TMI Blog1980 (7) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... had to be ignored and only the net foreign dividend had to be taxed. In that view of the matter, the AAC allowed the assessee's contention. Being aggrieved, the revenue went up in appeal before the Tribunal. It was urged before the Tribunal that it was the gross dividend that should be taxed and not the net dividend. According to the revenue, under s. 5(1)(c) all incomes which accrue or arise to the assessee outside India should be included in the total income. It was submitted by the revenue that the AAC was not right in holding that the taxes deducted in foreign countries had to be ignored and the net dividend alone should be taxed. On behalf of the assessee, the order of the AAC was sought to be justified. After considering the rival contentions, the Tribunal was of the opinion that in the instant case the amounts deducted towards taxes in the foreign countries never accrued to the assessee nor it had any right to get back what was paid in U.K. and Ceylon as taxes. The assessee had received only the net dividend which had accrued to it. In that view of the matter, relying on certain authorities, which we shall presently note, the Tribunal upheld the order of the AAC. In these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) of clause (22) of section 2 shall be deemed to be the income of the previous year in which it is so declared, distributed or paid, as the case may be ; (b) any interim dividend shall be deemed to be the income of the previous year in which the amount of such dividend is unconditionally made available by the company to the member who is entitled to it. Section 195 of the Act deals with deduction of tax at source from certain income and stipulates that any person responsible for paying to non-resident, not being a company, or to a company which is neither an Indian company nor a company which has made the prescribed arrangements for the declaration and payment of dividends within India, certain deductions have to be made. It is not necessary to set out in detail the provision of the said section. If those deductions are made, the certificate of those deductions are given to the person on whose behalf or from whose payment deductions are made and that person or persons is or are entitled to get benefit in their taxation in India in respect of those deductions. Section 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nion, is clear from the enunciation of the law on this aspect by the Supreme Court in the case of CIT v. Clive Insurance Co. Ltd. [1978] 113 ITR 636, a decision in which the Supreme Court affirmed a decision of the Calcutta High Court in the case reported in [1972] 85 ITR 531 which incidentally we shall note. There, the assessee-company was a resident in India. It held shares in certain U.K. based companies. In exercise of the option under s. 184 of the U.K. Income Tax Act, 1952, to reimburse themselves the tax paid by them, the U.K. companies deducted income-tax at the standard rate from the gross dividend paid to their shareholders. During the calendar year 1959, which was the previous year relevant to the assessment year 1960-61, with which the Supreme Court was concerned, the assessee received a net dividend income of Rs. 15,266 from the U.K. companies after deduction of the sum of Rs. 9,881 at the standard rate under s. 184 of the U.K. I.T. Act, 1952. The assessee claimed double taxation relief under s. 49D of the Indian I.T. Act, 1922, on the ground that the assessee had paid the amount deducted from the gross dividend in the U.K. income-tax by deduction. There was no recipro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 was the lower. The Explanation, with which the Supreme Court was concerned, by sub-cl. (iii) thereof provided as follows: "(iii) the expression `rate of tax of the said country' means incometax and super-tax actually paid in the said country in accordance with the corresponding laws of the said country after deduction of all reliefs due, but before deduction 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." Bearing in mind the aforesaid provision, the Supreme Court analysed the position of law in the United Kingdom. Discussing several authorities, to some of which our attention was drawn in this reference which we shall presently note, the Supreme Court, at p. 643 of the report, observed that it was well established according to the statute law of the United Kingdom and the interpretation put on it by the highest court in that country that the dividends which had borne tax in the hands of the paying company were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me-tax had been paid by deduction or otherwise under the law in force in the country in which income had arisen. The Supreme Court noted that the principle of agency in payment by the company was worked out on the basis of the company being treated as a large partnership so that its payment of the tax was on behalf of the quasi-partners. Relying on the aforesaid observations of the Supreme Court, learned advocate for the revenue sought to argue that if it was on the basis of the principle of agency then, the assessee had the benefit of this payment and, therefore, this income had accrued or arisen to the assessee. The Supreme Court had specifically pointed out that no specific provisions had been mentioned which would show that dividend income in the hands of the assessee-company was exempt from payment of incometax. The company was liable to pay income-tax, on its own profits and gains and s. 184 enabled the company to deduct from the dividend paid out of profits, tax at the standard rate for the year in which the amount payable became due. Dividends which represented the distribution of a taxed fund was, therefore, styled as franked income so far as it concerned any further taxat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax on dividends, and they are not assessed in respect of them. The reason presumably is that the amount which is available to be distributed as dividend has already been diminished by tax on the company, and that it is thought inequitable to charge it again. At one time it was thought that the company, in paying tax, paid on behalf of the shareholder: but this theory is now exploded by decisions in this House, and the position of the shareholders as to tax is as I have stated it." Reliance was placed by the Supreme Court in the case of Canadian Eagle Oil Co. Ltd. v. King [1945] 21 TC 205 (HL). The Supreme Court relied on the observations of Lord Macmillan. These cases were also relied on by the revenue in the instant case before us. But, reviewing the position the Supreme Court stated that the position in law was that when the income in the form of dividends was subjected to tax it was immaterial whether they were taxed in the hands of the shareholder or not. The Supreme Court, however, noted that the amount could be treated to be only a deemed income of the shareholder. As we have noted, under s. 5(1), sub-cl. (c) of the I.T. Act, 1961, it is only the income which accrues ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made on behalf of the shareholders were deemed to be made on behalf of the shareholder. The learned Chief justice felt that this was not quite correct. But we are not, however, concerned with that aspect of the controversy in the instant case. Even if it is considered to be the payment or deemed to be the payment on behalf of the shareholders the income which had arisen or accrued would be deemed to be the income of the assessee as the income which had arisen or accrued outside India could not become, in view of s. 5(1)(c) of the Act read with s. 198, the income of the assessee which was includible under s. 5(1) of the Act. The other decisions really do not deal with this question as this question did not fall for their Lordships' consideration. That the position regarding the dividend income in the United Kingdom as also in Ceylon was the same was noted by the Division Bench of the Madras High Court in the case of V. Ramaswami Naidu v. CIT [1959] 35 ITR 33, where at p. 38 of the report, it was observed by the Division Bench that the provisions of the Ceylon Income-Tax Ordinance merely incorporated the appropriate provisions of the English law on the subject. The position regardin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o, think the remaining incidents of the relation of the shareholder to the gross amount, actual or notional, of the dividends are against the view that the excess over the amount he receives is credited or paid to him. That excess the company is by law entitled to withhold whether it is included within, or excluded from, the amount of the dividend expressly declared. When the company retains such a sum, it forms part of its general funds and is applicable accordingly. The fact that it specifies in its declaration of dividend a larger sum or rate than it in fact pays, does not seem of importance. In point of law it incurs no liability to the shareholder by doing so for any amount except the net sum after the deduction. Whether it be correct or not, that before s. 7 of the Finance Act, 1931, the company was authorised to make a deduction from dividends out of profits on which the company paid no tax (see per Romer L.J. in Newmann's case [1933] 1 K.B. 728, 747, 749), it is clear that deduction of tax did not operate by way of set-off or otherwise to discharge any liability for any sum paid by the company for tax. There is no appropriation to or for the use of the shareholder; nothing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the right approach to the question. The provision in the Finance Act is looking at a dividend declaration from the point of view of the company and not from the point of view of the shareholder and it is directed at ascertaining what was left in the hands of the company after the declaration of the dividend and to what extent the funds of the company were affected by reason of the declaration. The receipts of the company, after the deduction of expenditure, are subject to two payments which cause a depletion where a dividend is declared. One is the payment of tax by the company, the other is a distribution by way of dividend. The provision in the Finance Act is not asking to what extent the funds of the company have been depleted by payment of tax, but, is asking to what extent they have been depleted by the declaration Of a dividend. It seems to me that the funds of the company are affected, in a case of a declaration of dividend, only to the extent of the sum which the company has to pay because of the declaration and which it would not have to pay otherwise and that sum obviously is the sum which it actually distributes as dividends." It is contended on behalf of the revenue t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art of the income of those shareholders." As we have mentioned before, that was a case dealing with deduction made on account of salary. Furthermore, fundamentally it was a case of taxation of an assessee in the United Kingdom whose income arose or accrued in that country. In the instant case, we are, however, concerned with the income of a resident of India whose income arose or accrued outside this country. Therefore, it must come strictly within the purview of s. 5(1)(c) read with s. 198 of the I.T. Act, 1961. Reliance was also placed on certain observations in the case of Bradbury v. English Sewing Cotton Co. Ltd. [1923] 8 TC 481 (HL). Our attention was drawn to the observations of Lord Phillimore at pp. 518-519 which we have mentioned hereinbefore. We have also noted that the Supreme Court considered this case in the case of CIT v. Clive Insurance Co. Ltd. [1978] 113 ITR 636 (SC), mentioned hereinbefore. Our attention was also drawn to a decision in the case of IRC v. Call [1939] 22 TC 603; [1940] 8 ITR (Supp) 1 (HL), and reliance was placed on the observations of Lord Atkin at p. 636. We have already mentioned that these observations were considered by the Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f under s. 49D of the Indian I.T. Act, 1922, in which the issue with which we are concerned, viz., whether, even if something is deemed to be the income of the assessee or deemed to have been paid on behalf of the assessee could be treated to be the income accruing or arising to the assessee under s. 5(1)(c) read with s. 198 of the I.T. Act, 1961, did not, fall for consideration. Therefore, in that context, the said observations would not be of any assistance to us in disposing of the present reference. Our attention was drawn to a decision of the Bombay High Court in the case of CIT v. Blundell Spence Co. Ltd. [1952] 21 ITR 28, where it was held that s. 16(2) and s. 18(5) of the Indian I.T. Act, 1922, constituted self-contained provisions with regard to grossing up. Section 49B dealt with altogether a different matter and that was a case where refund was asked for by the assessee. Section 16(2) could apply only to the income-tax paid by the company in India at the rate laid down by the Finance Act and it could not apply to the tax paid by the company outside India. There was no provision in the Act for adding to the dividend of a shareholder, a tax paid by the company outside In ..... X X X X Extracts X X X X X X X X Extracts X X X X
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