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SUPREME COURT OF INDIA
4th December, 1962
S.K. DAS, J.L. KAPUR, A.K. SARKAR, M. HIDAYATULLAH AND RAGHUBAR DAYAL, JJ.
Purshottamdas Thakurdas, Appellant
VERSUS
Commissioner of Income-tax, Bombay City I, Bombay, Respondent.
Civil Appeal No. 597 of 1961
Advocates appeared
M/s. A.V. Viswanatha Sastri and N. A. Palkhivala, Senior Advocates. (M/s J. B. Dadachanji, O.C. Mathur and Ravinder Narain, Advocate of M/s. J. B. Dadachanji and Co., with them), for Appellant; Mr. K. N. Rajagopala Sastri, Senior Advocate, (Mr. R. N. Sachthey, Advocate with them), for Respondent.
INCOME TAX - Advance payment of tax - Dividend income - Whether assessee liable to pay interest on shortfall of tax paid in advance - Income-tax Act (11 of 1922), Ss. 16(2), 18(5), 18A(1), (2), (6), 49B.
Fact of the Case:
The assessee, a businessman, was required to make advance payment of tax under S. 18A(1) of the Income-tax Act, 1922. He submitted an estimate of his income under sub-s. (2) of S. 18A, excluding dividend income on the ground that S.18 of the Act applied to such income. The Income-tax Officer levied penal interest on the assessee under sub-s (6) of S. 18-A in respect of super-tax payable on the dividend income. The assessee appealed to the Appellate Assistant Commissioner and the Appellate Tribunal, both of whom confirmed the view of the Income-tax Officer. The High Court, on a reference made by the Tribunal, answered the question in the affirmative and against the assessee.
Finding of the Court:
The Court held that dividend income is income in respect of which provision is made under S. 18 for "deduction of income-tax at the time of payment" within the meaning of sub-s. (1) of S. 18-A and therefore S. 18-A is not attracted to it. The assessee was not therefore liable to penal interest under sub-s. (6) of S. 18-A.
Issues: Whether dividend income is income in respect of which provision is made under S. 18 for "deduction of income-tax at the time of payment" within the meaning of sub-s. (1) of S. 18-A.
Ratio Decidendi: The Court interpreted the provisions of Ss. 16(2), 18(5), 18A(1), (2), (6), and 49B of the Income-tax Act, 1922, and held that sub-s. (5) of S. 18 read with sub-s. (2) of S. 16 and S. 49B provides for "deduction of income-tax at the time of payment" in respect of dividend income; therefore, S. 18-A does not apply to such income.
Final Decision: The Court allowed the appeal, set aside the judgment of the High Court, and answered the question referred to the High Court in the negative and in favour of the assessee.
Key Points: - Dividend income is treated as income for which deduction of income-tax at the time of payment is provided via Section 18(5) read with Sections 16(2) and 49B; therefore Section 18A does not apply to such income. (!) (!) (!) - The mechanism of credit under Section 18(5) and the deeming provision of Section 49B cause tax deducted by the company on dividend to be treated as if paid by the shareholder, affecting inclusion in total income and eligibility for refunds. (!) (!) (!) - For advance tax under Section 18A, the tax base to be considered in calculating liability under sub-section (2) excludes dividend income if Section 18A is not applicable to it; otherwise, dividends are to be included in computing the " eighty percent" threshold for interest under Section 18A(6). (!) (!) (!) - Sub-section (6) of Section 18A contemplates interest on shortfall where the advance tax paid is less than eighty percent of the final tax on income to which Section 18 does not apply; the scope depends on the applicability to dividend income. (!) (!) (!) - The understanding that grossed-up dividend income (including tax paid by the company) is included in the shareholder’s total income, supporting the view that dividend income is within the deduction-at-source framework and not subject to penal interest under Section 18A(6). (!) (!)
Judgment
S. K. Das, J. (majority judgment : Das, Kapur and Hidayatullah JJ.) This is an appeal on a certificate of fitness granted by the High Court of Bombay under S. 66-A (2) of the Indian Income-tax Act, 1922.
2. The short facts giving rise to the appeal are these. The original assessee was Purshottamdas Thakurdas, a well-known businessman of Bombay. He died sometime after the proceedings in the High Court had terminated and the appellants herein are his legal representatives. As nothing turns upon the distinction between the assessee and his legal representatives in this case, we shall ignore it for the purpose of this judgment. By a notice issued under S. 18-A(1) of the Act the Income-tax Officer concerned required the assessee to make advance payment of tax in respect of the assessment year 1947-48. On September 15, 1946 the assessee submitted an estimate of his income under sub-s (2) of S. 18-A/. In this estimate the assessee showed his total income at Rs.4,64,000/-. He deducted the sum of Rs.3,64,000/- stated to be his dividend income, on the ground that S.18 of the Act applied to such income. After claiming credit for Rs.10,000/- on the ground of double taxation relief, the assessee estimated the advance tax payable by him at Rs.2,67,752/-. The Income-tax Officer took the view that under S. 18-A (2) of the Act the assessee was bound to include in his estimate, and to pay advance super-tax on, his dividend income. Since that was not done and the advance tax paid was less than eighty per-cent of tax determined on the basis of the regular assessment he levied penal interest on the assessee under sub-s (6) of S. 18-A of the Act in respect of super-tax payable on the dividend income. There was an appeal to the Appellate Assistant Commissioner who confirmed the view of the Income-tax Officer. On a further appeal, the Appellate Tribunal held by its order dated October 25, 1957 that sub-s. (6) of S. 18-A did not apply to dividend income and the assessee was not liable to pay penal interest in respect of dividend income. The Commissioner of Income-tax, Bombay City, respondent before us, moved the Appellate Tribunal to state a case to the High Court of Bombay on the following question of law which arose out of the Tribunal s order :
"Whether on the facts and circumstances of the case, the assessee is liable to pay interest in respect of dividend income as provided under S. 18-A (6) of the Income-tax Act:"
3. The Tribunal stated a case on the aforesaid question and the reference made by the tribunal was dealt with by a Divisional Bench of the High Court of Bombay by its judgment dated July, 3, 1959*. The question framed by the Tribunal was slightly altered by the High Court, but the alteration made is not material for our purpose. J.C. Shah, J. came to the conclusion that dividend income was not income in respect of which S.18 made any provision "for deduction of income-tax at the time of payment" within the meaning of sub-s. (1) of S. 18-A and though the phraseology used in sub-s (6) of S. 18-A was slightly different from the phraseology used in sub-s. (1) of S. 18-A, the two sub-sections substantially had the same meaning. Accordingly, he answered the question in the affirmative and against the assessee. S. T. Desai, J. also gave the same answer to the question, though he reached a somewhat different conclusion. He held that on a proper construction of sub-s (6) of S. 18-A an assessee was liable to pay interest in respect of tax on dividend income to the extent that sub-s. (5) of S. 18 did not apply to the same. He said :
* See AIR 1959 Bomb 347.
"An assessee who is called upon to make advance payment of tax under S. 18-A (1) may, under sub-s. (2) of that section, pay such amount as accords with his own estimate. If he excludes the amount of super-tax on dividend income from his estimate he takes the risk of the application of the ratio of eighty per cent resulting in a shortfall and he would have to pay interest upon the amount by
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