R. N. Pyne, J. - In this reference under Section 66(1) of the Indian Income-tax Act, 1922 we are concerned with two assessment years i.e. 1953-54 and 1954-55, the respective relevant previous years of which were 2009 Diwali (30-10-51 to 18-10-1952) and year ended 31-3-1953 for dividend, and 2010 Diwali (19-10-1952 to 16-11-1953) and year ended 30-3-54 for dividend. During relevant previous years the assessee held shares in three companies, namely, Dhanlakshmi Trading Corporation Private Ltd., Bhagat Land Development Private Ltd. and Shri Gouri Shankar Jute Mills Private Ltd. Undisputedly these were companies where public were not substantially interested within the meaning of Section 23-A of the Indian Income tax Act. 1922 (as it stood prior to its amendment in 1955). In course of the assessment proceedings the Income-tax Officer H.C.E.P.T., District I, Calcutta received intimation of the assessees share of dividend from the Income-tax Officer assessing the aforesaid companies consequent to the application of Section 23-A to the companies as the shares in question were registered in the name of Bansidhar Durgadutt according to the Register of the said companies. Since the assessee was of that name, the deemed dividends were assessed in its hand. Accordingly, the assessments in the instant case were computed under Section 23(3) of the 1922 Act on the total income of Rs. 3,33,227 and Rs. 6,71,109/-. The figures of deemed dividend included in the assessment years are as follows :
Assessment years :
Name of the Company
(a) Dhanlakshmi Trading Corporation Private Ltd.
Rs. 37,705 /-
(b) Bhagat Land Development Company Private Ltd.
(c) Shree Gouri Shankar Jute Mills Private Ltd.
Tax Credit .....
2. In the appeals before the Appellate Assistant Commissioner grounds were taken for the first time challenging the legality of the inclusion of deemed dividend in the hands of the assessee. As no objection was raised before the Income-tax Officer the Appellate Assistant Commissioner did not permit the assessee to agitate the said point inasmuch as as according to him it was too late to urge for the said point. The Appellate Assistant Commissioner however upheld the inclusion of the deemed dividends. It may, however, be noted here that the Appellate Assistant Commissioner however wrongly mentioned Dhanlakshmi Trading Co. Ltd. in the place of Shri Gouri Shankar Jute Mills in his order in respect of the assessment year 1954-55.
3. Against the said order of the Appellate Assistant Commissioner the assessee preferred a second appeal before the Income-tax Appellate Tribunal. Before the Tribunal the assessee contended that the inclusion of the deemed dividends in the assessment of the firm which was not a person in the eye of law was not in order. It was further contended the assessee was a firm and, therefore, could of them held the name of Bansidhar Durgadutt. On behalf of the assessee reliance was placed on some of the provisions of different courts.
4. There was however a difference of opinion between the Judicial Member and the Accountant Member of the Tribunal over the issue. The Judicial Member was of the opinion that the addition made in the hands of the assessee of the deemed dividend were amply justified. He, therefore, upheld the addition of the deemed dividend in the assessment of the assessee. It was observed by the Judicial Member as follows :-
'Income-tax Act, being generally concerned with the beneficial ownership of income, we must, therefore, look to the beneficial ownership and not to the real ownership. Even if the shares be in the name of some one else, but if the benefit is derived wholly by the assessee, it is the assessee to whose income the benefit must be added. In such view of the matter we are of the view that even if the shareholders, as registered in the companys register, be not the assessee itself since it has had the benefits of the usufruct from those shares such benefit must be assessed in the hands of the beneficiary. We are, therefore, of the view that the additions made of the deemed dividend income are amply justified.'
On the other hand the Accountant Member found ample force in the assessees contentions and referring to the decision of the Calcutta High Court in Hindustan Investment Corporation Ltd. vs . Comm. of Income-tax : 27ITR202(Cal) deleted the addition of the deemed dividend income from the assessment in the hands of the assessee The Accountant Member observed :
'I am therefore, unable to agree with the learned Judicial Member that although the appellant firm could not be a shareholder in the companies concerned, it could still be assessed in respect of the deemed dividends declared under Section 23-A because the firm had been a beneficial owner of the shares. Since the firm could not have been the lawful owner of the shares in question the notional dividends under Section 23-A cannot be assesses in the hands of the firm in view of the clear decision of the Supreme Court cited above, and as such the addition of the deemed dividends amounting to Rs. 68,082 and Rs. 1,13,048 in the assessments for 1953-54 and 1954-55 cannot be sustained in law.'
5. In view of the difference of the members of the Tribunal stated above the matter was referred under Section 5-! (7) of the Indian Income-tax Act, 1922 to a third member. The President of the Tribunal as the Third Member passed an order agreeing with the decision of the Judicial Member observed that :
'As regards the argument based on Section 30 of the Companies Act, 1913, the extracts given from Lindley and Buckleys books would not appear to be sufficient answers. I also find the following in the Palmers Company Law, 2oth Edition, page 446, under the heading Registration of Partnership Firm :
'A firm can be registered in England under its partnership name although it is not a legal entity. That a Scottish partnership which is regarded as a legal entity can be registered under its firm name, is not remarkable.'
It is, therefore, clear that a firm can be registered in India also under its partnership name, although it may not be a legal entity for all purposes. In fact, even a person who applies for and is allotted shares under an alias is estopped from disputing his liability as a shareholder. Thus even fictitious names are recognised once they are registered.
6. There remains only the argument based on Section 25(4) of the 1956 Act. The section is concerned to recognise certain associations as companies, and permits them to dispense with the word limited in their names. The provision in Section 25(4) of the aforesaid 1956 Act was not there in Section 26 of the 1913 Act. We are concerned in the present case with the 1913 Act but need not be the only grounds for rejecting the contention advanced for the assessee. The section is dealing with associations and a member of the association may well be a partnership or firm. The question here is not merely of registration of members by company. The question is one of granting a licence by the Central Government recognising the association as a company without the use of the word limited. In the registration of members a company may refuse a firm, but once the firm is registered there is no question of illegality. In the question that arises under Section 26 of the 1913 Act or Section 25 of the 1956 Act, the Central Government has to consider the question of giving a licence to an association, and the right conferred on the association by the said Section is made more specific by the law by providing that the right is not taken away by the fact that one of the members of the association is a firm. The Central Government cannot refuse on a ground which is open to the Company in registration of members. It appears to me, therefore, that Section 25 of the 1956 Act does not furnish (sic) cannot be a member of the company.
7. In the above circumstances and in view of the majority judgment the Tribunal disallowed the assessees appeal. Therefore on the application of the assessee, the following question of law said to arise out of the Tribunals aforesaid order has been referred for consideration of this Court.
'Whether on the facts and in the circumstances, of the case, the Tribunal was right in holding that the dividends deemed to have been declared in respect of the shares registered in the name of Bansidhar Durgadutt in the cases of M/s. Dhanlaxmi Trading Corporation Private Ltd., M/s. Bhagat Land Developing Co. Private Ltd. and M/s. Shree Gouri Shankar Jute Mills Pvt. Ltd. and consequent to order passed in the cases of the said companies provisions of section 23 of the Indian Income-tax Act, 1922 (as it stood prior to its amendment in 1955) as the case may be, were assessable in the hands of the assessee'
8. It is necessary now to read the relevant portion of Section 23-A as it stood prior to its amendment by the Finance Act, 1955.
'23-A. Power to assess individual members of certain companies :
(1) Where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company up to the end of the sixth months after its accounts for that previous year are laid before the company in general meeting are less than sixty per cent of the assessable income of the company of that previous year, as reduced by the amount of income-tax and super tax payable by the company in respect thereof he shall, unless he us satisfied that having regards to lossed incurred by the company in earlier years or to the smallness of the profit made, the payment of a dividend or a larger dividend than that declared would be unreasonable, make with the previous approval of the Inspecting Assistant Commissioner an order in writing that the undistributed portion of the assessable income of the company of the previous year as computed for income-tax purposes and reduced by the amount of income-tax payable by the company in respect thereof shall be deemed to have been distributed as dividends amongst the shareholders at the date of the general meeting aforesaid, and thereupon the proportionate share thereof each shareholders shall be included in the total income of such shareholders for the purpose of assessing his total income'.
'Provided further that this sub-section shall not apply to any company in which the public are substantially interested or to a subsidiary company of such a company if the whole of the share capital of such subsidiary company is held by the parent company or by the nominees thereof.'
9. Counsel for the assessee has contended that only a person can be a member of a company. As the assessee is not a person but a firm it cannot be a member or shareholder of a company. Therefore, according to the counsel the assessee not being a person cannot be the legal owner of the shares in the three companies registered in the firm name and hence, the assessee cannot be made liable for the deemed dividend under Section 23-A of the Indian Income-tax Act, 1922 as it stood at the relevant time. He has stated that only under Section 25 of the Companies Act, 1956 a firm can be a shareholder of a company formed only with object specified in the section which, however, is not be case here. Learned counsel has further contended that as a firm cannot, in law, be a shareholder of a limited company the registration of share in the name of any firm is wholly void and should be treated as not est. It is the contention of the learned counsel that firm name denoted several persons and when shares are registered in the named of a firm it is really the partners, and not the firm, who are really the shareholders of the company and therefore, assessment under Section 23-A in the instant case should have been made on the individual partners of the assessee as shareholders of the company and not the assessee firm. Learned counsel has submitted that Sec 23-A speaks of shareholder and as the assessee Bansidhar Durgadutt being a firm cannot be the shareholders of the three companies, no order under Section 23-A could be made against it. In support of his above contentious learned counsel has relied on the provisions of the Indian Companies Act, 1913, and Companies Act 1956 and a passage in Halsburys Laws of England (3rd Edn.) Vol. 6, Art. 227 at p. 109. He has also relied on various cases, to cite, Dulichand Laxminarayan vs . Comm. of Income-tax Nagpur : 29ITR535(SC) ; Comm. of Income-tax Bombay City II, Bombay vs . Jadavji Narsidas and Co. : 48ITR41(SC) ; S. Meikole Udayar vs. S. P. Periasami Konar AIR 1967 Mad 449; Kishan Chand Lunidasing Bajai vs . Comm. of Income-tax, Bangalore : 60ITR500(SC) ; Commissioner of Income-tax, Bombay City 11 vs . Shakuntala : 43ITR352(SC) ; Comm. of Income-tax, West Bengal vs . A. W. Figgies and Company, : 24ITR405(SC) ; Comm. of Income-tax, Andhra Pradesh vs. C. P. Sarathy Mudaliar (1972) ITR 170; Y. Narayana Chetti vs . Income-tax Officer Nellore : 35ITR388(SC) .
10. Counsel for the revenue has submitted that in the instant case in view of the question referred by the Tribunal, there could be no question raising the issue that the registration of the shares in the name of the assessee was void or voidable in law and, therefore, on that ground the deemed dividends were not assessable. Learned counsel has further submitted that under 1922 Act the firm is an assessable entity and so are its partners. It is his contention that if the firm is registered in the books of the company as holder of the share that really concludes the matter because under Section 23-A we are only concerned with the question who are the shareholder in Section 23-A means only a registered shareholder. He has further submitted that if share of a company are registered shareholder. He has further submitted that if shares of a company are registered in the name of a firm that does not mean that it is void or non est but in such a case the partners are beneficially entitled to such shares. It is the contention of the learned counsel that for the purpose of taxation it is not necessary to see the sources of income. According to the learned counsel even if the income is tainted with illegality still nonetheless it is the income the hand of the assessee under the Act and the assessee is liable to be assessed in respect thereof. According to the learned counsel as in the instant case the assessee firm is the registered holder of the shares in question of the three difference companies it is liable to be assessed under Section 23-A of the Act. In support of his contentions learned has relied on; Kanga and Palkivalas The Law and Practice of Income-tax (6th Edition) Vol. I, p. 88; Sardar Baldev Singh vs . Comm. of Income-tax, Delhi and Ajmer, : 40ITR605(SC) - Mann vs. Nash (H.M. Inspector of Taxes), 16 Tax Cas 523 : (1932) 1 KB 752; Howrah Trading Co. Ltd. vs . Comm. of Income-tax, Central Calcutta : 36ITR215(SC) , Comm. of Income-tax Bombay City II vs . Shakuntala : 43ITR352(SC) and Sharma and Company, Generalganj, Kanpur vs . Comm. of Income-tax, U.P. Lucknow : 57ITR372(All) .
11. The provisions of the Indian Companies Act, 1913 relied upon by the assessee noted earlier may be reproduced here Section 30 of the Indian Companies Act, 1913 provides as follows :
'30. (1) The subscribers of the memorandum of a company shall be deemed to have agreed to become members of the company, and on its registration shall be entered as members in its register of members.
(2) Every other person who agrees to become a member of a company, and whose name is entered in its register of members, shall be a member of the company.
It may be noted that corresponding provision in the Companies Act, 1956 is Section 41.
12. Before proceeding any further we propose to deal with the cases cited at the Bar.
13. The proposition that a firm is not a person is now well-settled and for this no authority is needed. Therefore, it is not necessary to deal with the various decisions cited at the Bar in support of that proposition.
14. In the case of Comm. of Income-tax, West Bengal vs . A. W. Figgies & Co. : 24ITR405(SC) it was held that the partners of the firm are distinct assessable entitles, while the firm as such is a separate and distinct entity for the purpose of assessment.
15. In the case of Comm. Income-tax vs . Shakuntala : 43ITR352(SC) , the fact was that a Hindu undivided family which was the beneficiary of certain shares in a company in which public were not substantially interested held those shares in the names of different members of the family. The Income-tax Officer applied the provisions of Section 23-A of the Indian Income-tax Act, 1922 (before amendment in 1955) and passed an order that the undistributed portion of the distributable income of the company should be deemed to be distributed and the amount appropriated to the shares of the family were sought to be calculated in the income of the family. It was held by the Supreme Court that the word shareholder in Section 23-A of the Income-tax Act, 1922 meant the shareholders registered in the books of the company. The amount appropriate to the share had to be included in the incomes of the members of the family in whose names the shares stood in the register of the Company; and as the Hindu undivided family was not a registered shareholder of the company, the amount could not be assessed as the income of the family under Section 23-A. The Supreme Court observed :
'Similarly, we see to reason why the expression shareholder in Section 23-A should not have the same meaning, namely, a shareholder registered in the books of the company. Is would be anomalous if the expression shareholders has one meaning in Section 18(5) and a different meaning in Section 23-A of the Act : for that would mean that a Hindu undivided family as a shareholder for the purposes of Section 23-A would not be entitled to the benefit of Section 18(5) of the Act.
The section does not talk of the beneficial owner of the share. It talks of the shareholder only. Section 18(5) of the Act deals with grossing up of dividend and two expressions occur therein : owner of the security in concerned it may perhaps include a beneficial owner; but it has been decided by this court that the expression shareholder in Section 18 (5) means the shareholder registered in the books of the company. As we have earlier said, no good reason exists as to why the expression shareholder in Section 23-A shall not have the same meaning. Sub-section (3) and (4) of Section 23-A also make the position clear; they of members of the company and a Hindu undivided family as such is not a member of the company.'
16. In the case of Comm. of Income-tax Andhra Pradesh vs. C. P. Sarathy Mudaliar, 1972 Tax LR 1006 the fact was that members of a Hindu undivided family acquired shares in company with the funds of the family. Loans were granted to the Hindu undivided family and the question was whether the loans would be treated as dividend income of the family within Section 2 (6-A) (e) of the Income-tax, Act 1922. It was held that only loans advanced to the shareholders could be deemed to be dividends under Section 2 (6-A) (e). The Hindu undivided family, could not be considered to be a shareholder under Section 2 (6-A) (e) and hence the loans given to the Hindu undivided family could not be considered as loans advanced to a shareholders of the company and could not therefore, he deemed to be its income. Relying upon its earlier decisions in Howrah Trading Co. vs. Comm. of Income-tax (AIR 1959 SC 775) and Comm. of Income-tax vs. Shakuntala (AIR 1966 SC 710) the Supreme Court observed that 'From the above decisions it is clear that when the Act speaks of the shareholder, it refers to the registered shareholder.
17. In the case of Howrah Trading Co. Ltd. vs. Comm. of Income-tax, Central Calcutta (AIR 1959 SC 775), the Supreme was considering Sections 16 (2), 18 (5) and 49-B of the Indian Income-tax Act, 1922. In that case the assessee had received sums of Rs. 3,831, Rs. 6,606, Rs. 7,954, and Rs. 8,304 in the assessment years 1944-45, 1945-46, 1946-47 and 1947-48 respectively as income from dividends. The share in respect of which this dividend income was received were the property of the assessee but in the books of the various companies these stood in the names of other persons. It appears that these shares were purchased by the assessee from other persons under a blank transfer but the transfers had not been registered with the various companies. The assessees claim in these income-tax proceedings was that these shares although not registered in the name of the assessee were the property of the assessee. It was further claimed that this dividend income should be grossed up under Section 16(2) and credit for the tax deducted should be allowed to the assessee under Section 18(5). The question which arose in that case was whether by reason of Sections 16(2) and 18(5) of the 1922 Act the assessee was entitled to the benefit of grossing up of dividends. It was held that words of Section 18(5) must accordingly be read in the light in which the word shareholder has been used in the subsequent sections, and read in that manner, an assessee, who holds a share in a company under a blank transfer but whose name is not entered in the register of members of the company, is not entitled to be regarded as a shareholder for the purpose of Section 18(5) of the Act. That benefit can only go to the person who, both in law and in equity, is to be regarded as the owner of the shares and between whom in law and in equity, is to be regarded membership and ownership of a share in the share capital of the company. The Supreme Court observed :
'The words holder of a share are really equal to the word shareholder and the expression holder of a share denotes, in so far as company is concerned, only a person who, as a shareholder has his name entered on the register of members'. It was further observed that : 'The position, therefore, under the Indian Companies Act, 1913 is quite clear that the expression shareholder or holder of a share in so far as that Act is concerned, denotes no other person except a member'.
18. In the case of Kishanchand Lunidasing Bajaj vs. Comm. of Income-tax, Bangalore (AIR 1966 SC 1583), the Supreme Court had to consider the Section 3, 4, 16 (2) and 18 (5) of the 1922 Act. It was held that where shares acquired with the funds of a Hindu undivided family were held in the name of the karta, the Hindu undivided family could be assessed to tax under the Income-tax Act, on the dividend income of those shares. In this case the Supreme Court considered both the cases of Howrah Trading Co. Ltd. (AIR 1959 SC 775) and also Shakuntalas case (AIR 1966 SC 719). Referring to Shakuntalas case the Supreme Court observed that : 'the decision of the court was that for the purpose of Section 23-A, the expression shareholder mean only the registered shareholder and not an equitable owner. The decision has no bearing on the true interpretation of Section 16 (2).'
19. In the case of Mann vs. Nash, (1932) 16 Tax Cas 523 the fact was that the Appellant, who carried on the business of providing automatic machines for public use, dealt in, and entered into a arrangements for exploiting, certain automatic machines the use of which has been held to be illegal. The machines were set up in premises to which the public resorted, for public use, and the profits arising therefrom were divided between the Appellant and the occupier of the premises. On an appeal against assessment to income-tax made to include profits so arising, the Special Commissioners held that the provision of the machines formed part of the appellants ordinary business and that he was not entitled to claim that the portion of his profits derived from them was immune from taxation on the ground that it has been earned by unlawful means. It was held that the profits were chargeable with income tax, the Court observed :
'That leaves the matter, it seems to me, open. I myself cannot see why this letting out of the machines in a commercial way, with a view to the reception of profits in a commercial way is not trade, adventure, manufacture or concern in the nature. On the words, it clearly is. The question really is whether as a matter of construction those words are to be cut down by an overriding consideration that the trade is tainted with illegality. The great mainstay of Mr. Fields argument, quite rightly form his point of view, was the case of Duggan, decided in the Irish Free State, and that decision of the Supreme Court seems to have gone upon this principle, that no construction could be admitted which recognised that the State should come forward and seem to take a profit from what the State prohibited because the State ought to have prevented it; and it was argued, if I may venture to say so, in a somewhat rhetorical style : Does the State keep its revenue eye open and its eye to justice closed I must say, I do not feel the force of that observation at all. Would it have made any difference, I ventured to ask in the argument, if the State had kept both its eyes open and prosecuted the man for the lottery and taxed him for the profits at the same time That would at any rate have protected the State from the reflections which were made upon it in the words I have quoted. But, in truth, it seems to me that all that consideration is misconceived. The Revenue representing the State, is merely looking at an accomplished fact. It is not condoning it; it has not taken part in it; it merely finds profits made from what appears to be a trade, and the Revenue laws happen to say that the profits made from trades have to be taxed and they say : Give us the tax, it is not to the purpose in my judgment to say : But the same state that you represent has said they are unlawful; that is immaterial altogether and I do not see that there is any contract between the two propositions.
It was said in the Irish case that allegans suam turpitudinem non est audiendus. I cannot see that the State are alleging their own turpitude; it is the appellant who is alleging his own turpitude. The State says : It is a business; the appellant says : It is ana unlawful one; he is alleging his own turpitude. It is said again : Is the State Coming forward to take a share of unlawful gains It is mere rhetoric. The State is doing nothing of the kind; they are taxing the individual with reference to certain facts. They are not partners; they are not principals in the illegality, or shares in the illegality they are merely taxing a man in respect of those resources. I think it is only rhetoric to say that they are sharing in his profits, and a piece of rhetoric which is perfectly useless for the solution of the question which I have to decide'.
20. In Kanga and Palkhivalas Law of Income-tax 6th Edition, Volume I, after reviewing the various authorities it has been observed, that the taint of illegality or wrong doing associated with income, the profits or gains is immaterial for the purposes of taxes. The Revenue merely looks at an accomplished fact; by bringing profits to tax it does not condone or take part in then illegal enterprise. The assessee may be prosecuted for the offence and at the same time taxed upon the profits arising out of its commission. Profits arising from a trade which necessarily involves fraud upon the customs authorities, or from illicit trafficking in drugs, illicit trafficking in liquor contrary to prohibition laws, keeping automatic gaming machines for public use, or illegal bets taken by book-makers on reace courses, street betting or betting through the post, or wagering agreements are all chargeable to tax.
21. The question, therefore, is whether the assessee is liable for deemed dividend under Section 23-A of the 1922 Act. For this purpose we shall have to see if the assessee is a shareholder of the there companies within the meaning of that expression appearing in the said section. It is now well-settled that shareholder in Section 23-A means only the shareholder registered in the books of the company. The assessee in the instant case fulfils that condition. But is it said, as noticed earlier, that as a firm, not being a person, cannot be a shareholder of a company the registration of the shares in the assessees name is illegal. We are unable to accept this proposition. Though Section 30 of the Indian Companies Act 1913 (the corresponding section being Section 45 of the 1956 Act) speaks of person yet it does not appear to us that when shares are registered in the name of firm such registration is void or should be treated as non est. We express no opinion on the merits of the contention namely that in registering a firm as shareholder in the firm-name the Directors and other officers of the company would be liable under the provisions of the Companies Act because we are not concerned with it in this reference. It appears to us that when shares are registered in the name of a firm such registration in effect would render a partners as joint holders of the shares. In Palmers Company Law, 20th Edition at page 446 it is said that : 'A firm can be registered in England under its partnership name although it is not a legal entity. That a Scottish partnership which is regarded as a legal entity can be registered under its firm name, is not remarkable'. Similar observations have also been made in Buckleys Companies Act (12th Edn.) at page 75. In Halsburys Laws of England, 3rd Edition, Volume 6, Article 227 at page 109 it is observed that if a firm with the authority of the firm is subscribed to a memorandum, the partners are joint holders of the shares subscribed for. Therefore, it cannot be said that such registration is tainted with any illegality so as to vitiate it. Neither such registration is void, nor can it be treated as non est. In this case, as stated earlier the assessee firm is a registered shareholder of the 3 companies and as a firm it is a taxable entity and in fact the assessee has been taxed as an unregistered firm. Therefore, in our opinion, the assessee is liable as a shareholder under Section 23-A of the 1922 Act as it stood prior to its amendment in 1955, and the order under the said section, in our opinion, was rightly passed against the assessee. In our opinion, the Tribunal came to a correct conclusion in this case and, therefore, its decision should be upheld. In that view of the matter we answer the question in the affirmative and in favour of the Revenue. In the facts and circumstances of this case we do not propose to make any order as to costs.
Deb J. - I agree.