1. Dispute regarding the assessability of dividend income from shares registered in the name of a karta but acquired using funds of a Hindu undivided family. (Para 1 , 2 )
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1966 Supreme(SC) 57
SUPREME COURT OF INDIA
P.B. GAJENDRAGADKAR, C.J.I., K.N. WANCHOO, J.C. SHAH, S.M. SIKRI AND V. RAMASWAMI, JJ.
Kishanchand Lunidasing Bajaj, Appellant
Versus
The Commissioner of Income-tax, Bangalore, Respondent.
Civil Appeal No. 234 of 1965.
Advocates appeared
M/s. K. Srinivasan and R. Gopalkrishnan, Advocates, for Appellant; Mr. C. K. Daphtary, Attorney-General for India, (M/s. R. Ganapathy Iyer, R. H. Dhebar and R. N. Sachthey, Advocates, with him), for Respondent.
Advocates:
C.K.DAFTARY, K.SRINIVASAN INDRAJEETH SHAH, R.Ganapathy Iyer, R.GOPAL KRISHNAN, R.H.Dhebar, R.N.SACH
C.K.DAFTARY, K.SRINIVASAN INDRAJEETH SHAH, R.Ganapathy Iyer, R.GOPAL KRISHNAN, R.H.Dhebar, R.N.SACH
Dividend income is taxable in the hands of the real owner of the shares, regardless of whether the shares are registered in their name. Procedural benefits like "grossing up" and tax credits for registered shareholders do not exempt the real owner from their tax liability.
Headnote:(A) Indian Income-tax Act, 1922 - Sections 3, 4, 16(2) and 18(5) - Dividend income - Taxability in the hands of the real owner - While a company recognizes only the registered shareholder and pays dividends accordingly, for tax purposes, such dividends are deemed to accrue or arise to the real owner of the shares, regardless of the registered holder's identity. (Para 4)
(B) Section 16(2) - Nature of provision - This is a processing clause used for the purpose of "grossing up" dividend income and designating the year in which it is included in the total income; it does not operate as an exemption from the charging sections of the Act, nor does it restrict tax liability solely to the registered shareholder. (Para 6)
(C) Section 18(5) - Credit for tax paid - The mechanism of "grossing up" and the provision of credit for tax paid by the company on behalf of a shareholder are benefits available to the registered shareholder; however, this scheme does not imply that dividend income is the income only of the registered shareholder to the exclusion of the real owner. (Para 6)
Facts of the case:
A Hindu undivided family owned shares registered in the name of its karta. The family commenced a business and later formed a partnership. Dividends from the shares were credited to the firm's profit and loss account. During assessment, the family contended that since the shares were registered in the name of the karta and not the family, the dividend income should not be assessable in the hands of the family, arguing that only a person who is the owner both in law and equity should be taxed.
Findings of Court:
The court found that the charging sections of the Act apply to the person to whom the income accrues. Since the family was the real owner of the shares, the dividend income accrued to them. The inability to "gross up" the dividend or claim tax credit under the Act does not exempt the real owner from the liability to pay tax on the income received.
Issues: Whether dividend income from shares registered in the name of the karta but acquired with the funds of a Hindu undivided family is assessable in the hands of the said family.
Ratio Decidendi: Tax is charged on the total income of every taxable entity to whom income accrues or is received. Dividend income accrues to the real owner of the shares, regardless of the registration in the company's books. Section 16(2) is a procedural clause for grossing up and does not override the charging sections of the Act. The benefit of tax credit under Section 18(5) is limited to the registered shareholder, but this does not shift the primary tax liability away from the real owner.
Result: Appeal dismissed.
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Table of Contents
2. Contention that only the registered shareholder is liable for tax on dividends, and the real owner cannot be taxed if not registered in the company's books. (Para 3 )
3. Analysis of Sections 3, 4, and 16(2) of the Income-tax Act, 1922, distinguishing the liability to pay tax from the benefit of grossing up dividends. (Para 4 , 6 , 7 , 9 )
4. Dividend income is taxable in the hands of the real owner of the shares, irrespective of whether the shares are registered in their name. (Para 4 , 6 , 10 )
5. Appeal dismissed with costs. (Para 11 )
6. Who is liable for tax on dividend income when the registered shareholder is different from the real owner?
Dividend income is taxable in the hands of the real owner of the shares, as tax is charged on income that accrues or arises to a person, regardless of the company's registration records. (Para 4 , 6 )
7. Does Section 16(2) of the Income-tax Act, 1922, exempt the real owner of shares from tax if they are not the registered holder?
No. Section 16(2) is a processing clause for determining the year of inclusion and grossing up dividends; it does not operate as an exemption from the charging sections of the Act. (Para 6 )
8. Is the grossing up of dividend income available to a real owner who is not the registered shareholder?
No. The benefit of grossing up dividends and claiming credit for tax paid by the company is available only to the registered shareholder who is also the real owner. (Para 6 , 7 )
Judgement
SHAH, J. : Kishanchand Bajaj and his seven sons formed a Hindu undivided family which owned shares exceeding Rs. 91,000 in value, in public limited companies. The family commenced business in money-lending and as commission agents on May 16, 1956 in the name of Messrs. Mangoomal Kishanchand and in the books of account of the firm the shares which stood registered in the name of Kishanchand with the companies were credited as capital of the business. On August 22, 1956 Shyam Sundar and Girdharlal, two of the sons of Kishanchand, separated from the family, each receiving rupees two lakhs in lieu of his share. On August 23, 1956 a partnership was formed between Kishanchand representing the Hindu undivided family of himself and his five sons and Shyam Sundar and Girdhalal, for carrying on the business of Messrs. Mangoomal Kishanchand. Under the deed of partnership Shyam Sundar and Girdharlal were each entitled to a seventh shares and the remaining five-sevenths share was to belong to Kishanchand as karta of the Hindu undivided family. Dividends received in respect of the shares were credited to the profit and loss account of the firm.
2. In proceedings for assessment of the firm for the year 1959-60 it was claimed that the shares which stood registered in the name of Kishanchand belonged not to the Hindu undivided family but to the firm of Messrs. Mangoomal Kishanchand. The Income-tax Officer rejected that contention. He held that the Hindu undivided family was "the real and legal owner of the shares" and that the shares were at no time the property of the firm. The order of the Income-tax Officer was confirmed in appeal by the Appellate Assistant Commissioner. In second appeal to the Income-tax Appellate Tribunal, it was contended on behalf of the Hindu undivided family that the dividend from the shares could be assessed only in the hands of the person who held ownership "legal as well as equitable" in the shares, and as the family had ceased to be the "equitable owner" of the shares, the Hindu undivided family could not be assessed under the Income-tax Act, 1922 on the dividend. The Tribunal rejected the contention. The Tribunal then referred under S. 66 (1) of the Income-tax Act, 1922, the following question to the High Court of Mysore for opinion:
"Whether on the facts and circumstances of the case, the dividend income from shares standing in the name of Kishanchand Lunidasing Bajaj and acquired with the funds of the Hindu undivided family of which the said person was the karta was assessable in the hands of the assessee family ?"
The High Court answered the question in the affirmative, and with special leave the Hindu undivided family has appealed to this Court.
3. In this appeal it was urged that where one taxable entity is the registered holder of shares in a company and the real owner of the shares is another taxable entity, the registered shareholder alone is liable to be assessed to tax in respect of the dividend from those shares, and, therefore, Kishanchand alone was liable to be taxed in respect of the dividend income from the shares, and not the Hindu undivided family. Reliance in support of this contention was placed upon S. 16 (2) of the Indian Income-tax Act, 1922, and certain observations made by this Court in the judgment in Howrah Trading Co. Ltd., v. Commr. of Income-tax, Central Calcutta, (1959) 38 ITR 215
4. In our judgment the contention is wholly without substance. Under S. 3, total income of the previous year of every individual, Hindu undivided family, company and local authority, and of every firm and other association of persons or the partners of the firm or the members of the association individually is charged to tax. By S. 4 the total income of any previous year of any person includes, subject to the previous of the Act, all income, profits and gains from whatever source derived, which are received or deemed to be received in the taxable territories in such year by or on behalf of such person,
