TMI Blog1981 (2) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... er, being aggrieved, went up before the AAC and contended that foreign dividends should have been taken only at the net figure and the reliefs should also have been allowed only on such net amount. The AAC, relying on the opinion given by the U.K. tax consultants, held that only the net foreign dividend should be taken for taxation and not the gross. Following certain decisions of the Tribunal, he also agreed with the assessee that it was entitled to relief under s. 91 of the Act on such net foreign dividend included in its total income. There was a further appeal by the Revenue before the Incometax Appellate Tribunal. The Tribunal, after hearing the parties, referred to certain decisions of the Tribunal and held that it was only the net amount received by an assessee that could be included in its Indian assessment. Regarding the grant of relief under s. 91 also, it was held by them that the same should be granted on the net amount. The Tribunal found that in the order referred to in its previous order it had dealt with the U.K. law both before and after its amendment by the U.K. Finance Act, 1965. The Tribunal followed its previous order and held that the AAC was justified in hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation. In the decision before us in the case of CIT v. Shaw Wallace Co. [1981] 132 ITR 466 (Cal), referred to hereinbefore, that was the only question with which we were concerned. This Bench had also occasion to consider this question in the subsequent decision in the case of CIT v. Thomas Duff Co., referred to hereinbefore, where it was also held that even after the coming into operation of the Finance Act of 1965 (U.K.) in England, it was only the net income which was includible in the total income of an assessee under the I.T. Act, 1961. It must be reiterated that the assessee in this case is a company. The assessee-company had received certain dividends. The income has to be assessed under s. 5 of the I.T. Act, 1961, read with other provisions, which we shall refer. The assessee is a company resident in India, as would be apparent from the assessment order. On a plain reading of s. 5(1), any sum which is received or is deemed to be received in India in the relevant year by the assessee or on its behalf as well as any sum which accrues or arises or is deemed to accrue or arise to the assessee during the relevant year in India or any sum which accrues or arises to the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only the net income has to be included and only questions the applicability of relief under s. 91 of the Act. We must, however, note that in the second question as posed, it questions the validity or otherwise of the Tribunal's holding that only the net income is includible and not the gross income. It further questions that, even in respect of net income, whether s. 91 of the Act was applicable for granting relief. So far as the first aspect of the question is concerned, in view of the ratio of this Bench in the two decisions, referred to hereinbefore, viz., the decision in the case of CIT v. Shaw Wallace Co. Ltd. [1981] 132 ITR 466 (Cal), as well as the decision in the case of CIT v. Thomas Duff Co. (India) Pvt. Ltd., we should answer the question against the Revenue and hold that only the net income was to be included. Bat in this case learned advocate for the Revenue sought to urge certain additional points and, therefore, we have to re-examine the validity of our conclusion that only the net income under s. 5(1)(c) of the Act was to be included in computing the total income of the assessee who is resident in India in respect of dividend income received from U.K. compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade to s. 194 of the Act which obliges the principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends within India, before, making any payment in cash or before issuing any cheque or warrant in respect of a dividend or before making any distribution or payment to a shareholder of any dividend within the meaning of the different clauses we have mentioned, to deduct from the amount of such dividend, income-tax at the rates in force. It is provided that, where in the case of a shareholder, not being a company, the ITO gives a certificate in writing in the prescribed manner that to the best of his belief the total income of the shareholder would be less than the minimum liable to income-tax, such a deduction might not be necessary. The net effect of this section appears to be that the statute enjoined, leaving aside the case where there is a declaration given that the person to whom the dividend is paid is not taxable, that the company is not free but statutorily obliged to deduct the tax at source. This is important because the main question, in this case, is whether the whole amount becomes the income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant section is s. 47, which is as follows 47. (1) Except as otherwise provided by this Act, Corporation tax shall not be chargeable on dividends and other distribution of a company resident in the United Kingdom, nor shall any such dividends or distributions be taken into account in computing income for Corporation tax; but income-tax for a year of assessment after the year 1965-66, shall be chargeable under a new Schedule F in respect of all dividends and other distributions in that year of a company resident in the United Kingdom which are not charged under Schedule D or Schedule E and are not specially exempted from income-tax, and for purposes of income-tax all such distributions shall be regarded as income, however they fall to be dealt with in the hands of the recipient. (2) Income-tax under Schedule F for any year of assessment shall be charged in respect of any distribution made in the year on such sum as after deduction of income-tax thereon at the standard rate, equals the amount or value of the distribution after any deduction of income-tax actually made, and, subject to any enactment to the contrary, the distribution shall be deemed for the purpose of income-tax t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me-tax to represent income of an amount equal to that sum on which the income-tax has been borne by deduction. It was sought to be urged on behalf of the assessee that on proper reading of s. 47(1) and s. 47(2) of the Finance Act read with the relevant provisions of the English Income Tax Act, specially s. 190 of the I.T. Act, 1952, which was not repealed, it would be clear that income-tax was chargeable in respect of dividend income which a person not resident in the U.K. received from a U.K. company and, similarly, no allowance should be given to such a non-resident shareholder nor any repayment to be made in respect of assessed tax on dividend which was payable in the U.K. Section 47(2), it was submitted, only applied to dividends which were not chargeable under Sch. D or Sch. E and were specially exempted. It was submitted on behalf of the assessee that the dividend income of a non-resident shareholder of a U.K. company being specially exempted from income-tax by reason of s. 190 of the English Income Tax Act, 1952, no income-tax under Sch. F is chargeable on such dividend in the case of a non-resident shareholder of a U.K. company, and continued to remain exempt from income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is only franked investment income if the recipient is a company resident in the United Kingdom. (Finance Act, 1965 section 48(1)). Such a company is not chargeable to corporation tax thereon (Finance Act, 1965, section 50(2)(a)), and so is not exempt from income-tax (Finance Act, 1965, section 46(2)(b)), unless under a double taxation convention." In our opinion, for the purpose of adjudicating the controversy in this case it is not necessary for us to express any opinion whether under s. 190 of the English Income Tax Act, 1952, the dividend income of a nonresident shareholder cannot be grossed up or no income-tax is chargeable on such income. Even if we accept the position as we assumed in the case of CIT v. Thomas Duff and Company India Private Ltd. that by s. 47 of the Finance Act, 1965 (U.K.), it appears to us that under sub-s. (2) of the Finance Act, 1965 of England, income-tax under Sch. F for any assessment year shall be charged in respect of any distribution made in the year on such sum as after deduction of income-tax actually made, and, subject to any enactment to the contrary, the distribution shall be deemed for the purpose of income-tax to represent income. Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y became payable to each shareholder in respect of his dividend applied only in the case of dividends declared by the company in general meeting. Learned advocate drew our attention to the observations of the court at p. 87, where the Supreme Court observed that declaration of dividend by a company in general gave rise to a debt. That court was not concerned with the question with which we are concerned in the instant reference, namely, whether a right accrued or arose in favour of the assessee, for the amount also is liable to be deducted under the provisions of s. 194 of the I.T. Act and similar provisions of the I.T. Act. Our attention was also drawn to the case of In re Kidner: Kidner v. Kidner [1929] 2 All ER (Reprint) 551. There, it was held that a purchaser of shares was not entitled in the absence of any stipulation to the contrary to dividends declared on such shares before the date of contract of purchase, even though such dividend, or instalments thereof, was not payable until after the transfer of the shares. Learned advocate for the Revenue drew our attention to the observations of Mr. Justice Eve at p. 553 of the report, where it was observed as follows: " It is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hands of the assessee on the valuation date, 31st March, 1965, even though it was payable at a later date. The only question was whether a debt had come into existence on that date for the amount of Rs. 60,144. In that context the Calcutta High Court held that on declaration of dividend the entire amount had become a debt due to the shareholder and it was, as such, a taxable wealth of the shareholder. The question whether in the case of an Indian shareholder the declaration of gross dividend itself, on receipt of a tax deduction certificate creates or gives an accrual of right to the entirety of the gross dividend or creates a debt for the entirety of the gross dividend in favour of shareholder did not fall for consideration before the High Court in that case. Therefore, that question, was not examined, in our opinion, in that decision. The aforesaid ratio of the said decision, in our opinion, cannot, therefore, apply to the instant case. Learned advocate for the Revenue also sought to rely on certain decisions in aid of the proposition that a declaration of dividend creates a debt enforceable either immediately or in the future, according to, whether the dividend is or is not expr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could arise for deduction of tax appropriate on that amount. The deduction could only be made from the amount due. That is true. The question is, whether on a declaration of dividend the right accrues, in view of the statutory provision of deduction at source, as we have indicated under s. 194 and s. 198 of the I.T. Act, 1961. Therefore, in this case, where the assessee was liable to income-tax, it could not be said that the whole amount had become immediately due and payable to the shareholders as such. In this connection the scheme of the Indian Act may be looked at from this point of view which was examined by the Supreme Court in the case of CIT v. Clive Insurance Co. Ltd. [1978] 113 ITR 636. It was further urged by learned advocate for the Revenue that the rule of deduction of incometax at source was explained by Lord Hanworth in the case F. H. Hamilton v. IRC [1931] 16 TC 213 at 228 (CA). There, his Lordship emphasised that the rule was plain enough. It clearly entitled the deductor to retain out of the recipient's interest or payment due to him a sum, and he, the deductor, retained that, while the recipient was bound to give a discharge for the full amount as if he had actu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue. If the company had not paid this tax, the company had no right to make this deduction. The legal effect of the deduction was, according to the learned advocate for the Revenue, that the assessee-shareholder was making a payment at the standard rate on the gross dividend and the company was paying in its turn the gross dividend to the assessee-shareholder, the claim against each other being cancelled out by payment of the net dividend. In the eye of law, a full payment of dividend had taken place. Reliance in this connection was placed on the observations in the case of Trinidad Lake Asphalt Operating Co. v. CIT for Trinidad Tobago [1945] 13 ITR (Suppl.) 14 at 17 18 (PC), in the case of CIT v. Nainital Bank Ltd. [1966] 62 ITR 638 at 641 (SC), in the case of Coren v. Keighley [1972] 48 TC 370 (Ch D). In our opinion, in view Of the scheme of a. 194 read with s.198, in the case of the assessees who are liable to pay income-tax, the company is obliged by the statute to deduct that tax. In such cases, the assessee has no right to claim the deduction from the company even if the assessee is not liable to pay the taxes. The only right that the assessee gets is against the Revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see, for computing the income of the shareholders. Learned advocate for the Revenue sought to urge that deemed to be the income should not be confined only to mean that it was fictional income in certain cases. It was sought to be urged that cases which are obvious are often, for statutory reasons, included as " deemed ". In this connection he referred us to s. 2(22) of the I.T. Act, 1961 and he also referred us to certain provisions such as where under the I.T. Act, payment was not made by the assessee and the assessee was considered to be an assessee in default. The assessee was considered to be in default only when the assessee, though he had made the payment of the tax dues, had failed to make payment in accordance with the demand notice and for this reason in order to obviate the argument that those assessees could not be said to be the assessees in default while they made the entire payment, it is stipulated by the statute that such action of the assessees should also be deemed to be in default. Reliance in this connection was placed on the observations of Lord Radcliffe in the case of St. Aubyn v. Attorney-General (No. 2) [1951] 2 All ER 473 at 498; 3 EDC 292, 329 (HL). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... borne in mind that by fiction and by looking at s. 8, cl. (a) of the Act, the dividend is to be the deemed income of the previous year in which it was declared, in other words, this statutory fiction fixed or determined the year in which the dividend was to be treated as the income and the fiction did not provide for the quantum of the dividend which was treated to be income of the shareholders, whether the net dividend or the gross dividend, and for that purpose one has to look to s. 198 or s. 194 as we have set out hereinbefore. In this connection reliance may be placed on the observations of the Supreme Court in the case of Keshav Mills Ltd. v. CIT [1953] 23 ITR 230, where at p. 241 the Supreme Court observed in the context of the Indian Income-tax Act, 1922, as follows: " It is clear that under these circumstances there is no receipt of the moneys at all, either actual or constructive, in cash or in kind, by actual payment or by adjustment or settlement of accounts. There is also no scope for the argument that even though these sums may not be said to be either actually or constructively received, they should be 'deemed to be received'. The expression 'deemed to be receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 1975, in order to be taxable, the income must arise or accrue to an assessee and cannot cover income which is deemed to accrue or deemed to arise. We reiterated the said conclusion that the same is supported by the view of the Supreme Court in the case of CIT v. Clive Insurance Co. Ltd [1978] 113 ITR 636, as well as the Fall Bench decision of the Kerala High Court in the case of CIT v. Y. N. S. Hobbs [1979] 116 ITR 20, and the observations of the Australian High Court in the case of jolly v. Federal Commissioner of Taxation [1933] 50 CLR 131 (Australia). The next contention, therefore, is whether the changes in the English law by the Finance Act, 1965, have altered the position. We have set out the relevant provisions of s. 47(2) of the Act. The effect of s. 47(2)of the Act, as we have discussed in our case in the case of CIT v. Thomas Duff Co. (India) Pvt. Ltd., I.T. Ref. No. 352 of 1975 that "subject to enactment to the contrary the distribution shall be deemed for the purpose of income-tax to represent an income equal to an amount on which the income has been borne by deduction ". There was a good deal of argument before us whether a non-resident Indian company was taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue 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 same view of the English law was expressed by the Supreme Court of India in the case of Keshav Mills Ltd. v. CIT [1953] 23 ITR 230 (SC), which we have referred to hereinbefore. This position was sought to be rectified by the Finance Act of 1965 (U.K.). We are concerned with s. 47(2) of the said Act, the consequences of which we have noticed. Therefore, it appears to us that both under s. 47(2) of the U.K. Finance Act as introduced in 1947 and under s. 185(2) of the English I.T. Act, 1952, the amount deducted by the company at the time of distribution to the shareholder is deemed to be the income for the purpose of the English I.T. Act. It is a statutory receipt or a fictional income. The Supreme Court has reiterated the position in which an assessee paid income-tax by deduction or otherwise in respect of the net dividend so as to be eligible for the relief contemplated by s. 49D of the old Act. Therefore, for the purpose of giving relief under s. 49D of the old Act, the enquiry was to be made whether the shareho ..... X X X X Extracts X X X X X X X X Extracts X X X X
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