TMI Blog1980 (11) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... e duly and regularly paid and the assessee otherwise observes and performs all other terms and conditions of the agreement to be observed and performed on his part, the dividends on the said securities shall belong to and be paid to the nominee of the assessee, namely, Dudani. On 8th February, 1965, the ITO issued a notice to the assessee under s. 23(3) of the Act saying: " It appears that you have received dividends on 2,50,000 shares of Jaipur Udyog Ltd., which you have not declared. Please specify the date on which the shares were actually transferred and the details of dividends actually received by you (during the previous year) till such date please file the dividend warrants. " On receipt of this notice, the assessee sent the following reply on 8th March, 1965 : " The abovementioned shares of Jaipur Udyog Ltd. (2,50,000 ordinary shares) were made over by me to the Life Insurance Corporation of India (BIC) with effect from September 1, 1957, as per my agreements with them. Hence whatever dividend was received in respect of these shares from the said date was the income of the Life Insurance Corporation of India and was only routed through me. Accordingly, a sum of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -61 over again offended the well-known principle against double taxation. On the second question, the Tribunal held that on a proper construction of the agreement dated May 21, 1955, which was entered into by the assessee on the one hand and BIC on the other at the time of the purchase of the property as well as the supplemental agreement dated August 31, 1959, it was quite clear that 2,50,000 shares pledged by the assessee as security for debt were actually transferred on 1st September, 1957, in favour of BIC and, therefore, no longer remained the property of the assessee. They found that the assessee, after the transfer of the shares in favour of BIC on September 1, 1957, was bound in law to pass on the dividend declared by Jaipur Udyog to BIC. On this basis, they came to the conclusion that the amount of Rs. 3,25,000 was no part of the income of the assessee and the amount could not be taxed in his hands. The following two questions of law have been referred to us by the Tribunal under s. 66(1) of the Act: " i. Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the dividend of Rs. 3,12,500 (out of dividend of Rs. 5,00,000 receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment year 1960-61. In our opinion, this approach of the Tribunal is perfectly correct. The taxing of the same item twice in the hands of the same person is not allowed in law. " The principle of the I.T. Acts is to charge all income with tax, but in the hands of the same person only once." (per Viscount Haldane in Sugden v. Leeds Corporation [1913] 6 TC 211, 253 (HL). Taxing twice for the same purpose cannot be permitted. Counsel for the revenue referred us to Bhim Sen Khosla v. CIT [ITR No. 31 of 1970 decided on April 30, 1980] (S. Ranganathan and Mrs. Leila Seth JJ.) (since reported in [1982] 133 ITR 667 (Delhi)]. In that case, the question of double taxation arose. The assessee there raised the objection that he was being subjected to double taxation. The learned judges held that the department was in equity bound to grant refund of the amount of tax realised in the earlier assessment and only then could assess according to law. We can find nothing in this judgment which helps the revenue. The principle against double taxation was clearly recognised. The judges ordered the department to give relief to the assessee in order to avoid double taxation. In the present case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated August 31, 1959. This is what the assessee said in his letter to the ITO on March 8, 1965. It is necessary to understand the real nature of the transaction which the assessee entered into with BIC in 1955. On a combined reading of the two agreements certain facts appear to be well established. As a security for debt there was a mortgage of shares. The blank transfer deeds duly signed by the assessee's nominee with share certificates were handed over to BIC. If the assessee performed the terms of the agreement his nominee was to receive the dividend from the company. The assessee defaulted in the payment of instalments. The Administrator called upon him to pay the balance of the purchase price then outstanding against him, vide notice dated June 12, 1957. The matter was settled on September 1, 1957. The assessee transferred on that date the shares at an agreed valuation and" renounced " his right to dividend for the year ending March 31, 1958. The two agreements of 1955 and 1959 have not been doubted by any of the I.T. authorities. They were accepted as genuine documents. The answer to the second question will depend on the construction of these two agreements. The ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement and did not pay the instalments then his nominee was not entitled to receive the dividend. In that event, BIC was entitled to receive the dividend. This is how we read cl. 6 of the agreement. It will, therefore, appear that after the default committed by the assessee as is evidenced by the notice dated June 12, 1957, he had no right to receive the dividend from Jaipur Udyog Ltd. In terms of cl. 6 he clearly forfeited that right. It was only as a part of the settlement which was arrived at the time of the transfer of shares on September 1, 1957, that he was allowed to receive and retain the dividend for the year ending March 31, 1957. On a true interpretation of this clause we are not prepared to hold that the dividends which the assessee received on October 6, 1958, and March 23, 1959, could in any sense be termed as his income after the completion of the transfer on September 1, 1957. He was a trustee for the BIC, the beneficial owner, for these amounts. BIC was not the registered holder of shares. As a result of the transfer on September 1, 1957, there was a fiduciary obligation on the transferor to pay the amount to the transferee. This is why the assessee remitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able. The legal relationship of the assessee with BIC was that of borrower and the mortgagee. The borrower executed a document which set out the terms of the transaction, the manner in which the loan was to be repaid, the rate of interest on the loan, and the powers of the mortgagee to realise his security if the borrower defaulted. If the loan is not repaid, the mortgagee, may sell the shares. But, if the loan is repaid, the mortgagee, on the redemption of the equitable mortgage, must return the share certificate to the borrower together with the blank transfer executed by him so that it may be destroyed. (See Pennington's Company Law, 4th Edn., pp. 342-344 and Gower's Modern Company Law, 4th Edn., pp. 464-465). What happened here was this. The mortgagee obtained blank transfers from the borrower with share certificates. There was equitable charge in favour of the mortgagee to secure the indebtedness. The terms of the transaction were reduced to writing on May 21, 1955. The mortgagee was entitled to sell the shares after notice of one month. He had the implied authority to complete the blank transfer. (In re Tahiti Cotton Co. [1873] LR 17 EQ 273). When the borrower, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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