from whose dividend income the said deduction is made. The learned counsel submits that though there is no specific provision in this regard in this statute, the provisions of the statute, however, make the position clear and the question is well settled by judicial pronouncements. The learned connsel has argued that the position of dividend income received from a company resident in U. K. by its shareholders under the income-tax law in force in U.K. is rather peculiar. He has submitted that under the income-tax law prevailing in U.K. there is only one liability for payment of income-tax on the profits of any company and the liability is the liability of the company; and in respect of profits of any company the revenue authorities in U.K. look to the company for recovery of income-tax on the profits earned by the company and the company is liable for payment of income-tax on the entire amount of profit before declaration of any dividend. The revenue authorities in England, argues the learned counsel, are not any further concerned with the profits remaining in the hands of the company after taxation and are not bothered as to what the company proposes to do with regard to the profits, inasmuch as the revenue authority has already realised its dues by way of income-tax on the said profits; and in the event of the company choosing to distribute the said profits or any portion thereof after taxation by way of dividend among the shareholders, the revenue authority is no longer interested in the said distribution of the profits by way of dividend and in the amounts so received by the shareholders in consequence thereof, on the basis that the amount which reaches the hands of any shareholder is only a part of the company's profits which have already been taxed. The dividend which may be declared is not treated as income separately in the hands of the shareholder for the purpose of charge to income-tax by the revenue authority, and the shareholder has no liability for payment of any further income-tax in respect of the dividend income received by him. The learned counsel points out that though the revenue authorities do not treat the dividend amount received by any shareholder as income for the purpose of levying any income-tax on the said amount in the hands of the shareholder, on the footing that the company has already been taxed in respect of the entire profits, the English Income-tax Act, however, makes provision that the company will be entitled to deduct from the shareholders tax from the amount of dividend to be paid to the shareholders at the time of paying the dividend. It is the contention of the learned counsel that this amount which is deducted by the company under the authority of the law from the dividend amount payable to a shareholder is treated and recognised under the English law as payment of income-tax by the shareholder in respect of the dividend income received by the shareholder, although the said amount, deducted by the company, is not paid to the inland revenue and is allowed to be appropriated by the company in recoupment of the tax paid by the company. The contention of the learned counsel is that the deduction from the dividend amount payable to any member by the company constitutes payment of income-tax by the member in England and is treated and recognised as such by the law prevailing in England. The learned counsel-submits that there are two systems of taxation under the English law, namely, (1) taxation by direct assessment, and, secondly, taxation by deduction at source. It is the submission of the learned counsel that in case of any dividend income, the taxation is by deduction at source and the position is more or less the same as in the case of rent income. In support of his contention that the sum so deducted from UK: dividend amount of any member of the company constitute payment of Income-tax by the member in respect, of the dividend income in. U.K., the learned counsel has referred to various authorities. We shall refer to these authorities later. As already noted the same decisions have been referred to and relied on by 'both the sides.

17. Mr. Roy has argued that the rate of tax in England can easily be ascertained in the instant case for the purpose of computation of the quantum of relief and the Explanation (iii) creates no difficulty whatsoever in the instant case. It is his contention that Explanation (iii) makes provision for finding the rate of tax in the country in which the tax has been paid to enable the taxing authority here to work out the basis on which the quantum of relief is to be calculated, Mr. Roy bag argued that in England there is only one standard rate of tax and it is his argument that the assessee being a company is not liable to pay any super-tax under the English law nor is the assessee entitled to claim any relief under the English Income-tax Act. Mr. Roy, therefore, submits that there is no difficulty in finding out the rate at which the assessee has paid income-tax in England. Mr. Roy has argued that if the word 'assessed' in Explanation (iii) is to be understood and construed in the sense of actual assessment on the basis of return filed, as contended for by the department, the said interpretation will be clearly erroneous and misleading in the instant case. He argues that the dividend income will not find any place in any return of the assessee and it is his argument that dividend, income-tax in respect of which is deducted at the very source, is not included in any return unless a liability for payment of super-tax or a claim for relief or refund arises on the basis of the tax paid on the said dividend income by deduction at the source. Mr. Roy has submitted that the Tribunal in the instant case has rightly construed the word 'assessed' to mean 'taxed' or 'suffered tax'.

18. On the question of the interpretation of the section Mr. Roy has commented that the decision of the Orissa High Court in Ramchandra Mardaraj Deo v. Collector of Commercial Taxes relied on by the learned counsel for the department is not correct and he has contended that Section 49D which provides for exemption and relief to the assessee should be construed liberally in favour nf the assessee. The learned counsel has referred to the following decisions in support of his contention: Commissioner of Agricultural Income-tax v. Raja Jagadish Chandra Deo Dhabal Deb, [1949] 17 I.T.R. 426 (Cal.), Upper India Chamber of Commerce, Cawnpore v. Commissioner of Income-tax, [1947] 15 I.T.R. 263; 17 Comp. Cas. 108 (All.), Kameshwar Singh v. Commissioner of Income-tax, [1954] 26 I.T.R. 121 (Pat) and Commissioner of Income-tax v. K.E. Sundara Mudaliar, [1950] 18 I.T.R. 259 (Mad.).

19. The learned counsel points out that the Supreme Court in the case of Commissioner of Income-tax v. Raja Benoy Kumar Suhas Roy, [1957] 32 I.T.R. 466, [1958] S.C.R. 101 (S.C.) has taken note at pages 475-76 of this principle of liberal construction in case of provisions for exemption and relief without expressing any disapproval. Mr. Roy has submitted that whatever view may be taken of the principle of construction, the decision of the Tribunal is clearly justified in the facts of the instant case-The object of Section 49D, as the section itself makes amply clear, is to grant relief to an assessee against any double taxation of the income. The said relief can never be had in terms of the said section and the said section can never be applied, unless the requirements of the said section are satisfied. An analysis of the relevant provision of the said section, in our opinion, indicates that an assessee must satisfy the following requirements:

(1) that the assesses is resident in the taxable territory,

(2) that his income accrued or arisen during the relevant year without the taxable territories,

(3) there is no reciprocal arrangement for relief or avoidance of double taxation with the country where the income has accrued or arisen.

(4) the assessee has paid in that country in which the income has accrued or arisen income-tax, by deduction or otherwise, under the law in force in that country.

20. Unless these basic requirements of the section are satisfied, Section 49D will not come into operation. In order to obtain relief under Section 49D, an assessee, apart from satisfying the basic requirements, must further establish the rate at which tax has been paid as provided in the Explanation contained in the section, as otherwise the quantum or measure of relief cannot be worked out in terms of the provisions of the said section.

21. In the instant case the assessee is resident in the taxable territory. There can be no doubt that the dividend income in question of the assessee accrued or arose outside the taxable territory, i.e., in U. K. There is no reciprocal arrangement between India and the United Kingdom for relief or avoidance of double taxation. The principal controversy centres round the question of payment by the assessee of income-tax in U. K. in respect of the dividend income in question. The crux of the matter, therefore, is whether the sum deducted from the dividend income of the assessee constitutes payment of income-tax by the assessee in U. K. in accordance with the law of U. K. This question will necessarily have to be determined on the basis of the law prevailing in U. K. The provisions of the Indian Income-tax Act are of no assistance in the matter.

22. It will be convenient to set out the provisions of the English Act, material to the question in dispute. The English Act in force at the relevant time was the Income Tax Act, 1952, which is still in force and the following provisions of the said Act may be noted :

'Section 169 ;

Payments out of profits or gains already taxed.--(1) Where any yearly interest of money, annuity or other annual payment is payable wholly out of profits or gains brought into charge to tax-

(a) no assessment shall be made on the person entitled to the interest, annuity or annual payment ; and

(b) the whole of the profits or gains shall be assessed and charged with tax on the person liable to the interest, annuity or annual payment, without distinguishing the interest, annuity or annual payment; and

(c) the person liable to make the payment, whether out of the profits or gains charged with tax or out of any annual payment liable to deduction, or from which a deduction has been made, shall be entitled, on making the payment, to deduct and retain out of it a sum representing the amount of the tax thereon at the standard rate for the year in which the amount payable becomes due ; and

(d) the person to whom the payment is made shall allow the deduction on receipt of the residue of the payment, and the person making the deduction shall be acquitted and discharged of so much money as is represented by the deduction, as if that sum had been actually paid.

(2) Sub-section (1) of this section shall have effect whether the interest, annuity or annual payment-

(a) is payable within or out of the United Kingdom; or

(b) is payable as a charge on any property of the person paying it by virtue of any deed or will or otherwise, or as a reservation out of it, or as a personal debt or obligation by virtue of any contract ; or

(c) is payable half-yearly or at any shorter or more distant periods.

(3) Where-

(a) any royalty or other sum paid in respect of the user of a patent; or

(b) any rent, royalty or other payment which, under any of the provisions of this Act, is declared to be subject to deduction of tax under this Chapter as if it were a royalty or other sum paid in respect of the user of a patent,

is paid wholly out 'of profits or gains brought into charge to tax, the person making the payment shall be entitled on making the payment to deduct and retain out of it a sum representing the amount of the tax thereon at the standard rate for the year in which the amount payable becomes due,'

'Section 184.

Deduction of tax from United Kingdom dividends.--(1) The profits or gains to be charged on any body of persons shall be computed in accordance with the provisions of this Act on the full amount, of the same before any dividend thereof is made in respect of any share, right or title thereto, and the body of persons paying the dividend shall be entitled to deduct tax at the standard rate for the year in which the amount payable becomes due.

(2) Sub-section (1) of this section shall, in relation to a dividend paid by any body of persons, be construed as authorising the deduction of tax from the full amount paid out of profits and gains of the said body which have been charged to tax or which, under the provisions of this Act, would fall to be included in computing the liability of the said body to assessment to tax for any year if the said provisions required the computation to be made by reference to the profits and gains of that year and not by reference to those of any other year or period.'

'Section. 185 :

Computation of gross income represented by United Kingdom dividends.--(1) Subject as hereinafter provided, a dividend paid by a body of persons shall, to the extent to which it is paid out of such profits and gains as are mentioned in Sub-section (2) of the last preceding section, be deemed, for all the purposes of this Act, to represent income of such an amount as would, after such deduction of tax as is authorised by Sub-section (1) of the last preceding section, be equal to the net amount received :

Provided that the provisions of this subsection shall not apply to a preference dividend and shall have effect subject to the provisions of section four hundred and ninety-three of this Act (which relates to the effect of deductions from dividends, other than preference dividends, made by reference to the wrong standard rate). (2) In this section, 'preference dividend' means, subject to the provisions of the next following section-

(a) a dividend payable on a preferred share or preferred stock at a fixed gross rate per cent; or

(b) where a dividend is payable on a preferred share or preferred stock partly at a fixed gross rate per cent. and partly at a variable rate, such part of that dividend as is payable at a fixed gross rate per cent.'

'Section 186 :

United Kingdom dividends paid without full deduction of tax.--(!) Where any dividend from which deduction of tax is authorised by Sub-section (1) of section one hundred and eighty-four of this Act is paid without deduction of tax, the amount received in respect thereof shall, for the purposes of this Act, be deemed to be a net amount received in respect of a dividend from the gross amount of which such deduction as is authorised by the said Sub-section (1) has been made, and the provisions of-

(a) the last preceding section ; and

(b) section one hundred and ninety-nine of this Act (which relates to the form of dividend warrants and other documents), shall apply accordingly.

(2) A preference dividend paid without deduction of tax shall not be treated as a preference dividend within the meaning assigned to that expression by Sub-section (2) of the last preceding section.

(3) The provisions of this section shall apply where, though a deduction is made from a dividend, that deduction is less than the full amount authorised as it applies where no deduction is made :

Provided that nothing in this subsection shall be construed as applying the said provisions to any dividend paid before the passing of the Act imposing the tax for the year by reason only that the deduction made therefrom was made by reference to a standard rate lower than that ultimately imposed for the year.' 'Section 199 :

Explanation of income tax 'deductions to be annexed to dividend warrants, etc,--(1) Every warrant or cheque or other order drawn or made, or purporting to be drawn or made, in payment of any dividend or interest distributed by any company, being a company within the meaning of the Companies Act, 1948, or the Companies Act (Northern Ireland), 1932, or a company created by letters patent or by or in pursuance of an Act of Parliament, shall have annexed thereto or be accompanied by a statement in writing showing-

(a) the gross amount which, after deduction of the income tax appropriate thereto, corresponds to the net amount actually paid; and

(b) the rate and the amount of income tax appropriate to such gross amount; and

(c) the net amount actually paid ; and

(d) where Sub-section (1) of section three hundred and fifty of this Act applies, the net United Kingdom rate as provided by that subsection.

(2) If a company fails to comply with the provisions of this section, the company shall, in respect of each offence, incur a penalty of ten pounds :

Provided that the aggregate amount of any penalties imposed under this section on any company in respect of offences connected with any me distribution of dividends or interest shall not exceed one hundred pounds.' 'Section 350:

Effect on dividends of double taxation relief.--(1) The amount of tax which is authorised by section one hundred and eighty-four of this Act to be deducted from any dividend shall be determined without taking into account any reduction, by reason of double taxation relief, of the United Kingdom income tax payable directly or by deduction by the company, but-

(a) notwithstanding anything in this Act, no relief or repayment inrespect of tax deducted or authorised to be deducted from any dividendshall be allowed at a rate exceeding the rate (hereinafter referred to as'the net United Kingdom rate') of the United Kingdom income tax payable directly or by deduction by the company after taking double taxationrelief into account; and'

(b) where the United Kingdom income tax payable directly or by deduction by the company is affected by double taxation relief, the particulars to be given by the company in the statement required by section one hundred and ninety-nine of this Act shall include particulars of the net United Kingdom rate.

(2) 'Where the whole or any part of any annual payment is payable out of a dividend, and the rate of relief or repayment allowable in respect of the tax deducted or authorised to be deducted from the dividend is affected by double taxation relief, the animal payment, or that part thereof, as the case may be, shall be deemed to be paid out of profits or gains not brought into charge to tax and section one hundred and seventy of this Act shall apply accordingly, but the tax chargeable under the said section one hundred and seventy on the person making the payment shall be reduced by an amount equal to tax on the payment or part of the payment at the net United Kingdam rate applicable to the dividend.

(3) In this section-

'dividend' means a dividend from which deduction of tax is authorised by section one hundred and eighty-four of this Act;'double taxation relief means any credit for tax payable in any territory outside the United Kingdom which is allowable against United Kingdom income tax by virtue of arrangements having effect under section three hundred and forty-seven of this Act or by way of unilateral relief under section three hundred and forty-eight thereof, and any relief from United Kingdom income tax allowable under the provisions of section twenty-seven of the Finance Act, 1920, including any credit or relief which has been taken into account for the purposes of determining the net United Kingdom rate applicable to any dividends received by the company; 'the company' means the body of persons paying a dividend. (4) Without prejudice to the general transitional provisions contained in Part XXVI of this Act, the following special transitional previsions shall have effect for the purposes of this section-

(a) the double taxation relief which may be taken into account for the purposes of this section includes relief for years before the year 1952-53, and references in Sub-section (3) of this section to provisions of this Act shall be construed accordingly as including, in relation to relief for such years, references to the corresponding provisions of the enactments repealed by this Act; and

(b) the reference in the said Sub-section (3) to section twenty-seven of the Finance Act, 1920, shall be construed as including a reference to that section as in force (whether in relation to the Republic of Ireland or in relation to other countries) for any year before the year 1952-53, as well as a reference to that section as set out in Part II of the Eighteenth Schedule to this Act; and

(c) Sub-section (3) of section fifty-two of the Finance (No 2) Act, 1945 (which directs double taxation relief connected with dividends paid before, the twentieth day of February, nineteen hundred and forty-six, to be taken into account for the purposes of that section in the manner specified in that subsection) shall apply in relation to this section as it would have applied in relation to that section had that section applied to the year 1952-53 and subsequent years.'

'Section 493:

Deduction from dividends (other than preference dividends) made by reference to the wrong standard rate.--Where, on payment of a dividend (not being a preference dividend), income tax has, under section one hundred and eighty-lour of this Act, been deducted therefrom by reference to a standard rate of tax greater or less than the standard rate for the year in which the dividend became due, the net amount received shall, for all income tax purposes, be deemed to represent income of such an amount as would, after deduction of tax by reference to the standard rate last mentioned, be equal to the net amount received, and for the said purposes there shall, in respect of that income, be deemed to have been paid by deduction tax of such an amount as is equal to the amount of tax on that income computed by reference to the standard rate last mentioned.'

23. We shall now refer to the decisions which were cited from the Bar. The cases cited from the Bar are : Commissioners of Inland Revenue v. John Blott, [1921] 8 T.C. 101 (H.L.). Bradbury v. English Sewing Cotton Company Ltd., [1923] 8 T.C. 481 (H.L.). Ritson v Philips, [19241 9 T.C. 10 (K.B.), Neumann v. Commissioners of Inland Revenue, [1934] 18 T.C. 332 (H.L.)., Commissioners of Inland Revenue v. Cull, [1939] 22 T.C. 603 (H.L.), Canadian Eagle Oil Company Ltd, v. King, [1945] 27 T.C 205 (H.L.), Cenlon Finance Company Ltd. v. Ellwood, [1962] 40 T.C. 176 (H.L.)., F. S. Securities Ltd. v. Commissioners of Inland Revenue, [1964] 41 T.C. 666 ; [1966] 59 I.T.R. 331 (H.L.)..

24. In Blott's case, the question for consideration was whether the shareholders in a company who had received, in the year of assessment, bonus shares, fully paid up by use of undivided profits of the company, were bound to return to super tax the face value of the share being the amount actually paid up on them by transfer of undivided profits of the company in the capital account of the company. The case had pone to the House of Lords and Viscount Cave, in the course of his speech, observed at page 136 :

'Some time was occupied in the discussion of the question, whether in paying income tax on its profits the company acted as agent for its shareholders, and some cases were cited where this expression had been used. Probably the word was intended only to express in an abbreviated form the effect of Section 54 of the Income Tax Act, 1842. Plainly, a company paying income tax on its profits, does not pay it as agent for its shareholders. It pays as a taxpayer, and if no dividend is declared the shareholders have no direct concern in the payment. If a dividend is declared, the company is entitled to deduct from such dividend a proportionate part of the amount of the tax previously paid by the company ; and, in mat case, the payment by the company operates in relief of the shareholder. But no agency, properly so called, is involved.'

25. In the case - of Bradbury v. English Sewing Cotton Company Ltd., the question propounded was whether the dividends received by the English Sewing Cotton Company Ltd., the English company upon its holding- of common stock in the American Thread Company, an American company, during the relevant years could be taken into account in computing the liability of the English company to income tax. The matter had gone to the House of Lords and Lord Phillimore observed at page 518 :

'This case seems to depend upon the following considerations. A joint stock company is under the Income Tax Act, 1842, treated as a person and is directed to make a return of its profits or gains according to Schedule D upon a conventional figure, arrived at by taking an average of the three preceding years, and is liable to be assessed and taxed thereupon.

If the principle of its being a distinct person, distinct from its shareholders or the aggregate of its shareholders, had been carried to a logical conclusion, there would have been no reason why each shareholder should not, in his turn, have to return as part of his profits or gains under Schedule D the money received by him in dividends.

Their taxation would seem to be logical, but it would be destructive of joint stock company enterprise, so the Act of 1842 has apparently proceeded on the idea that for revenue purposes a joint stock company should be treated as a large partnership, so that the payment of income-tax by a company would discharge the quasi-partners. The reason for their discharge may be the avoidance of double taxation, or to speak accurately, the avoidance of increased taxation. But the law is not founded upon the introduction of some equitable principle as modifying the statute; it is founded upon the provisions of the statute itself; and the statute carries the analogy of a partnership further, for it contemplates a company declaring a dividend on the gross gains, and then on the face of the dividend warrant making a proportionate deduction in respect of the duty, so that the shareholder whose total income is so small that he is exempt from income tax or pays at a lower rate, can get the income tax which has been deducted on the dividend warrant returned to him.

This is the state of the law with regard to companies known as such to the legislature. But the British taxpayer may be receiving annual shims from foreign possessions and thus become liable to be assessed and taxed on a three-yearly average computed in the same way as already mentioned, according to the Fifth Case of Schedule D. And it matters not what the foreign possession is, whether it is land or goods or shares in a foreign company. The periodic sums which are so remitted to him must be entered by him in his return and are liable to assessment and taxation, not because they are dividends on shares in foreign companies, but simply because they are remittances from foreign sources. '

26. In the case of Ritson v. Philips, the facts were briefly as follows; Ritson received for the year ended 5th April, 1923, dividends from public companies amounting to 363 15s. in respect of periods ending on various dates from 31st March, 1922, to 31st December, 1922, income tax (to a total amount of 100 15s. Id.) being deducted therefrom at 6s. in the pound, at 5s. in the pound or at an intermediate rate, according as the respective periods fell wholly before, wholly after, or partly before and partly after, 6th April, 1922. Ritson had no other source of income. Ritson claimed the reliefs to which he was entitled under the Income Tax Acts for the year ending 5th April, 1923, and was repaid tax at 5s. in the pound which was the standard rate for the year on 135, and 2s, 6d. in the pound (half the standard rate) of 225 making 61-17-6 in all. Ritson, however, raised a contention that he was chargeable at lower rates and was entitled to be repaid a higher amount. Rowlatt J. negatived the contention and held at page 13 :

'In paying the dividends the companies correctly deducted tax at 6s, in the case of the first-named dividend, at rates between 5s. and 6s. (according to the overlap in each case of the income tax year and the working year) in the case of the dividends in the group secondly mentioned, and at 5s. in the case of the last-named dividend. The appellant has had refunded to him tax at the rate of 5s. on 135 and 2s. 6d. on 225 which, he says, is less than he is entitled to. His contention is that he is chargeable with tax on 225 at 2s. 6d. and on 3 15s. at 5s. He adds these two sums together, subtracts them from the aggregate deducted from his dividends, and claims a refund of the difference. This involves that in respect of 3 15s. he claims to be repaid in the year 1922-23, because he received his dividends then, a portion of the tax levied on the profits of the companies in the year before. This is plainly inadmissible. It might as well be said that if the rate of tax bad risen in 1923 the revenue could make an assessment on the appellant to supplement the lesser rate deducted by the companies. The argument is that he is taxable only at 5s., and must not be made to bear more. Here is the old fallacy. He is not taxed on his dividends. The companies are taxed on their profits, not as his agents (as has been loosely said), though at his ultimate expense. There is no provision for the return of any of this tax to the shareholder save in the process of giving effect to deductions and reliefs. But it is to be observed that the point made is wholly independent of the circumstance that taxpayers are now entitled to deductions or reliefs. It arises solely upon the situation produced by a change in the rate of tax. It would have arisen equally had these deductions and reliefs not existed, and it could be raised under the law as it is by a non-resident not entitled to them.'

27. In the case of Neumann v. Commissioners of Inland Revenue, the matter, arising out of an assessment to surtax made upon the appellant, Neumann, by the Commissioners for the Special Purposes of the Income Tax Act, had gone to the House of Lords. The facts of the case as set out by Lord Tomlin in his judgment may be noted. A company called The Salisbury House Estate Ltd. owned and managed a block of buildings, in the city of London, containing numerous rooms, jet unfurnished, as offices, to many tenants. The company, for appropriate considerations, provided, for the tenants who required them, services in connection with the cleaning and heating of the rooms. For the 4 years ending 5th April, 1925. 1926, 1927 and 1928, the company were assessed under Schedule A to income tax on the gross value of the building as appearing on the valuation list under the Metropolis (Valuation) Act, 1869. In regard to the profits and gains derived from the services rendered to the tenants, the company admitted liability to be assessed to income tax under Schedule D, but the Crown claimed that, in making the assessment under Schedule D, the rents, which far exceeded the annual value as assessed under Schedule A must be included, allowance being made for tax assessed under Schedule A. The matter came up on appeal before the House of Lords and the House of Lords had held that the rents were profits arising out of the ownership of land in respect of which the assessment under Schedule A was exhaustive and that such rents should not be, therefore, included in the assessment under Schedule D as trade receipts of the company. During the tendency of that appeal, the company distributed in dividend (from which the appropriate amounts for income tax were deducted) sums equal to their profits in respect of services assessable under Schedule D, and also sums equal to the amounts of the assessments, made under Schedule A. The company, however, set aside the sum of 18,325 (representing the amount by which their net rents exceeded their amounts of the assessments under Schedule A) to the credit of an income tax reserve account to meet such liability, if any, as may be established against them in the litigation then pending. On 4th April, 1930, immediately after the decision of the House of Lords was announced, the company distributed the sum of 18,325 so set aside among their shareholders by way of dividend. The appellant, Neurnana, who held 85,500 shares of 1 each in the company received from the company a cheque for 4,275, together with a letter from the company, dated 4th April, 1930, informing him that the 4,275 was in respect of an interim dividend of 5%, free of tax, on the shares registered in his name and that it was equivalent to a gross amount of 5,343-15s-Od. Later, the appellant was informed by the company that the sum of 4,275 had been erroneously described by the company as a dividend of 5 per cent., free of tax, and that, in fact, it represented a sum distributed out of'the un-taxed income of the company which should not have been included in any surtax return made by the appellant Nevertheless, the Commissioners for the Special Purposes of the Income Tax Acts, in making upon the appellant an assessment to surtax for the year 1929-30, included the sum of 5,343-15s.-Od, as being the gross amount applicable to a net dividend of 4,275. Mr. Justice Finlay held that, in respect of the dividend in question, nothing at all ought to have been included in the assessment, and the Court of Appeal had held that the sum of 4,275, and not the sum of 5,343-l5s.-0d. ought to have been so included. In dealing with the case Lord Tomlin observed at page 358 :--' The relative positions of a company and the shareholders of the company in relation to income tax under the Income Tax Acts have always been recognised as special in character. 'It was never, I think, doubted that, under the Act of 1842, the profits of a business carried on by a company were taxable against the company under Schedule D, and were not taxable again, after distribution, in the hands of the shareholders under Schedule D or any other Schedule. At the same time, it was permissible to the company, under Section 54 of the Act of 1842, to deduct from the dividend the proportionate part of the tax paid to the tax collector, and the shareholders entitled to exemption from or abatement of income tax could, upon the footing of the deduction, obtain the necessary return of tax. I cannot but think that the position under the Act of 1842 upon its proper construction is correctly described in the following passage from the speech of Lord Phillimore in Bradbury v. English Sewing Cotton Company Ltd.:

'A joint stock company is under the Income Tax Act, 1842, treated as a person and is directed to make a return of its profits or gains according to Schedule D upon a conventional figure, arrived at by taking an average of the three preceding years, and is liable to be assessed and taxed thereupon. If the principle of its being a distinct person, distinct from its shareholders or the aggregate of its shareholders, had been carried to a logical conclusion, there would have been no reason why each shareholder should not, in his turn, have to return as part of his profits or gains under Schedule D, the money received by him in dividends. Their taxation would seem to be logical, but it would be destructive of joint stock company enterprise, so the Act of 1842 has, apparently, proceeded on the idea that for revenue purposes a joint stock company should be treated as a large partnership, so that the payment of income tax by a company would discharge the quasi-partners. The reason for their discharge may be the avoidance of double taxation, or to speak accurately, the avoidance of increased taxation. But the law is not founded upon the introduction of some equitable principle as modifying the statute; it is founded upon the provisions of the statute itself; and the statute carries the analogy of a partnership further, for it contemplates a company declaring a dividend on the gross gains, and then on the face of the dividend warrant making a proportionate deduction in respect of the duty, so that the shareholder whose total income is so small that he is exempt from income tax or pays at a lower rate, can get the income tax which has been deducted on the dividend warrant returned to him.

In practice, the matter did not work out quite so simply. It has to be remembered that the amount distributable in dividend in any year might, in view of the assessment of profits or gains under Schedule D being upon the basis of the average of the three preceding years, as it then was, be much more 01 much less than the amount of the assessment for that year, so that if this proportionate deduction was treated as meaning the rateable proportion of the tax paid by the company in respect of the year of distribution, it might much exceed or be much less than the amount which would be deducted from the dividend if the current rate of tax in respect of the gross dividend had been deducted. At any rate, a practice seems to have grown up of companies deducting from dividends tax appropriate to the amount of the dividend at the current rate of tax, quite irrespective of the amount of tax paid by the company to the revenue, and of the shareholders claiming exemption or abatement being treated by the revenue as having paid tax to the extent of that deduction.'

28. His Lordship observed at page 361, after referring to certain sections of the Finance Act:

'The effect of this last mentioned section seems to place beyond doubt this, that, where tax may be deducted from a dividend, the amount deductible is the sum which equals the standard rate of tax for the year of payment upon the gross amount of the dividend and that, whenever the profits were earned, the sum from which the deduction is made, and the deduction itself, are to be treated as income and deduction in respect of the year in which the payment is made. Thus, the deduction permissible from the dividend clearly had no relation to the figure of tax payable by the company to the revenue, though there was still no obligation on the company to account to the revenue for what was deducted. The deduction, in fact, was only part of a system by which was measured, (1) the extent of the shareholders' right to have exemption or abatement, and (2) the liability of the shareholder to surtax.'

29. Lord Wright, in the course of his speech observed at page 368:

'Rule 20 is, in effect, based on Section 54 of the Income Tax Act, 1842, with the substitution of the words 'the tax appropriate thereto' for the words 'the tax proportionate thereto'. The scheme of these provisions, as I understand them, is to impose the tax on all the profits of the company at the source; if and so far as these profits have been so taxed, they are not liable to any further tax, other than surtax, in the hands of the shareholder receiving the dividend. The shareholder and the company are, no doubt, separate entities; the company is not an agent for the shareholder to pay tax on the dividend, nor is the company the collector for the revenue to deduct tax from the dividend. The company is the taxpayer. The shareholder has no right to any share in the profits till a dividend is declared ; the company may use the profits in any way it pleases vis-a-vis any shareholder ; it may put them to reserve or capitalise them or use them for extensions or improvements ; the profits declared and paid as dividends in one year may have been made in previous years, when the standard rate of tax was different. It is only very rarely, and in exceptional cases, that dividends are paid out of any particular source of profit; usually they are paid out of the general revenue fund of company What is essential to the requirements of the Inland Revenue is that all the profits of the company should be taxed and, if that is done, the revenue is not concerned with what is done with these profits. The company is not bound, but only authorised, to deduct tax in paying dividends ; whether it deducts or not is left to its discretion because the profits, once having been taxed in the company's hands, do not bear further tax--apart from surtax--in the shareholders' hands. There is, in fact, only one profit, no new profit being created from the fact that the shareholder gets his share ; the tax is a tax on the profits and not on the dividend. But, if tax is deducted from the dividend, the Acts have provided that it is to be at the standard rate of tax of the year of dividend, in order to avoid obvious difficulties, which might arise because profits divided in one year may have been earned in other years. The provisions of Section 7 of the Finance Act, 1931, will be considered by me more particularly in connection with the cross appeal.

On a careful review of these provisions, I reach the conclusion that a shareholder is not separately taxable--I disregard sur-tax--on a dividend, as a profit individual to himself, under Schedule D, Case VI, as the Court of Appeal held, or at all. Apart from what I conceive to be the clear effect of the Acts in this regard, I think the position has been so stated by this House more than once, at least as a matter of observation.

Thus', in Inland Revenue Commissioners v. Blott, Viscount Cave thus explained the system :-- Plainly, a company paying income tax on its profits does not pay it as agent for its shareholders. It pays as a taxpayer, and if no dividend is declared the shareholders have no direct concern in the payment. If a dividend is declared, the company is entitled to deduct from such dividend a proportionate part of the amount of tax previously paid by the company; and in that case the payment by the company operates in relief of the shareholder.' In Bradbury v. English Sewing Cotton Company Ltd., Lord Wrenbury thus expressed the same idea in concise form : 'The corporator bore his share of the tax by the deduction of the appropriate share of the collective tax paid by the corporation from his dividend.' Lord Phillimore expresses the same view at page 771 : 'The shareholder'--in the ordinary case of a taxed company - 'is taken to have paid the tax upon his dividends through the company and is not .... taxed upon them'.

These cases, and other similar statements of the principle which I need not quote, were, no doubt, made with reference to Section 54 of the Income Tax Act, 1842, but I do not think that the substitution in the latter Act of the word 'appropriate' for the word 'proportionate in the earlier Act, affects the principle.'

30. The decision in the case of Commissioners of Inland Revenue v. Cull is also a decision of the House of Lords, Cull was the shareholder of 20,000 ordinary shaves in Cull and Company, an unlimited company having a share capital of 800,000 divided into 700,000 preference and 100,000 ordinary shares of 1. each all issued and fully paid. The company carried on business as bankers and financiers. On the 13th March, 1934, the directors resolved ;

'that the dividends on the 5% cumulative preference shares for the four years to 31st March, 1934, be paid on the 31st of March, 1934, and that an interim dividend for the year to 31st March, 1934, on the ordinary shares of twenty-one shillings per share be paid on the 31st of March, 1934, without deduction of income-tax'.

31. In making his return of total income for sur-tax purposes, Cull included the sum of 21,000, his dividend on his holding of ordinary shares. The assessing Commissioners added 7,000 as representing income tax in respect of this dividend, thus increasing the assessment to 28,000. On appeal, the Commissioners for Special Purposes reduced the assessment by the sum of 7,000 and this determination was reversed by Finlay J. and the matter ultimately went to the House of Lords. Lord Atkin, in the course of his speech, observed at page 636 :

'My Lords, it is now clearly established that in the case of a limited comply, the company itself, is chargeable to tax on its prompts, and that it pays tax in discharge of its own liability and not as agent for its shareholders. The latter are not chargeable with income tax on dividends, and they are not assessed In respect of them. The reason presumably is that the amount which is available to be distributed as dividend has already been diminished by tax on the company, and that it is thought inequitable to charge it again. At one time it was thought that the company, in paying tax, paid on behalf of the shareholder; but this theory is now exploded by decisions in this House, and the position of the shareholders as to tax is as I have stated it.'

32. The noble Lord further proceeds to observe at the same page (p. 636) after referring to Rule 20 of the General Rules applicable to all Schedules of the Income Tax Act, 1918:

'The deduction is optional, and when it is made, the result in the instances I have given--a dividend which is paid less the deduction, and a dividend which is declared to be tax free--is that the shareholder has suffered a deduction authorised by statute from a total sum which otherwise he would be entitled to receive in full.'

33. Lord Macmillan, in the course of his speech, observed at page 642.

'My Lords, it is now well-settled that the shareholders of a company are not liable to be directly charged with income-tax at the standard rate on the dividends which they receive from the company. It is also settled that dividends received by any individual must be brought into computation in ascertaining his total income for sur-tax purposes; they are a source of income within the meaning of Section 4 of the Income Tax Act, 1918. So far as income tax at the standard rate is concerned, dividends received by the shareholders of a company are regarded as franked by the payment by the company of income tax on its profits or gains. But companies are not liable to and do not pay sur-tax, which is levied only on individuals. Consequently, dividends received by shareholders of a company are not franked, so far as regards sur-tax, by any payment of surtax by the company.

The present appeal relates to the question of the proper way of treating dividends in the individual taxpayer's return of his total income from all sources for the purpose of ascertaining his liability to sur-tax.

In making a return of his total income the taxpayer has to classify the items of his income under two main heads, viz., (1) income not taxed at the source, and (2) income taxed at the source. Income which has been received by the taxpayer without any deduction in respect of income taxis entered at the actual amount received as income not taxed at the source income which has been received less a deduction in respect of tax is incometaxed at the source and must be entered at the gross amount before deduction of tax, for income tax paid or suffered is not a permissible deduction in computing total income.

A company, on paying dividends to its shareholders, is entitled but not bound to deduct income tax at the standard rate at the time of payment. If the company exercises this right and deducts the tax from the dividends which it pays, the shareholders must, on entering the dividends in their return of total income, add back the deducted tax to the net amount actually received. But what if the company does not exercise its right of deduction and chooses to pay its dividends without deduction of tax Ought the shareholder (1) to enter the actual sum received by him as income not taxed at the source, or ought he (2) to enter such a sum as, after deduction of tax, would give the sum actually received, thus treating the dividends as income taxed at the source? That is the question which the present appeal poses.'

34. In the case of Canadian Eagle Oil Company Ltd. v. King, thequestion for determination was whether in taxing a person resident in theUnited Kingdom in respect of his income arising from dividends on sharesin a foreign company (that is, in respect of income arising from possessionsout of the United Kingdom under Case V of Schedule D), relief from taxation should be given as regards that much of that income as could heshown to have already borne tax in the United Kingdom. This case alsowent to the House of Lords and Viscount Simon, in the course of his speech,quoted, at page 247, the view expressed by Viscount Cave in Commissionersof Inland Revenue v. Blott, which has already been noted. Lord Simonalso at the same page referred to the observations of Lord Atkin in Cullv. Commissioners of Inland Revenue, [1939] 22 T.C. 603 (H.L.).. The said observations of Lord Atkinhave also been quoted earlier. Lord Russell of Killowen in his judgmentat page 252, referred to the observations of Lord Phillimore in Bradburyv. English Sewing Cotton Company Ltd., and then proceeded to observe asfollows:

'The provisions of the 1842 Act, which result in this fictional treatment of the relationship between a joint stock company and its shareholders, are now to be found in Rules 1 and 20 of the General Rules. Under Rule 20 the company, having been charged on the full amount of its profits and gains, is entitled to deduct tax from the dividend which it pays, the tax which it can so deduct being now (see Finance Act, 1927, Section 39(1)) tax at the standard rate for the year in which the dividend is declared, irrespective of the rate or rates at which tax was paid by the company on the profits and gains out of which the dividend is being paid. The procedure indicated by Rule 20 is, accordingly, an artificial device by means of which a shareholder's income from dividends of a joint stock company is protected from being treated as a new taxable income in his hands, but as a result of which the company, in shifting the burden on to the shoulders of the shareholder, may well recoup itself a larger sum than the revenue had received from it. As Lord Atkin pointed out in Cull v. Commissioners of Inland Revenue, the shareholder pays no tax, in the sense that the revenue receives nothing from the shareholder and receives no tax except what it has already received from the company. The shareholder, however, bears the burden of what the company has paid (and perhaps more), and has certainly paid tax by deduction within the meaning of Section 29 of the Income Tax Act, 1918. '

35. Lord Macmillan observes at page 256:

'The key to the problem is to be found in the fundamental distinction drawn in the income tax code between income arising from sources in this country and income arising from sources outside the United Kingdom. The income of a British taxpayer, so far as earned or received from sources within the United Kingdom, is dealt with in one way, and his income so far as received from sources abroad is dealt with in another way; and for the very good reason that sources of income in this country are subject to the jurisdiction of the Government of this country, which can enact laws and make regulations as to returns, accounts and investigations which it has no power to do in respect of sources of income outside the United Kingdom. So far as a British taxpayer has a source of income arising from possessions out of the United Kingdom, the revenue laws of this country have no operation on that source. It is only in so far as income from that foreign source is received by, or in some cases credited to, a resident within the United Kingdom that it comes within the purview of British taxation at all. The British revenue authorities have no means of analysing or investigating such income from foreign sources. All that they have power to ascertain from the British taxpayer is the amount of his income derived therefrom. Thus, in the case of income from stocks, shares or rents abroad, the tax is directed to be computed on the full amount thereof, and with that full amount alone are the British revenue authorities concerned. They have no power to pursue inquiries abroad as to the prior history or provenance of such income. 'The officers of the Crown do not know and do not care what is the character of the sources from which the money comes'--per Lord Phillimore in Bradbury v. English Sewing Cotton Co Ltd.

The topic has been darkened rather than illumined by a false analogy which it has been sought to draw with the case of the taxation of the income of United Kingdom companies and their shareholders. It is true, as Lord Phillimore points out in the case just cited ((1923) A.C. at page 769; 8 T.C., at pages 518-519), that in the system of taxation in this country a company and its shareholders are for economic reasons treated as if they constituted a partnership having a single income, the tax on which is paid by the company, the shareholders being thereby discharged of liability to tax (apart from sur-tax) on their dividends or shares of the company's income. The company recoups itself by deducting income tax from the dividends which it pays to its shareholders. The system is highly artificial, for the tax is deducted at the standard rate obtaining wben the dividends are paid, while the profits out of which the dividends are paid may have been earned in previous years and have borne lax at a higher or a lower rate, and a company does not usually distribute in dividends in any one year all the profits of that year on which it has paid tax. But this is a domestic expedient limited in its operation to this country. It has no application to foreign companies. A foreign company paying dividends to its shareholders within the United Kingdom is not subject to British revenue laws or practice. It cannot pay dividends to its United Kingdom shareholders under deduction of a tax of which it has no knowledge and to which it is not subject except in so far as it derives income from a source in this country. It pays its dividends to its United Kingdom shareholders either directly or through paying agents in this country and then leaves our domestic revenue laws to operate upon the money so transmitted.'

36. In the case of Cenlon Finance Co. Ltd. v. Ellwood, the facts were briefly as follows : Tableau Holdings Ltd. was incorporated in November, 1952, as a finance company--that is to say, a company which trades in stocks and shares. In the same month. Tableau Holdings acquired the whole of the issued capital of a company known as Henry White (Sutherland House Ltd.), which carried on business as ladies' outfitters. It had sold some of its free-hold property at Newcastle-under-Lyme and thereby realised a profit which was a capital profit and had not been assessed to income tax in its hands. The purchase consideration for the acquisition of its shares was the sum of 87,909. On the same day, Henry White distributed by way of dividend to Tableau Holdings, as its sole shareholder, a sum of 18,000 out of the capital profit on the sale of its premises. Being a capital profit not subject to tax, no tax was deducted by Henry White when making the distribution. Nearly a year later, on 20th October, 1953, Tableau Holdings sold the whole of the issued share capital in Henry White to Cenlon Finance Company Ltd. for the sum of 72,000. The operation was repeated, and on 2nd November, 1953, Henry White made another capital distribution, by way of dividend out of the profits on the sale of its premises to Cenlon of 25,000 again without deduction of tax. On the 4th December, 1953, Cenlon sold its entire holding of shares in Henry White for 27,500, Cenlon, like Tableau Holdings, was incorporated to carry on a business as a finance company or dealer in stocks and shares. In those circumstances, it was not doubted that each company was assessable under Case I of Schedule D for the profits that it made on transactions in investments and securities, and was entitled to deduct losses made in the course of such transactions. Thus it was not in dispute that each of the companies was entitled to bring into the computation of its total profits for the year the loss which it made on the sale of the shareholding in Henry White. The sole question was whether the dividends declared by Henry White and paid to Tableau Holdings and Cenlon respectively ought to be brought in as a credit in assessing the profits of the respective companies' trade. Viscount Simonds, in the House of Lords, observed at page 202 :

'My Lords, it is a familiar fact that the statutory provisions in regard to the payment of dividends by any body of persons (which expression includes a limited company) have from time to time caused difficulties and created anomalies. But first it must be observed that no other section is relied on for affording exemption from tax than Section 184 of the Act, and this section will be searched in vain for any least suggestion that, where a dividend has been paid by a company out of profits and gains which have not been assessed to tax, it is to be exempt in the hands of the shareholders. On the contrary, it does nothing more than require that the company shall be assessed to tax on the full amount of its profits and gains before any dividend is paid and entitles it, but no more, to deduct from the dividend tax at the standard rate for the year in which the amount payable becomes due.'

37. The noble Lord then proceeds to refer to the cases of Bradbury v. English Sewing Cotton Co. Ltd., Neumann v. Commissioners of Inland Revenue, Canadian Eagle Oil Company Ltd. v. King, [1945] 27 T.C. 205 (H.L.) and Selection Trust Ltd. v. Devitt, [1946] A.C. 199 ; 27 T.C. 205 (H.L.). and observes at page 203 :

'These cases establish that a dividend as such is not taxable in the hands of its recipient. So be it. But it is not a logical step from that to say that a sum paid out of untaxed profits and received by a trader in respect of his trade is to be excluded from the computation of his profits and gains. Nor is there any warranty for it in any speech in your Lordships' House that I have read, unless it be in a dictum made per incuriam in the speech of Lord Wright in Neumann's case.

I will add two more observations. First, it is true that the Selection Trust case, where the shareholder was a trader in stocks and shares, might have been shortly disposed of upon the grounds on which I would dismiss this appeal. But the case had been linked with the Canadian Eagle Oil Co. case which had been brought to this House to dispose of that long-standing sore in the administration of the revenue, Gilbertson v. Fergusson, [1881] 7 Q.B.D. 562, 1 T.C. 501 (C.A). That point having been determined in favour of the Crown, it was unnecessary to discuss any other question. Secondly, I would affirm what was said by Donovan L.J. (than whom no one has a wider knowledge of revenue law), about the treatment by a trading company of dividends from which tax has been deducted at the source. There is no doubt that the practice is, and, so far as I know, always has been, to include such dividends in the computation of profits taxable under Case I of Schedule D and to make an allowance or adjustment for the tax that has been paid. I agree with the learned Lord Justice in thinking that there is no specific provision of any statute which prescribes such an adjustment. It can only arise out of the recognition by the Crown that it is necessary in order to avoid double taxation of the same subject-matter. It is, in any case, no justification for exempting from taxation a dividend paid out of profits which have not borne tax.'

38. Lord Reid, in the course of his speech, observed at pages 204-205:

'There is not, in the Income Tax Act or anywhere else, any express general exemption of dividends from taxation in the hands of those who receive them. But the appellant founds on a series of decisions in this House which establish that no dividend received by a person who is not a trader can be taxed in his hands. The appellant maintains, and the Crown deny, that these decisions apply to the present case.

The difference between a case like the present and the case of a non-trader receiving a dividend is this. In the hands of a non-trader, a dividend would have to be treated as a separate item I it would not fall within any of the first five cases of Schedule D and would have to be assessed, if at all, under Case VI. In the case of a trader, it would not be treated as a separate item: like any other trading receipt, it would be taken into account in determining the balance of profits and gains assessable under Case I. The appellant maintains that this difference is immaterial: the Crown say it is all-important.

It is therefore necessary to see why dividends are not assessable in the hands of a non-trader. It is not because Case VI is not wide enough to catch them, and it is not because of any express statutory provision to that effect. The appellant says that it results from the provisions of Section 184 of the Income Tax Act, 1952, which can be traced back to Section 54 of the Income Tax Act, 1842. But that section and its predecessors do not even mention the shareholder who receives a dividend: they merely entitle the company paying a dividend out of profits to deduct tax in paying it, and they are silent about a dividend which is not paid out of profits charged to tax. It is, however, argued that, by reason of the decisions of this Mouse to which I have referred, the section must- now be treated as referring to all dividends and as exempting them from tax in the hands of shareholders who receive them. The short answer to thatappears to me to be that there is no mention of this section or its predecessors in any of the passages in the speeches in this House which are founded on by the appellant. No doubt a good deal has been read into various provisions of the income tax code from time to time, but I find it difficult to believe that anyone could ever have intended to attribute that meaning to these provisions.

To reach a solution of the present problem I find it necessary to start from the ordinary case of a dividend paid out of profits under deduction of tax. Why is the shareholder not taxed on what he receives? It is part of his income, or if he is a trader, it is a trading receipt. But it seems always to have been recognised that an individual does not pay income tax on it (I do not refer to surtax), and a trader does not include it as a trading receipt in determining his taxable profits. At one time it was thought that a company pays tax on behalf of or as agent for its shareholders, and, if that were so, the explanation would be obvious. But that idea has long been discarded. The fullest explanation is that given by Lord Phillimore in Bradbury v. English Sewing Cotton Co. Ltd., which was approved and amplified by Lord Toralia in Neumann v. Commissioners of Inland Revenue. These passages are too long to quote : they give an explanation of the rule as stated by Viscount Cave in Commissioners of Inland Revenue v. Blott:

'If a dividend is declared, the company is entitled to deduct from such dividend a proportionate part of the amount of the tax previously paid by the company; and in that case the payment by the company operates in relief of the shareholder.' Lord Philiimore said, in the passage to which I have referred :

'But the law is not founded upon the introduction of some equitable principle as modifying the statute; it is founded upon the provisions of the statute itself.' He does not say to which provision he refers ; he only says that the statute carries the matter further in entitling a shareholder with a small income to recover from the revenue part of the tax which the company deducted and retained when paying his dividend to him. In spite of the fact that Lord Philiimore denies the introduction of any equitable principle and that other judges well versed in income tax law have also denied any equitable principle, I am inclined to think that the rule cannot be fully explained without recourse to practice based on equity, or perhaps on the old theory that the company pays tax on behalf of the shareholders and not on any specific provision in any statute.

The matter becomes much more difficult when tax could not be, and is not, deducted by the company when paying the dividend; and I can find no satisfactory explanation of why an individual who receives such a dividend is not assessable in respect of it. It cannot, then, be said that, because the company has already paid tax on this money, it would be unjust if the shareholder had to pay again.'

39. Lord Denning spoke in these terms at pages 206-207 :

'If the Cenlon Finance Co. Ltd. had not been a dealer in stocks and shares but a butcher or baker or anything else, it would not have been chargeable with tax on this dividend for the simple reason that by a positive rule of law, to be found in judicial decisions and not in the statute, dividends as such are not liable to tax. The justice of this rule is obvious when the dividend is paid out of a fund which has already been brought into charge for tax. It is not so obvious when the dividend is what is called a 'capital' dividend, that is a dividend paid out of a capital profit which has not been brought into charge for tax. I should have thought that, in the ordinary way, any dividend on shares would be income in the bands of the recipient and it would have been chargeable under Case VI as an 'annual profit or gain', were it not for the positive rule of law which exempts it. But I see no reason why this positive rule of law should extend to a dealer in stocks and shares. He is chargeable with tax under Case I of Schedule D 'on the full amount of the profits or gains of the year'. The dividends which he receives are certainly part of his profits or gains. They are the very lifeblood of his trade. Take this very case. The Cenlon Finance Co. Ltd. bought shares for 72,000. Two weeks later it received a 'capital' dividend of 25,000. This, of course, lowered the value of the shares. One week later the company sold the shares for 27,500. Can anyone suppose that, in computing his profits or gains, he can bring in his loss on the resale of the shares and omit his profit from the dividends? It would not only give an entirely false picture of his trade, it would make a breach in the revenue law through which a regiment of share dealers would soon pass.

I would agree, of course, that if a share dealer receives a dividend which has been taxed at source--that is to say, ii it is paid out of a fund which has already been brought into charge to tax--he should not be taxed again on it. The tax bill against him should be adjusted, as Donovan L.J. said, on equitable grounds, so as to allow for the tax suffered at source, even though there is nothing in the statute about it. But, when a dividend has not been taxed at source--as, for instance, when it is a 'capital' dividend--I think it is part of his profits as a share dealer and it must be brought into his tax bill in full.'

40. In the case of F. S. Securities Ltd. v. Commissioners of Inland Revenue, the main question for consideration was whether the company was an investment company within the meaning of Section 257 of the Income Tax Act, 1952. The company was incorporated in August, 1954, and was at all material times under the control of not more than 5 persons. Its memorandum of association, provided, inter alia--that it might purchase, hold and deal in shares, etc. In December, 1954, and in March, 1955, the company purchased the entire share capital of three companies, each of which had substantial undistributed profits. On the 28th of March, 1955, all the three companies declared large dividends. The value of their shares decreased as a result and this decrease was reflected in the trading account of the company for the period from 1st September, 1954, to 31st March, 1955. The company claimed and was allowed relief under Section 341, Income Tax Act, 1952, in respect of a trading loss for that period on the basis that the dividend should be excluded in computing its profit or loss for tax purposes. On 22nd January, 1960, a direction under Section 245, Income Tax Act, 1952, was given in respect of the company's actual income from all sources for the above-mentioned period, on the footing that it was an investment company within the meaning of Section 257(2). On appeal, the direction was confirmed by the Special Commissioners. In the Court of Appeal and the House of Lords, the company contended that the dividends declared on 28th March, 1955, were trading receipts to be taken into account in arriving at its liability under Case I of Schedule D. The House of Lords upheld the decision of the Commissioners. Lord Reid, in the course of his speech at the House of Lords, observed at pages 691-692 :

'The question how dividends paid under deduction of tax fall to be treated for income-tax purposes has a long history. I dealt with that matter in my speech in the Cenlon case, but anything said in that case about dividends paid under deduction of tax was obiter because the question before this House related solely to dividends which had not borne tax, and I certainly did not have in mind any case like the present. So I have carefully reconsidered what I said in that case, but on reflection I see no reason to alter it. I said, at page 205:

'. . . .I find it necessary to start from the ordinary case of a dividend paid out of profits under deduction of tax. Why is the shareholder not taxed on what he receives? It is part of his income, or if he is a trader, it is a trading receipt. But, it seems always to have been recognised that an individual does not pay income-tax on it (I do not refer to sur-tax), and a trader does not include it as a trading receipt in determing his taxable profits.' But the view of Viscount Simonds and, to some extent, that of Lord Denning were different. In the ordinary case it would make no practical difference which view is right, but in this case if Viscount Simonds' view were right it would support the respondent's argument. He said, at page 203:

'. . . .I would affirm what was said by Donovan L.J. (than whom no one has a wider knowledge of revenue law), about the treatment by a trading company of dividends from which tax has been deducted at the source. There is no doubt that the practice is, and, so far as I know, always has been, to include such dividends in the computation of profits taxable under Case I of Schedule D, and to make an allowance or adjustment for the tax that has been paid.' I do not think that Donovan L.J. went quite so far as that, because he does not state what the practice was; he only said, at page 198:

'These also, in my view, would fall to be included in a computation of profits taxable under Case I of Schedule D, with an adjustment of the tax bill which allows for that suffered at source.' It is now agreed by counsel for both parties that there never was such a practice as that to which Viscount Simonds refers. At one time there was a somewhat similar practice with regard to claims based on losses, but as regards the ordinary profit and loss account to show the profits or gains chargeable under Schedule D, Case I, it was always the practice before the Cenlon case for a trader to leave out of the account those trading receipts which consisted of dividends received by him after deduction of tax. The respondent now says that the practice has always been wrong. In my opinion, it was right.

Neither view can be derived directly from any provisions of the Income Tax Act. If the words of the Act were applied literally the result would be double taxation of the same income, but it has been said again and again that the Act cannot be so read as to authorise that.'

41. Viscount Radcliffe observed at page 696 :

'Dividends are sometimes spoken of as being exempt from assessment to income-tax or as if they were somehow entitled to special protection under the tax system. There are, too, rather mysterious statements to the effect that they are not taxable 'as such'. This is quite misleading and tends to create the idea that there is a special mystique about the taxation of dividends, an idea that in at least one respect has led to unfortunate consequences. In my opinion, there is by now really no room for doubt that dividends, for income tax as well as sur-tax, are just as much a taxable subject as any other form of income, or for doubting that, for the purposes of income-tax as distinct from surtax, when they are distributed by a limited company out of a fund of profit that has been taxed in its hands, the proportionate shares of the taxed fund so distributed are not liable to taxation again in the hands of the recipients. The operation of transferring the residue of the taxed fund from the company's hands to the hands of the owners no more creates a fresh accrual of income than does the operation of a trustee paying over to his beneficiary the net amount of the trust income that has borne tax in his hands. Dividends which represent the distribution of a taxed fund are therefore 'franked' income so far as concerns any further taxation at the standard rate, that is the rate at which deduction has been made; while, for the purposes of administering relief against tax at standard rate and of assessing to surtax, it is proper to treat the net sum received as grossed up in the way that the statute (Income Tax Act, 1952, Section 184) requires. This account of the status of dividends in the tax system is in line with the analysis offered by Lord Phillimore in Bradbury v. English Sewing Cotton Co. Ltd.1 where he points out that the Income Tax Act, 1842, the basic instrument of our income-tax code, treated a joint stock company as if it were 'a' large partnership, so that the payment of income-tax by a company would discharge the quasi-partners.'

In my opinion, this analysis is now accepted as being correct; and it remains essential to the application of the whole system, even though the connection between any particular fund of profits and a dividend paid has now become in effect untraceable, and the rule that the company recoups itself at the standard rate of tax that is current at the date of payment means that the company and the shareholder do not necessarily equate their respective positions as completely as the theory of the matter would require.'

42. These decisions are not directly concerned, as they cannot possibly be with the question involved in the present case. These decisions, and particularly the observations, which were relied upon from the Bar and which we have noted, throw, however, a good deal of light on the system of taxation and the principles governing the same in U.K. and they explain the position of dividend income in U.K. and the nature and character under the English law of taxation of the sums deducted then from under Section 184 of the English Income Tax Act, 1952. It may be noted that though many of these decisions are not concerned with the provisions of the 1952 Act and deal with the provisions of earlier statutes, there have been no substantial and fundamental changes in the basic principles and the material provisions.

43. It is true that in the English statute there is no provision corresponding to Section 18(5) of the Indian Income-tax Act, 1922, which specificallyprovides that amounts deducted from dividend income of a member will constitute payment of income-tax by the member. It is also true that, unlike the position in India, the amounts so deducted are not made over to the revenue authority in U.K. and are retained by the company. It is equally true that the incomes from dividends in the hands of the shareholders are not liable to payment of any income-tax when such dividends have been declared and paid out of profits which have been taxed in the hands of the company. Notwithstanding, however, these peculiar features, the sums deducted from the dividend amounts, payable to a member, constitute under the law and system of taxation in U.K. payment of income-tax by deduction by the member and are treated and recognised as such. The provisions of the statute and the judicial decisions, in our opinion, make the position quite clear. It is to be noted that the authority to deduct from the dividend amount payable to any member is conferred by the taxing statute and no other statute. Section 184 of the English Income Tax Act, 1952, empowers the company 'to deduct tax at the standard rate ' from the dividend payable to its members. The English Income Tax Act, which makes all necessary provisions relating to taxation, itself provides that the company is entitled to deduct tax at the standard rate from the dividend amounts to be paid out of its profits after taxation. The section, therefore, specifically provides for deduction of tax from the dividend income of the shareholders, and from the viewpoint of shareholders, the sums so deducted from their dividend income, must necessarily constitute payment of income-tax by deduction on their dividend income. Section 199 of the English Act of 1952, which deals with 'Explanations of income tax deductions to be annexed to dividend warrants, etc.,' refers to such deduction specifically as 'deduction of income tax'. Again in Section 493 of the present English Act of 1952, deduction under Section 184 from the dividend income is categorically described as deduction of income-tax. The further and other provisions of the English tax law, which entitle a shareholder to claim relief in respect of the sums so deducted from the dividend income under Section 184, and even refund of the sums so deducted, if any particular member happens to be entitled to any such refund, clearly indicate, in our opinion, that the sums so deducted from the dividend income of any shareholders, constitute payment of income-tax by him and are treated and recognised as payment of income-tax by deduction under the law prevailing in U.K. Unless, under the law of U.K., these sums so deducted from the dividend income of any member constitute payment of income-tax by him on his dividend income and are recognised and treated as such under the system of taxation in U.K., there can be no question of granting any relief in respect of such payment and, in any event, of granting any refund or making any repayment by the revenue authority to any such member under any circumstances, particularly when the sums, so deducted by the company under Section 184, do not fill the coffers of the revenue.

44. In spite of the fact that there is no express statutory provisions in the English Act corresponding to Section 18(5) of the Indian Act of 1922, the English Income Tax Act, in our opinion, contemplates and postulates that the sums deducted from the dividend income of any member under Section 184 shall constitute payment of income-tax by deduction by the member on the dividend income. This position is made clearer still by judicial pronouncements. The decisions, to which we have earlier referred and the observations which we have already quoted, go to show, in our opinion, that the dividend income in U.K. enjoys a peculiar position in the sphere of taxation. When paid by a company out of its profits which have already been taxed in the hands of the company which in law is liable to assessment and to pay income-tax on its gains and profits, the dividend is not considered to be a separate income in the hands of the members for the purpose of any further charge to income-tax in their hands. The revenue authority after having received the tax from the company on its profits does not concern itself any longer as to what the company does with its profits and in the event of the company choosing to distribute the surplus profits or any part thereof after taxation amongst its members by way of dividend, the revenue is no longer interested in the said dividend which is regarded as 'franked by the payment by the company of income tax on its profits or gains' (to quote the words of Lord Macmillan in the case of Inland Revenue Commissioners v. Cull). When the company exercises the authority conferred on it by Section 184 and deducts tax from the dividend payable to its member, the tax, so deducted from the dividend income of the member by the company under the statutory authority, is considered to be payment of income-tax by deduction by the member and treated and recognised as such by the revenue under the law and system of taxation prevailing in U.K. and it is essentially on this basis that relief and refund inappropriate cases by the revenue .authority are given to the members in respect of the sums deducted as tax by the company from such dividend income, notwithstanding the fact that the sums deducted by the company are not made over to the revenue and are retained by the company itself. The observations of the learned law Lords in the decisions which we have already noted may not all be in accord as to the basis on which dividend paid by a company out of its tax profits is considered to be franked and not liable to further charge of income-tax in the hands of the members. The said decisions, however, make it clear that whenever tax is deducted by the company from the dividend amount payable to amember under Section 184, the sum, so deducted as tax, clearly constitutes payment of income-tax by deduction by the member. The following observations of Lord Russell of Killowen in the case of Canadian Eagle Oil Co. Ltd. v. King are very clear with a direct bearing on this question.

'The shareholder, however, bears the burden of what the company has paid (and perhaps more), and has certainly paid tax by deduction within the meaning of Section 29 of the Income Tax Act, 1918.'

45. The decision in the case of Ritson v. Philips, on which particular reliance was placed by the learned counsel for revenue, supports, in our opinion, the view that we take. It is to be noted that in this particular case the assessee had claimed relief and refund in respect of the sums deducted from the dividend income of the assessee by the various companies declaring and paying the dividend and the claim of the assessee could only have been based on the footing that the tax deducted from his dividend income constituted payment of income-tax by the assessee of a sum which was far in excess of his liability. Apart from the question as to what should be considered to be the basis and quantum of the refund to which the assessee should be entitled, there was no question, as there could not be any, as to the assessee's right to claim a refund on the footing that the sum deducted from his dividend income as tax by the company under Section 184 was payment by the assessee of income-tax by deduction in respect of his dividend income. The chart mentioned in the case at page 10 of the report, indicating the gross amount of dividend and the amounts of tax deducted therefrom, clearly mentions such deductions as 'income-tax deducted therefrom'. Entitlement to relief and refund in respect of the sum deducted from the dividend income could only proceed on the basis that the sums, so deducted from dividend income of the assessee, constituted payment of income-tax by the assessee. Under the law of taxation prevailing in U.K., income-tax is either paid directly by assessment or by deduction at the source. The tax deducted by the company from the dividend income paid to its members out of the company's taxed profits, is treated and recognised under the law in U.K. as payment by deduction at source of income-tax by the member in respect of the dividend income, notwithstanding the peculiar position of the dividend income of the company under the law of taxation in U.K.

46. The following passages in Simon's famous treatise on Income Tax, in our opinion, also establish that the sums, so deducted from the dividend income, constitute payment of income tax by the member by deduction and clearly support the view we are taking In Simon's Income Tax, 2nd edition, volume I, at page 203, Article 307, under the heading ' Deduction of tax at source', the learned author states :

'It is a general principle of the Income Tax Acts that as far as possible tax is charged at the point where the income first emerges from the source; and this is so even if the person primarily in receipt of the income does not ultimately enjoy it but pays it over or accounts for it to another who is the person beneficially entitled to it. In such cases the person assessed has the right to recoup himself, when making a payment of income to the, person entitled thereto, by deducting the tax appropriate to that income, or by crediting himself with the amount when accounting. The following classes of income are taxed at source :--

(i) Rents under short leases.........

(x) Dividends paid by a body of persons, which includes joint stock companies.'

47. In Article 309, at page 206 of the same volume, under the heading 'Deletion of tax at the standard rate', the learned author comments;

'Under Section 184 a company when paying a dividend is 'entitled to deduct the tax at the standard rate for the year in which the amount payable becomes due'.

The date when a dividend becomes due is that fixed for payment by the company when the dividend is declared, or, if no date is so fixed, the date of declaration of the dividend. In practice the date on the dividend warrant is taken to be the date when the dividend was due, and therefore became income of the person entitled to the dividend. Under Section 524(3) of I.T.A., 1952, the income from which tax is deducted at the standard rate in force for any year is to be treated as income of the same year of assessment in the hands of the recipient. From the shareholder's point of view, the dividend, having suffered tax at the standard rate by deduction, forms part of his taxed income of the year of assessment in which the date of the dividend voucher falls, and relief, or repayment, of the tax deducted may be claimed in respect of any personal or other allowances due.'

48. In Article 26, at pages 17-18 of the same volume, the learned author, under the heading 'Direct assessment and deduction at source', states :

'The normal method of charging tax is by direct assessment. The amount of the income upon which tax is chargeable depends on an assessment, made by the proper authority, according to the source of income involved. In the case of the annual value under Schedule A, and the assessable value under Schedule B, the assessments are prepared by the Inspector, and signed by the Additional Commissioners for the division in which the property is situated. Unless there have been changes in the property, assessments are quinquennial, though there has been no revaluation since 1936-37, the revaluation for 1941-42 having been postponed chiefly by reason of the war. Income under Schedule C is assessed by the appropriate Commissioner. Assessments under Schedule D are normally prepared by the Inspector, and signed by the Additional Commissioners for the division in which the trade, etc., is carried on or the taxpayer resides; but the taxpayer may elect to be assessed by the Special Commissioners. Income within Schedule K is assessed by the Inspector.

The other method of charging tax is that of deduction at source. In certain cases of interest, annual payments, annuities and royalties tax may (or must) be deducted by the payer when the income is paid to the recipient. These are payments of such a nature that the sums in question are not to be regarded as part of the income of the payer at all, but rather as charges on his income. The payer having borne tax obtains his relief and at the same time discharges his liability by paying to the recipient the sum due, less tax; and the recipient may be regarded as having received the full sum and paid tax thereon.

Example:--

A is liable to pay 100 per annum to B by way of interest on a loan. A pays tax at the standard rate. In paying the interest A deducts therefrom tax at 9s. 6d. in the . Tax deducted, 47 10s. Sum paid to B, 52 10s. He has already paid tax at the standard rate on the 100, namely, 47 1 Os., so be has in effect paid out either to B or to the Revenue the whole 100. On the other hand B has only received 52 10s. in cash, but as he is deemed to have paid tax on this, he is in the same position as if he had received 100 in cash, and had paid 47 10s. in tax on a direct assessment. Where the payer is not liable to pay tax at the standard rate on his income sufficient to cover the interest, his reliefs have to be restricted so that he bears tax at the standard rate on an amount of income equal to the interest. A recipient of interest who is not liable to tax at the standard rate can claim repayment of part or all of the tax which he has suffered by deduction.

Similar provisions apply to dividends paid by companies whose profits have already been taxed; the company may deduct tax from the dividend.'

49. In this connection, the following passages in the well-known book, The Principles of Income Taxation Deduced from the Cases by J. P. Hannan and A. Farnsworth, may also be usefully noted. In Chapter 6, which deals with 'Dividends and bonus shares', the following passage appears at page 60 under the head 'General principles' ;

'The British Income Tax Code is the only system of income taxation which does not levy a direct tax upon a shareholder in respect of dividends received by him, though in normal circumstances dividends fall to be included in the return of total income from all sources that is required for the purposes of a claim for allowances and for sur-tax. The reasons for this anomalous course are considered in the succeeding section and are peculiar to our unique system of ' taxation at the source'; this treatment, however, applies only in the case of dividends paid by British companies.'

50. At pages 69-70 of the said book it is further stated under the head 'Dividends payable by British companies ':

'The question whether a dividend payable by a British company can be regarded as income in the hands of the recipient cannot be determined by the general principles enunciated in the previous section because of the application of the system of 'taxation at the source' to such dividends. This system can, on occasion, result in a dividend, which would be regarded as 'income' according to such principles, not coming within the ambit of the Income Tax Acts.

'Taxation at the source' is applied to dividends of British companies by Rule 20 of the General Rules applicable to all Schedules, Income Tax Act, 1918, which reads as follows :

' The profits or gains to be charged on any body of persons shall be computed in accordance with the provisions of this Act on the full amount of the same before any dividend thereof is made in respect of any share, right or title thereto, and the body of persons paying such dividend shall be entitled to deduct the tax appropriate thereto.' Section 237 of the Income Tax Act, 1918, defines a ' body of persons ' as including '.....any company.....or society of persons whethercorporate or incorporate'.

As a result of these provisions a person cannot be directly assessed to income tax in respect of dividends of British companies but is liable to suffer deduction of tax at the source thereon.'

51. We, therefore, hold that the sum in question deducted from the dividend income of the assessee constitutes payment of income-tax by deduction by the assessee on the assessee's dividend income in U. K. under the law prevailing in U. K. We are, therefore, satisfied in the instant case that the requirements of Section 49D(1) which entitle the assessee to claim the necessary relief are satisfied. It is to be noted that Section 49D(1) speaks in express terms of payment of 'Income-tax by deduction or otherwise under the law in force, in that country'.

52. The further question that remains to be considered is whether the requirement of Explanation (iii) is satisfied to enable the assessee to get necessary relief. As we have already observed, mere entitlement to relief by fulfilling the necessary conditions laid down in Section 49D(1) is not by itself sufficient for obtaining necessary relief under Section 49D and relief under Section 49D cannot be granted unless the rate of tax of the country in which such income-tax has been paid is ascertained, as providedin the said Explanation. The said Explanation (iii), as we have earlier observed, provides for ascertainment of the rate of tax of the country in which tax is paid for computation of the basis and quantum of relief to be granted. In the facts of the instant case there is no difficulty in ascertaining the rate of income-tax in U. K. for granting necessary relief to the assessee in terms of the provisions contained in Explanation (iii). The assessee being a company is not liable to pay any sur-tax in U. K. under the laws of U. K. and the assessee as a company is also not entitled to any relief in respect of the tax paid by it. The assessee has paid tax at the standard rate and in the instant case, therefore, there is no difficulty in applying the provisions of the said Explanation (iii) and ascertaining the rate of tax of the said country in accordance therewith. Whether the requirement of the Explanation is satisfied in any given case will necessarily depend on the facts and circumstances of each particular case. It is, however, essential that the said requirement must be complied with and the rate of tax of the said country must be determined by applying the provisions of the said Explanation. In the facts of the instant case, the assessee, which happens to be a company, is neither liable to any sur-tax nor entitled to any relief as the rate of tax is easily determined in terms of the provisions contained in the Explanation. As, in our view, all the requirements for granting necessary relief to the assessee in the instant case are fulfilled, we do not propose to detain ourselves over the question of interpretation of the said section and also over the interpretation put by the Tribunal on the word 'assessed' in Explanation (iii). We, however, wish to observe that if the Tribunal had sought to put a wide or liberal or a general interpretation on the word 'assessed' in the said Explanation, we must not be understood to have approved of the same. In the view that we have taken, it does not become necessary for us to consider the submission on the question of construction of this particular section and to deal with the cases cited from the Bar. To us, however, it appears that Section 49D which has been enacted for the purpose of granting relief to an assessee should be so construed as will serve the object and purpose of the said section and the said section should be construed liberally in favour of an assessee and necessary relief should be granted whenever the requisite conditions are fully satisfied. It is to be noted that in the decision of the Supreme Court in the case of Commissioner of Income-fax v. Raja Benoy Kumar Sahas Roy the Supreme Court has referred to the other decisions which take a similar view without any disapproval and the Supreme Court has made no mention of the decision of the Orissa High Court.

53. The question is, therefore, answred in the affirmative, in favour of the assessee. The applicant will pay the costs to the respondent-assessee.

Sankar Pkasad Mitra, J.

54. I agree.


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