TMI Blog1957 (9) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... as a payment of tax on behalf of the shareholder, and the latter is entitled to adjustment or refund of the difference, but not if the shareholder's dividend income is included under section 16(1) (c) in the total income of another person. This exception is in accordance with section 18(5) second proviso, and section 48(3). The Income-tax Officer held that section 16(1 )(c) was applicable in these cases while the Appellate Assistant Commissioner held the contrary. 3. The share capital of Austin Distributors Ltd., hereinafter called the company, is ₹ 4 lakhs divided into 40,000 shares of the face value of ₹ 10 each. The bulk of the capital was held in the beginning of March, 1950, by two groups of Britons [non-residents in India], the Thomson group holding 20,749 shares and the Wilson Group 18,750 shares. These 39,490 shares were sold to the applicants on 25th March, 1950. Most of the applicants purchased 3,500 shares each (one purchased 3,400 shares). A few of the applicants purchased lesser quantities. But the applicants did not pay the price of the shares which were valued at ₹ 30 per share, immediately in cash, although that was their primary obligation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of section 16(1) (c) were not applicable. For detailed reasons given in its order, the Tribunal held that the transaction was revocable and that the provision of section 16(1) (c) did apply. A copy of the contract of sale dated 25th March, 1950, and the loan acknowledgment of that date forms part of this statement of the case and is attached as annexure 'A'. A copy of the Tribunal's order also forms a part of the statement of the case and is attached as annexure 'B'. 5. On the above facts, the following questions of law arise : 1. Whether the dividend income received by the assessees on the shares of the Austin Distributors Limited held by them arises by virtue of revocable transfers of assets by the transferors within the meaning of section 16(1) (c) of the Indian Income-tax Act? 2. Whether in the circumstances of the case, the assessees are entitled to the refund claimed under section 48 of the Act ? 6. This statement was sent to the parties who have accepted the correctness of the facts stated therein. S. Mitter and K. L. Roy, for the assessees. Meyer and B. L. Pal, for the Commissioner JUDGMENT C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me purchased 3,500 shares each and some a slightly smaller number. The sales appear to have been cum-dividend, already declared on the shares. After the transaction, the company paid the dividends to the purchasers and the dividend was necessarily paid out of funds on which the company had already paid income-tax at the company rate. On receipt of the dividends, the purchasers, who do not appear to have been otherwise assessable to tax, applied for refund under section 48 of the Income-tax Act. The applications of three of them were with respect to three assessment years, namely, 1949-50, 1950-51 and 1951-52, while those of the rest, including Tarunendra Nath Tagore, related only to the assessment years 1950-51 and 1951-52. The Income-tax Officer rejected the applications in the view that the transfers were revocable transfers within the meaning of section 16(1)(c) of the Act and, therefore, the dividend income was to be deemed to be the income of not the purchasers but the vendors who only would have the right to claim a refund, if they were otherwise entitled thereto. On appeal by the assessee, the Income- tax Officer's decision was reversed by the Appellate Assistant Commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ixed at ₹ 30 per share, subject to abatement in certain circumstances to which I shall refer in a moment and it was payable immediately on the completion of the agreement. In fact, however, the price was not immediately paid, but on the other hand, while it remained unpaid, it was not left outstanding as price. The agreement provided that if the price was not paid immediately, it was to be treated as a loan advanced by the seller to the purchaser, carrying interest at ? per cent. per annum and such loan would be repayable on demand, as would be provided for in a deed of acknowledgment to be executed or in such time or times and in such amount or amounts as the purchaser might fix, subject, however, to the condition that full payment would have in any event to be made on or before the 31st of December, 1951. There can be no doubt that it was well understood between the parties that the price was not going to be paid immediately and that in fact the mode of payment would be the alternative mode. The price would be deemed as a loan and it would be repaid in accordance with certain further terms and conditions which the agreement contained. In the first place, the loan was to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he loan was retained by the seller. The agreement provided that the business of the company was to be conducted in accordance with its usual business practice followed in the past. The articles of association were not to be altered. One of the sellers who was the existing managing director was to retain his office, but if he ever ceased to hold it, it would be the duty of the purchaser to use his votes for procuring the appointment of a successor whom his seller might nominate. Messrs. Lovelock Lewes, who were the existing auditors of the company, were to continue as auditors and one of the firm was always to be a director of the company. Two persons mentioned in the agreement were to be appointed directors by the managing director in exercise of the powers conferred on him by article 125 of the articles of association and a third person, also named, would conduct the business of the company. They would have to submit monthly statements and six monthly accounts to the managing director who would be entitled, if he chose, to visit India at any time or from time to time and to take control of the business of the company. If he elected to visit India it would be the duty of the purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as less than ₹ 30. It will thus appear that the seller made it certain that he would, in any event, get a price of ₹ 30 per share. The difference between the second and the third forms of remedy which would be open to the seller appears to be this. In case he chose merely to complete the blank transfer forms, have the retransfer to himself registered in the books of the company and to sell off the shares, he would be acting in exercise of his rights as a mortgagee in possession. In such event, if the sale of the shares fetched a price higher than the amount of the loan, the purchaser would obviously be entitled to the excess, due regard being paid to the amount which he had already paid. If, however, the seller chose to cancel the sale altogether, the sale would be wiped out as if it had never taken place. But the seller would not allow himself to suffer any loss by reason of the miscarried transaction, because while he would repay the amount paid by the purchaser, he would not repay the full amount, if it was found that the current price was less than the price of ₹ 30 per share at which he had made the sale. In that event he would reimburse himself to the ext ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be instruments in the form laid down in regulation 19 of Table A of the Companies Act and would contain nothing but a bare recital of the transfer. The question as to whether the actual purchase was governed by the terms and conditions laid down in the agreement is set at rest by the assessee's own statement in his application for a reference. In paragraph 2 of the statement of facts the following sentence occurs: The applicant purchased the said shares in implementation of three agreements made on March 25, 1950, from the then holders, who duly executed the deeds of transfer in the applicant's favour. There has never been any other case. As has been seen, two questions have been referred for the opinion of the court. Mr. Mitra submitted that the real question was the second one but he had found it necessary to add the first question, because the Income-tax Officer had complicated matters by needlessly importing section 16(1)(c) of the Act. I do not see how the introduction of section 16(1)(c) could have been avoided. The claim of refund was undoubtedly made under section 48 of the Act which Mr. Mitra repeatedly emphasised, but sub-section (1) of section 48 is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any person by virtue of a settlement or disposition whether revocable or not,......from assets remaining the property of the settlor or disponer, shall be deemed to be income of the settlor or disponer, and all income arising to any person by virtue of a revocable transfer of assets shall be deemed to be income of the transferor. We are really concerned with the last part of the sub-clause which speaks of a revocable transfer. Mr. Mitra contended that the word transfer as used in the sub-clause did not contemplate out and out sales, but only contemplated dispositions which the disponer could recall by a unilateral act, such as gifts. Ordinarily, one undoubtedly speaks of revocation only in respect of transactions which the person dealing with a property or entering into a transaction can recall at his pleasure, but a revocable sale is also not an impossible notion. Sale with a condition of repurchase is one of the well-known forms of transaction relating to property and if the option to repurchase is given to the seller by the deed of sale, I do not see why it cannot be said that there has been a revocable sale, although in itself the initial transaction is one of an out and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of clause 4, after the seller has caused a retransfer of the shares to himself, he is to proceed to sell them, but in the case of clause 12, it is not necessary that the shares should be sold and it would appear that the seller might continue to hold them, just as he had been doing before the sale, since cancelled. It was contended that the power to enforce a retransfer reserved to the seller was to be exercised only in certain contingencies and, therefore, the power not being an absolute or unqualified power, the provision containing it could not be said to be a provision for retransfer of assets within the meaning of the first proviso to section 16(1)(c). I cannot accept that view of the proviso as correct. Power to cause retransfer reserved to a seller is generally exercisable on the happening of a contingency and so also a power to resume control over the income or assets transferred. The qualification contained in the deed of agreement in the present case that the power of causing a retransfer of the assets is not to be exercised by the seller except in certain contingencies is a perfectly normal provision and has not, in my view, the effect of taking the case out of the firs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with respect to Mr. Mitra's contention that an out and out sale was not contemplated by the expression revocable transfer occurring in section 16(1)(c). Mr. Meyer submitted that the totality of the transaction in the present case could well be regarded as an arrangement even if it was not a transfer. I do not consider that contention sound but at any rate it would not help Mr. Meyer because an arrangement is included by the second proviso to section 16(1)(c) only in the definition of settlement or disposition. If the transaction in the present case was an arrangement, it would only be a settlement or disposition and if it was a settlement or disposition, section 16(1)(c) would be attracted only if there was some income arising from assets remaining the property of the settlor or disponer. It could not possibly be said in the present case that the shares remained the property of the sellers after the transaction of sale had taken place. Mr. Meyer's contention cannot, therefore, be accepted, but he does not require the aid of that contention for reasons which I have already given. It is, strictly speaking, not necessary to discuss any other question but since the matt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viso to the sub-section does not mention the shareholder and, therefore, does not purport to take away the privilege from him, it follows that even if the dividend income of a person receiving it is to be deemed under section 16(1)(c) to be the income of another person, the amount by which the dividend has been increased shall still be treated as payment of income-tax or super-tax on behalf of the actual recipient of the income and, therefore, shall not be treated as payment on behalf of the person, in whose total income the dividend income is included by the operation of section 16(1)(c). I do not think that this contention is tenable. The omission of a reference to the shareholder in the second proviso to section 18(5) appears to me to have been accidental and caused by an oversight. It is to be noticed that section 16(1)(c) does not contain any qualification of any kind and makes no exception in favour of dividend income arising from assets held under a revocable transfer. If dividend income is also subject to the provisions of section 16(1)(c), the consequence must be that such income will not be taken into consideration in computing the total income of the recipient and, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x paid by him or on his behalf or treated as paid on his behalf for any year exceeds the amount with which he is properly chargeable under the Act for that year, he shall be entitled to a refund of any such excess. Had the section stopped here, it might be arguable that since the assessee was a registered shareholder of a company and since he had received dividend income, the amount of proportionate tax paid by the company which could be related to the dividend amount paid to him was to be deemed as tax paid on his behalf and, therefore, if the amount exceeded the amount for which he was properly chargeable, a claim to refund was established. There is, however, sub-section (3) of the section to which I have already referred and to which I would refer again. It says, where income of one person is included under any provision of this Act in the total income of any other person such other person only shall be entitled to a refund under this section in respect of such income. It is clear that if the dividend income of a person who has received it is included in the total income of another person under the provisions of section 16(1)(c), the former cannot be entitled to any refund and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim on the basis of even section 18(5), because section 18(5) contemplates a case where the dividend received by a person has been increased by a certain sum under section 16(2), that is to say, where it has been included in his total income and subjected to the operation of grossing up. The assessee could not contend that this income had been treated as his income and that it had been grossed up for the purpose of his own assessment and, therefore, under the terms of section 18(5), he could claim that there was a sum by which the dividend had been grossed up and that sum must be deemed to have been paid as tax on his behalf. There was thus no tax paid by him or on his behalf or treated as paid on his behalf , on which he could found his claim. If that be correct, even section 48(1) would not be satisfied in the assessee's case, but in order to answer the questions, I need not rely upon this line of reasoning. It is sufficient to confine oneself to section 48(3) and to point out that the provisions of that section are a complete answer to the assessee's claim. His dividend income was includible, under section 16(1)(c) of the Act, in the total income of his vendor and th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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