1967 (9) TMI 1 - HC - Income Tax

Amount of dividends is diverted at the source by an overriding title - whether the amounts paid by the company to the assessee s sisters out of the dividends on the shares could be assessed to tax in the hands of the assessee - Held no

Summary

Issues:
1. Interpretation of article 7(e) of a company's articles of association regarding payment of dividends.
2. Taxability of dividends received by an assessee under the Income-tax Act.

Analysis:
The case involved a dispute over the taxability of dividends received by the assessee, L. Bansi Dhar, from a private limited company as per article 7(e) of the company's articles of association. The article outlined conditions for the succession of shares, including the payment of dividends to specific family members of a deceased shareholder. The controversy arose when the Income-tax Officer considered the payments to the family members as voluntary income application by the assessee, leading to tax liability. However, the Appellate Tribunal, relying on the principle of diversion by overriding title, held that the dividends paid to the family members should be excluded from the assessee's total income.

The key argument presented by the revenue's counsel was that the dividends constituted the assessee's income, regardless of the direct payment to family members, and thus should be taxable. Reference was made to Supreme Court decisions to support the position that the shareholder is the owner of both shares and dividends. On the other hand, the assessee's counsel emphasized the binding nature of the company's articles of association, creating a first charge in favor of the family members for dividend payments. The counsel argued that the diversion of income at the source, as per article 7(e), excluded the dividends from the assessee's assessable income.

The High Court analyzed the legal position, stating that the registered shareholder is considered the owner of shares, and dividends are assessable income if received by the shareholder, either actually or constructively. However, if dividends are diverted by an overriding title before reaching the shareholder, they cannot be considered assessable income. Examples of such diversion include maintenance decrees or will provisions for specific beneficiaries. In this case, the court found that the dividends were diverted at the source by article 7(e), before reaching the assessee, and thus should be excluded from the assessee's income.

In conclusion, the High Court held that the dividends in question should be excluded from the assessee's total income, affirming the decision of the Appellate Tribunal. The court ruled in favor of the assessee, stating that the payments to family members were pursuant to the directions in the company's articles of association, and not an application of the assessee's own income. The court awarded costs to the respondent and answered the question in the affirmative.