TMI Blog1971 (5) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 1922?" Two main contentions which have been urged and which fall for consideration in the instant reference, are : "(1) Whether the sum deducted from the amount of dividend payable to the assessee constitutes payment of income-tax by the assessee by deduction or otherwise in accordance with the law of U.K. on the said dividend income received by the assessee ? (2) Whether in view of the provisions contained in Explanation (iii) in the said section 49D, the assessee can claim any relief under the said section before actual assessment of the assee in U.K. ?" It has also to be noted that a preliminary objection has been raised on behalf of the assessee as to the competence of the present reference. For a proper appreciation of the contentions raised, it is necessary to consider the relevant facts. The facts material for the purpose of this reference appear from the relevant records and may be briefly indicated. The Clive Insurance Company Ltd., the assessee herein, is a company resident in India. The company carries on the business of general insurance. The assessee also derives income from its investments in U.K. The assessment year under reference is 1960-61, the releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es that, in respect of his income which accrues or arises during that year without the taxable territories ...... he has paid in any country, with which there is no reciprocal arrangement for relief or avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country, whichever is lower (Underlined by us). With reference to this provision we have only to see whether the assessee has paid by deduction or otherwise income-tax under the law in force in the foreign country. That the assessee had paid by deduction income-tax under the law in force in the foreign country is incapable of dispute. Thus, the assessee is entitled under section 49D to the relief. The word "entitled" underlined by us occurring in the provision shows that the assessee has got an indefeasible right. The extent of relief is also indicated in the same provision. The definition in sub-clause (4) does not, in our opinion, run counter to the claim of the assessee. The error lies in u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question relating to foreign law. Such a question would be a question of fact, and in view of the conclusion of the Tribunal that under the law in Malaya the letters of administration granted would be valid, no question either of the validity of the will or of the rights of the Hindu undivided family over the properties disposed of can at all arise." Mr. Roy has contended that as to the decision of the Tribunal on the meaning to be given to the word "assessed" in Explanation (iii), no question has been referred and the said decision, therefore, does not and cannot form any part of this reference. Mr. Roy has drawn our attention to section 49D which may conveniently be set out in its entirety. Section 49D reads as follows: "49D. Relief in respect of incomes accruing or arising outside the taxable territories.-(1) If any person who is resident in the taxable territories in any year proves that, in respect of his income which accrues or arises during that year without the taxable territories (and which is not deemed to accrue or arise in the taxable territories), he has paid in any country, with which there is no reciprocal arrangement for relief or avoidance of double taxation, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction of any relief due in the said country in respect of double taxation, divided by the whole amount of the income assessed in the said country; (iv) the expression 'income-tax in relation to any country' includes any excess profits tax or business profits tax charged on the profits by the Government of that country and not by the Government of any part of that country or a local authority in that country." Mr. Roy has submitted that the relevant provisions of the said section 49D applicable in the present case are contained in sub-section (1) and in Explanation (iii). He has argued that section 49D, in so far as the same is applicable in the instant case, has really two limbs or parts. According to Mr. Roy, the first limb or part contained in sub-section (1) lays down the necessary requirements which the assessee has to fulfil to be entitled to any relief and the second part or limb which is contained in the Explanation prescribes the mode of computation or calculation of the amount of relief to which the assessee may be entitled. Mr. Roy has contended that so far as the conditions laid down in the first part or limb, contained in sub-section (1), are concerned, the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re finding of fact. The question of construction of statutes and also of interpretation of judicial decisions is, undoubtedly, a question of law. A finding on any question, even of fact, which must be based on such construction of law, must, therefore, be regarded as a mixed question of fact and law. A similar view appears to have been expressed by the Delhi High Court in the case of Commissioner of Income-tax v. R. B. Jodhamal Kuthiala. The Delhi High Court, after a review of various authorities, observed at pages 603-604: "Even in England it has been held that, where an expert states his opinion based upon his knowledge and practical experience of foreign law, he may refer to courts' decisions or treatises for the purpose of refreshing his memory but in such an event the court is at liberty to examine the law, decision or passage in question in order to arrive at its correct meaning. Such an ascertainment of the meaning would always remain a question of law. In any case, we have to ascertain the meaning of the word 'owner' in section 9 of the Indian Income-tax Act, in the light of the facts found and that would, on any process of reasoning, be a mixed question of fact and law. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e given, unless the mode of granting relief as provided in the Explanation can be worked out and the basis for computing the quantum of such relief can be ascertained. There may be two parts or limbs, but both of them must operate together for a proper working of the section and for granting the necessary relief contemplated by the section. In the instant case, one of the main contentions of the department has been that unless the assessee has been assessed to income-tax in U.K., the assessee cannot be considered to have paid any income-tax in U.K. The question referred in the instant case, in our opinion is wide enough to cover this aspect which clearly arises in this reference. The decisions of the Supreme Court in Commissioner of Income-tax v. Scindia Steam Navigation Co. and Commissioner of Income-tax v. Smt. Anusuya Devi, relied on by Mr. Roy, are of no avail in the facts of the instant case. We are, therefore, unable to entertain the preliminary objection. Now, turning to the merits, the principal submission of the department before us has been that the assessee cannot be considered to have paid income-tax in U. K. on the dividend income received and the assessee is, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of such dividend income received. The learned counsel contends that as there is no income-tax liability on any dividend income received by a member of a company in England and as the amounts which are recovered by the company from its members by way of deduction from the dividend payable to the members are realised under the authority of statute and appropriated by the company itself and are not paid to the revenue authority, there cannot be any question of payment of any income-tax by the assessee on the dividend income received by the assessee. It is, therefore, the contention of the learned counsel that the amounts so deducted cannot constitute payment of income-tax by the member on the income received by way of dividend. The learned counsel has drawn our attention to sections 18(4) and 18(5) of the Indian Income-tax Act, 1922, and has pointed out that there is no section in the English Act corresponding to section 18(5) of the Indian Act which provides that such deduction should be treated as payment of income-tax. It is the submission of the learned counsel that there is no such provision in the English Act, as under the English Act no income-tax is payable on any divi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income-tax before assessment. Reference has been made to the following observations of Rankin J. in the case of Probhat Chandra Barua v. Emperor; "Thus the income-tax is one tax, and income assessed under one Schedule cannot be assessed all over again under another. That there is any legal presumption of a general character against 'double taxation' in any wider sense is a proposition to which I respectfully demur as a principle for the construction of a modern statute." The learned counsel has submitted that in any event Explanation (iii) makes it quite clear that the income must be assessed in the foreign country before there can be any question of any relief under section 49D. The learned counsel contends that the interpretation purported to have been given by the Tribunal in its order on the word "assessed" used in Explanation (iii) cannot be accepted and the said word "assessed" cannot be used in the sense "taxed" or "suffered tax". It is his contention that the expression "assessment" should be given its clear, ordinary and natural meaning and the ordinary meaning of the expression "assessment" solves all the questions and fits in with the scheme of section 49D. The le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion in U.K. in accordance with the law in force in U.K. Mr. Roy has drawn our attention to the copy of the dividend warrant which appears as annexure "A" at page 4 of the paper book and points out from the said document that the gross dividend income payable to the assessee was pound 96-12-0 from which income-tax at the rate of 7sh. 9d. in the pound amounting to 37-8-8 has been deducted and a sum of 59-3-4 has been paid by way of net dividend. The learned counsel contends that the sum of pound 37-8-8 deducted from the dividend income of the assessee constitutes payment of income-tax by the assessee in U.K. in respect of his dividend income under the law in force in U.K. The learned counsel has argued that it may be true that in the English Income Tax Act there is no section corresponding to section 18(5) of the Indian Act and it is the argument of the learned counsel that there is no specific provision in the English statute expressly declaring that the sums so deducted from the dividend income will constitute payment of income-tax of the shareholder from whose dividend income the said deduction is made. The learned counsel submits that though there is no specific provision in thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of dividend to be paid to the shareholders at the time of paying the dividend. It is the contention of the learned counsel that this amount which is deducted by the company under the authority of the law from the dividend amount payable to a shareholder is treated and recognised under the English law as payment of income-tax by the shareholder in respect of the dividend income received by the shareholder, although the said amount, deducted by the company, is not paid to the inland revenue and is allowed to be appropriated by the company in recoupment of the tax paid by the company. The contention of the learned counsel is that the deduction from the dividend amount payable to any member by the company constitutes payment of income-tax by the member in England and is treated and recognised as such by the law prevailing in England. The learned counsel submits that there are two systems of taxation under the English law, namely, (1) taxation by direct assessment, and, secondly, taxation by deduction at source. It is the submission of the learned counsel that in case of any dividend income, the taxation is by deduction at source and the position is more or less the same as in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provides for exemption and relief to the assessee should be construed liberally in favour of the assessee. The learned counsel has referred to the following decisions in support of his contention: Commissioner of Agricultural Income-tax v. Raja Jagadish Chandra Deo Dhabal Deb, Upper India Chamber of Commerce, Cawnpore v. Commissioner of Income-tax, Kameshwar Singh v. Commissioner of Income-tax and Commissioner of Income-tax v. K. E. Sundara Mudaliar. The learned counsel points out that the Supreme Court in the case of Commissioner of Income-tax v. Raja Benoy Kumar Sahas Roy, has taken note at pages 475-76 of this principle of liberal construction in case of provisions for exemption and relief without expressing any disapproval. Mr. Roy has submitted that whatever view may be taken of the principle of construction, the decision of the Tribunal is clearly justified in the facts of the instant case. The object of section 49D, as the section itself makes amply clear, is to grant relief to an assessee against any double taxation of the income. The said relief can never be had in terms of the said section and the said section can never be applied, unless the requirements of the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) no assessment shall be made on the person entitled to the interest, annuity or annual payment; and (b) the whole of the profits or gains shall be assessed and charged with tax on the person liable to the interest, annuity or annual payment, without distinguishing the interest, annuity or annual payment; and (c) the person liable to make the payment, whether out of the profits or gains charged with tax or out of any annual payment liable to deduction, or from which deduction has been made, shall be entitled, on making the payment, to deduct and retain out of it a sum representing the amount of the tax thereon at the standard rate for the year in which the amount payable becomes due; and (d) the person to whom the payment is made shall allow the deduction on receipt of the residue of the payment, and the person making the deduction shall be acquitted and discharged of so much money as is represented by the deduction, as if that sum had been actually paid. (2) Sub-section (1) of this section shall have effect whether the interest, annuity or annual payment- (a) is payable within or out of the United Kingdom; or (b) is payable as a charge on any property of the perso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded that the provisions of this sub-section shall not apply to a preference dividend and shall have effect subject to the provisions of section four hundred and ninety-three of this Act (which relates to the effect of deductions from dividends, other than preference dividends, made by reference to the wrong standard rate). (2) In this section, 'preference dividend' means, subject to the provisions of the next following section-- (a) a dividend payable on a preferred share or preferred stock at a fixed gross rate per cent; or (b) where a dividend is payable on a preferred share or preferred stock partly at a fixed gross rate per cent. and partly at a variable rate, such part of that dividend as is payable at a fixed gross rate per cent." "Section 186: United Kingdom dividends paid without full deduction of tax.--(1) Where any dividend from which deduction of tax is authorised by sub-section (1) of section one hundred and eighty-four of this Act is paid without deduction of tax, the amount received in respect thereof shall, for the purposes of this Act, be deemed to be a net amount received in respect of a dividend from the gross amount of which such deduction as is authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hundred and eighty-four of this Act to be deducted from any dividend shall be determined without taking into account any reduction, by reason of double taxation relief, of the United Kingdom income tax payable directly or by deduction by the company, but-- (a) notwithstanding anything in this Act, no relief or repayment in respect of tax deducted or authorised to be deducted from any dividend shall be allowed at a rate exceeding the rate (hereinafter referred to as 'the net United Kingdom rate') of the United Kingdom income-tax payable directly or by deduction by the company after taking double taxation relief into account; and (b) where the United Kingdom income tax payable directly or by deduction by the company is affected by double taxation relief, the particulars to be given by the company in the statement required by section one hundred and ninety-nine of this Act shall include particulars of the net United Kingdom rate. (2) Where the whole or any part of any annual payment is payable out of a dividend, and the rate of relief or repayment allowable in respect of the tax deducted or authorised to be deducted from the dividend is affected by double taxation relief, the an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lief connected with dividends paid before the twentieth day of February, nineteen hundred and forty-six, to be taken into account for the purposes of that section in the manner specified in that sub-section) shall apply in relation to this section as it would have applied in relation to that section had that section applied to the year 1952-53 and subsequent years." "Section 493 : Deduction from dividends (other than preference dividends) made by reference to the wrong standard rate.--Where, on payment of a dividend (not being a preference dividend), income-tax has, under section one hundred and eighty-four of this Act, been deducted therefrom by reference to a standard rate of tax greater or less than the standard rate for the year in which the dividend became due, the net amount received shall, for all income tax purposes, be deemed to represent income of such an amount as would, after deduction of tax by reference to the standard rate last mentioned, be equal to the net amount received, and for the said purposes there shall, in respect of that income, be deemed to have been paid by deduction tax of such an amount as is equal to the amount of tax on that income computed by re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any is under the Income Tax Act, 1842, treated as a person and is directed to make a return of its profits or gains according to Schedule D upon a conventional figure, arrived at by taking an average of the three preceding years, and is liable to be assessed and taxed thereupon. If the principle of its being a distinct person, distinct from its shareholders or the aggregate of its shareholders, had been carried to a logical conclusion, there would have been no reason why each shareholder should not, in his turn, have to return as part of his profits or gains under Schedule D the money received by him in dividends. Their taxation would seem to be logical, but it would be destructive of joint stock company enterprise, so the Act of 1842 has apparently, proceeded on the idea that for revenue 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 reason for their discharge may be the avoidance of double taxation, or to speak accurately, the avoidance of increased taxation. But the law is not founded upon the introduction of some equitable principle as modifying the statute ; it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ording to the overlap in each case of the income tax year and the working year) in the case of the dividends in the group secondly mentioned, and at 5s. in the case of the last-named dividend. The appellant has had refunded to him tax at the rate of 5s. on pound 135 and 2s. 6d. on pound 225 which, he says, is less than he is entitled to. His contention is that he is chargeable with tax on pound 225 at 2s. 6d. and on pound 3 15s. at 5s. He adds these two sums together, subtracts them from the aggregate deducted from his dividends, and claims a refund of the difference. This involves that in respect of pound 3 15s. he claims to be repaid in the year 1922-23, because he received his dividends then, a portion of the tax levied on the profits of the companies in the year before. This is plainly inadmissible. It might as well be said that if the rate of tax had risen in 1923 the revenue could make an assessment on the appellant to supplement the lesser rate deducted by the companies. The argument is that he is taxable only at 5s., and must not be made to bear more. Here is the old fallacy. He is not taxed on his dividends. The companies are taxed on their profits, not as his agents (as h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essable under Schedule D, and also sums equal to the amounts of the assessments made under Schedule A. The company, however, set aside the sum of pound 18,325 (representing the amount by which their net rents exceeded their amounts of the assessments under Schedule A) to the credit of an income-tax reserve account to meet such liability, if any, as may be established against them in the litigation then pending. On 4th April, 1930, immediately after the decision of the House of Lords was announced, the company distributed the sum of pound 18,325 so set aside among their shareholders by way of dividend. The appellant, Neumann, who held 85,500 shares of pound 1 each in the company received from the company a cheque for pound 4,275, together with a letter from the company, dated 4th April, 1930, informing him that the pound 4,275 was in respect of an interim dividend of 5%, free of tax, on the shares registered in his name and that it was equivalent to a gross amount of 5,343-15s-0d. Later, the appellant was informed by the company that the sum of pound 4,275 had been erroneously described by the company as a dividend of 5 per cent., free of tax, and that, in fact, it represented a sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n would seem to be logical, but it would be destructive of joint stock company enterprise, so the Act of 1842 has, apparently, proceeded on the idea that for revenue 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 reason for their discharge may be the avoidance of double taxation, or to speak accurately, the avoidance of increased taxation. But the law is not founded upon the introduction of some equitable principle as modifying the statute; it is founded upon the provisions of the statute itself ; and the statute carries the analogy of a partnership further, for it contemplates a company declaring a dividend on the gross gains, and then on the face of the dividend warrant making a proportionate deduction in respect of the duty, so that the shareholder whose total income is so small that he is exempt from income tax or pays at a lower rate, can get the income tax which has been deducted on the dividend warrant returned to him. In practice, the matter did not work out quite so simply. It has to be remembered that the amount distributable in dividend in any year might, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur-tax, in the hands of the shareholder receiving the dividend. The shareholder and the company are, no doubt, separate entities ; the company is not an agent for the shareholder to pay tax on the dividend, nor is the company the collector for the revenue to deduct tax from the dividend. The company is the taxpayer. The shareholder has no right to any share in the profits till a dividend is declared ; the company may use the profits in any way it pleases vis-a-vis any shareholder ; it may put them to reserve or capitalise them or use them for extensions or improvements ; the profits declared and paid as dividends in one year may have been made in previous years, when the standard rate of tax was different. It is only very rarely, and in exceptional cases, that dividends are paid out of any particular source of profit ; usually they are paid out of the general revenue fund of company. What is essential to the requirements of the Inland Revenue is that all the profits of the company should be taxed and, if that is done, the revenue is not concerned with what is done with these profits. The company is not bound, but only authorised, to deduct tax in paying dividends ; whether it deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titution in the latter Act of the word 'appropriate' for the word 'proportionate' in the earlier Act, affects the principle." The decision in the case of Commissioners of Inland Revenue v. Cull is also a decision of the House of Lords. Cull was the shareholder of 20,000 ordinary shares in Cull and Company, an unlimited company having a share capital of pound 800,000 divided into 700,000 preference and 100,000 ordinary shares of pound 1 each all issued and fully paid. The company carried on business as bankers and financiers. On the 13th March, 1934, the directors resolved ; "that the dividends on the 5% cumulative preference shares for the four years to 31st March, 1934, be paid on the 31st of March, 1934, and that an interim dividend for the year to 31st March, 1934, on the ordinary shares of twenty-one shillings per share be paid on the 31st of March, 1934, without deduction of income-tax". In making his return of total income for sur-tax purposes, Cull included the sum of pound 21,000, his dividend on his holding of ordinary shares. The assessing Commissioners added pound 7,000 as representing income tax in respect of this dividend, thus increasing the assessment to pound ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany are not franked, so far as regards sur-tax, by any payment of sur-tax by the company. The present appeal relates to the question of the proper way of treating dividends in the individual taxpayer's return of his total income from all sources for the purpose of ascertaining his liability to sur-tax. In making a return of his total income the taxpayer has to classify the items of his income under two main heads, viz., (1) income not taxed at the source, and (2) income taxed at the source. Income which has been received by the taxpayer without any deduction in respect of income tax is entered at the actual amount received as income not taxed at the source ; income which has been received less a deduction in respect of tax is income taxed at the source and must be entered at the gross amount before deduction of tax, for income tax paid or suffered is not a permissible deduction in computing total income. A company, on paying dividends to its shareholders, is entitled but not bound to deduct income tax at the standard rate at the time of payment. If the company exercises this right and deducts the tax from the dividends which it pays, the shareholders must, on entering the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from dividends of a joint stock company is protected from being treated as a new taxable income in his hands, but as a result of which the company, in shifting the burden on to the shoulders of the shareholder, may well recoup itself a larger sum than the revenue had received from it. As Lord Atkin pointed out in Cull v. Commissioners of Inland Revenue, the shareholder pays no tax, in the sense that the revenue receives nothing from the shareholder and receives no tax except what it has already received from the company. The shareholder, however, bears the burden of what the company has paid (and perhaps more), and has certainly paid tax by deduction within the meaning of section 29 of the Income Tax Act, 1918." Lord Macmillan observes at page 256 : " The key to the problem is to be found in the fundamental distinction drawn in the income-tax code between income arising from sources in this country and income arising from sources outside the United Kingdom. The income of a British taxpayer, so far as earned or received from sources within the United Kingdom, is dealt with in one way, and his income so far as received from sources abroad is dealt with in another way ; and for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a lower rate, and a company does not usually distribute in dividends in any one year all the profits of that year on which it has paid tax. But this is a domestic expedient limited in its operation to this country. It has no application to foreign companies. A foreign company paying dividends to its shareholders within the United Kingdom is not subject to British revenue laws or practice. It cannot pay dividends to its United Kingdom shareholders under deduction of a tax of which it has no knowledge and to which it is not subject except in so far as it derives income from a source in this country. It pays its dividends to its United Kingdom shareholders either directly or through paying agents in this country and then leaves our domestic revenue laws to operate upon the money so transmitted." In the case of Cenlon Finance Co. Ltd. v. Ellwood, the facts were briefly as follows : Tableau Holdings Ltd. was incorporated in November, 1952, as a finance company--that is to say, a company which trades in stocks and shares. In the same month, Tableau Holdings acquired the whole of the issued capital of a company known as Henry White (Sutherland House Ltd.), which carried on business as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d has been paid by a company out of profits and gains which have not been assessed to tax it is to be exempt in the hands of the shareholders. On the contrary, it does nothing more than require that the company shall be assessed to tax on the full amount of its profits and gains before any dividend is paid and entitles it, but no more, to deduct from the dividend tax at the standard rate for the year in which the amount payable becomes due." The noble Lord then proceeds to refer to the cases of Bradbury v. English Sewing Cotton Co. Ltd., Neumann v. Commissioners of Inland Revenue, Canadian Eagle Oil Company Ltd. v. King, and Selection Trust Ltd. v. Devitt, and observes at page 203 : "These cases establish that a dividend as such is not taxable in the hands of its recipient. So be it. But it is not a logical step from that to say that a sum paid out of untaxed profits and received by a trader in respect of his trade is to be excluded from the computation of his profits and gains. Nor is there any warranty for it in any speech in your Lordships' House that I have read, unless it be in a dictum made per in curiam in the speech of Lord Wright in Neumann's case. I will add two mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t maintains that this difference is immaterial : the Crown say it is all-important. It is therefore necessary to see why dividends are not assessable in the hands of a non-trader. It is not because Case VI is not wide enough to catch them, and it is not because of any express statutory provision to that effect. The appellant says that it results from the provisions of section 184 of the Income Tax Act, 1952, which can be traced back to section 54 of the Income Tax Act, 1842. But that section and its predecessors do not even mention the shareholder who receives a dividend : they inerely entitle the company paying a dividend oat of profits to deduct tax in paying it and they are silent about a dividend which is not paid out of profits charged to tax. It is, however, argued that, by reason of the decisions of this house to which I have referred, the section must now be treated as referring to all dividends and as exempting them from tax in the hands of shareholders who receive them. The short answer to that appears to me to be that there is no mention of this section or its predecessors in any of the passages in the speeches in this House which are founded on by the appellant. No do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision in any statute. The matter becomes much more difficult when tax could not be, and is not, deducted by the company when paying the dividend ; and I can find no satisfactory explanation of why an individual who receives such a dividend is not assessable in respect of it. It cannot, then, be said that, because the company has already paid tax on this money, it would be unjust if the shareholder had to pay again." Lord Denning spoke in these terms at pages 206-207 : "If the Cenlon Finance Co. Ltd. had not been a dealer in stocks and shares but a butcher or baker or anything else, it would not have been chargeable with tax on this dividend for the simple reason that by a positive rule of law, to be found in judicial decisions and not in the statute, dividends as such are,not able to tax. The justice of this rule is obvious when the dividend is paid out of a fund which has already been brought into charge for tax. It is not so obvious when the dividend is what is called a 'capital' dividend, that it a dividend paid out of a capital profit which has not been brought into charge for tax. I should have thought that, in the ordinary way, any dividend on shares would be income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f their shares decreased as a result and this decrease was reflected in the trading account of the company for the period from 1st September, 1954 to 31st March, 1955. The company claimed and was allowed relief under section 341, Income Tax Act, 1952, in respect of a trading loss for that period on the basis that the dividend should be excluded in computing its profit or loss for tax purposes. On 22nd January, 1960, a direction under section 245, Income Tax Act, 1952, was given in, respect of the company's actual income from all sources for the above-mentioned period, on the footing that it was an investment company within the meaning of section 257(2). On appeal, the direction was confirmed by the Special Commissioners. In the Court of Appeal and the House of Lords, the company contended that the dividends declared on 28th March, 1955, were trading receipts to be taken into account in arriving at its liability under Case I of Schedule D. The House of Lords upheld the decision of the Commissioners. Lord Reid, in the course of his speech at the House of Lords, observed at pages 691-692 : "The question how dividends paid under deduction of tax fall to be treated for income-tax purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave out of the account those trading receipts which consisted of dividends received by him after deduction of tax. The respondent now says that the practice has always been wrong. In my opinion, it was right. Neither view can be derived directly from any provisions of the Income Tax Act. If the words of the Act were applied literally the result would be double taxation of the same income, but it has been said again and again that the Act cannot be so read as to authorise that." Viscount Radcliffe observed at page 696 : " Dividends are sometimes spoken of as being exempt from assessment to income-tax or as if they were somehow entitled to special protection under the tax system. There are, too, rather mysterious statements to the effect that they are not taxable 'as such'. This is quite misleading and tends to create the idea that there is a special mystique about the taxation of dividends, an idea that in at least one respect has led to unfortunate consequences. In my opinion, there is by now really no room for doubt that dividends, for income tax as well as sur-tax, are just as much a taxable subject as any other form of income, or for doubting that, for the purposes of inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefrom under section 184 of the English Income-Tax Act, 1952. It may be noted that though many of these decisions are not concerned with the provisions of the 1952 Act and deal with the provisions of earlier statues, there have been no substantial and fundamental changes in the basic principles and the material provisions. It is true that in the English statute there is no provision corresponding to section 18(5) of the Indian Income-tax Act, 1922, which specifically provides that amounts deducted from dividend income of a member will constitute payment of income-tax by the member. It is also true that, unlike the position in India, the amounts so deducted are not made over to the revenue authority in U.K. and are retained by the company. It is equally true that the incomes from dividends in the hands of the shareholders are not liable to payment of any income-tax when such dividends have been declared and paid out of profits which have been taxed in the hands of the company. Notwithstanding, however, these peculiar features, the sums deducted from the dividend amounts, payable to a member, constitute under the law and system of taxation in U.K. payment of income-tax by deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny under section 184, do not fill the coffers of the revenue. In spite of the fact that there is no express statutory provisions in the English Act corresponding to section 18(5) of the Indian Act of 1922, the English Income Tax Act, in our opinion, contemplates and postulates that the sums deducted from the dividend income of any member under section 184 shall constitute payment of income-tax by deduction by the member on the dividend income. This position is made clearer still by judicial pronouncements. The decisions, to which we have earlier referred and the observations which we have already quoted, go to show, in our opinion, that the dividend income in U.K. enjoys a peculiar position in the sphere of taxation. When paid by a company out of its profits which have already been taxed in the hands of the company which in law is liable to assessment and to pay income-tax on its gains and profits, the dividend is not considered to be a separate income in the hands of the members for the purpose of any further charge to income-tax in their hands. The revenue authority after having received the tax from the company on its profits does not concern itself any longer as to what the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome of the assessee by the various companies declaring and paying the dividend and the claim of the assessee could only have been based on the footing that the tax deducted from his dividend income constituted payment of income-tax by the assessee of a sum which was far in excess of his liability. Apart from the question as to what should be considered to be the basis and quantum of the refund to which the assessee should be entitled, there was no question, as there could not be any, as to the assessee's right to claim a refund on the footing that the sum deducted from his dividend income as tax by the company under section 184 was payment by the assessee of income-tax by deduction in respect of his dividend income. The chart mentioned in the case at page 10 of the report, indicating the gross amount of dividend and the amounts of tax deducted therefrom, clearly mentions such deductions as "income-tax deducted therefrom". Entitlement to relief and refund in respect of the sum deducted from the dividend income could only proceed on the basis that the sums, so deducted from dividend income of the assessee, constituted payment of income-tax by the assessee. Under the law of taxation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to be treated as income of the same year of assessment in the hands of the recipient. From the shareholder's point of view, the dividend, having suffered tax at the standard rate by deduction, forms part of his taxed income of, the year of assessment in which the date of the dividend voucher falls, and relief, or repayment, of the tax deducted may be claimed in respect of any personal or other allowances due." In article 26, at pages 17-18 of the same volume, the learned author, under the heading "Direct assessment and deduction at source", states : "The normal method of charging tax is by direct assessment. The amount of the income upon which tax is chargeable depends on an assessment made by the proper authority, according to the source of income involved. In the case of the annual value under Schedule A, and the assessable value under Schedule B, the assessments are prepared by the Inspector, and signed by the Additional Commissioners for the division in which the property is situated. Unless there have been changes in the property, assessments are quinquennial, though there has been no revaluation since 1936-37, the revaluation for 1941-42 having been postponed chiefly by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chapter 6, which deals with "Dividends and bonus shares", the following passage appears at page 60 under the head "General principles" : "The British Income Tax Code is the only system of income taxation which does not levy a direct tax upon a shareholder in respect of dividends received by him, though in normal circumstances dividends fall to be included in the return of total income from all sources that is required for the purposes of a claim for allowances and for sur-tax. The reasons for this anomalous course are considered in the succeeding section and are peculiar to our unique system of 'taxation at the source' ; this treatment, however, applies only in the case of dividends paid by British companies." At pages 69-70 of the said book it is further stated under the head "Dividends payable by British companies" : " The question whether a dividend payable by a British company can be regarded as income in the hands of the recipient cannot be determined by the general principles enunciated in the previous section because of the application of the system of "taxation at the source" to such dividends. This system can, on occasion, result in a dividend, which would be regarde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r granting necessary relief to the assessee in terms of the provisions contained in Explanations (iii). The assessee being a company is not liable to pay any sur-tax in U. K. under the laws of U. K. and the assessee as a company is also not entitled to any relief in respect of the tax paid by it. The assessee has paid tax at the standard rate and in the instant case, therefore, there is no difficulty in applying the provisions of the said Explanation (iii) and ascertaining the rate of tax of the said country in accordance therewith. Whether the requirement of the Explanation is satisfied in any given case will necessarily depend on the facts and circumstances of each particular case. It is, however, essential that the said requirement must be complied with and the rate of tax of the said country must be determined by applying the provisions of the said Explanation. In the facts of the instant case, the assessee, which happens to be a company, is neither liable to any sur-tax nor entitled to any relief as the rate of tax is easily determined in terms of the provisions contained in the Explanation. As, in our view, all the requirements for granting necessary relief to the assessee in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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