1967 (7) TMI 46 - HC - Income Tax

Assets of the dissolved firm including the shares were taken over by the private limited company - real owner - registered shareholder - Tribunal was correct in holding that the amount included as dividend in the total income of the assessee in consequence of an order u/s 23A should be excluded

Summary

Issues:
Interpretation of section 23A of the Indian Income-tax Act regarding the assessment of deemed dividends, Reassessment based on section 34 of the Indian Income-tax Act, Application of the decision in Commissioner of Income-tax v. Shakuntala on the definition of "shareholder," Inclusion of deemed dividends in the income of the registered shareholder, Consideration of equitable ownership in assessing deemed dividends, Legal implications of partnership dissolution on dividend assessment.

Analysis:
The judgment dealt with the interpretation of section 23A of the Indian Income-tax Act concerning the assessment of deemed dividends. The case involved a dissolved partnership, Messrs. Sen and Pandit, which held shares in a limited company, Messrs. S. K. Sen and Sons Limited. Following the dissolution, the assets, including the shares, were transferred to a private limited company, Messrs. Sen and Pandit Private Limited. The Income-tax Officer made orders under section 23A, deeming dividends distributed to shareholders. The issue arose when assessing the deemed dividends in the hands of the partners of the dissolved partnership. The Appellate Tribunal reversed the Appellate Assistant Commissioner's order, citing the Supreme Court decision in Commissioner of Income-tax v. Shakuntala, emphasizing that only registered shareholders could be assessed for deemed dividends under section 23A.

Regarding the application of the Shakuntala case, the Commissioner of Income-tax argued that the dissolution of the registered shareholder, Messrs. Sen and Pandit, allowed for inclusion of deemed dividends in the partners' income. The Commissioner contended that even if a registered shareholder ceased to exist, the Income-tax Officer could attribute deemed dividends to the real owners of the shares. However, the court rejected this argument, noting that the shares were transferred to Messrs. Sen and Pandit Private Limited, making them the rightful owner, not the assessee. The court emphasized that the Shakuntala case clarified that only registered shareholders could be assessed for deemed dividends under section 23A, disregarding equitable ownership considerations.

The judgment highlighted the distinction between registered shareholders and equitable owners in assessing deemed dividends under section 23A. It rejected the argument that dissolution of a partnership allowed for inclusion of deemed dividends in the income of subsequent owners, emphasizing the importance of registered ownership. The court ruled in favor of the assessee, affirming that the deemed dividends should be excluded from the assessee's income as they were not the registered shareholder. The Commissioner of Income-tax was directed to pay the costs of the reference to the assessee, concluding the legal proceedings on this matter.