JUDGMENT - S. T. DESAI J. :

These six references arise out of assessments made on the six assessees who are sharehholders of Messrs. Cawasji Jehangir and Co. Ltd. The assessment year is 1948-49. An order was mode under S. 23A (1) in the matter of M/s. Cawasji Jehangir and Co. Ltd. — whom we shall refer to as the Company — by the Income-tax Officer in respect of the previous year, which was 1946. The total income of the company was determined at Rs. 20,63,016/-. What the company had done was that out of this amount it had taken a sum of Rs. 7,86,900/- directly to the general Reserves and not to the profit and loss account and no part of the same was distributed as dividend. The dividend declared amounted to Rs. 4,34,768/- This was less than 60 per cent. of the assessable income of the company for that previous year as reduced by the amounts of income-tax and super-tax payable by the company in respect of the same. In making the order of assessment on the company the Income-tax Officer determined the undistributed portion of the) assessable income of the company of that previous year as computed for income-tax purposes and reduced by the amount of income-tax and super tax payable by the company in respect thereof. This will appear from the following figures.

Total income finally determined

Rs. 20,63,016/-

Less: Tax payable: .. .. Rs. 8,03,115/-

Rs. 12,59,901/-

Less: Dividend declared by the

company. Rs. 4,34,768/-

Rs. 8,25,133/-

The sum of Rs. 7,86,900/- was brought to tax in the hands of the company under S. 12B as "capital gains". Having determined the figure of Rs. 8,25,133/- as pointed out by us above, the proportionate share thereof was included by the Income-tax Officer in the total income of each share-holder for the purpose of assessing his total income. Suitable grossing up was done as required by S. 16 (2). Having done that, the Income-tax Officer computed the total income of the six share-holders by including a sum of Rs. 6,31,527/- (as S. 23A dividend) in the case of "the Executors and Trustees of late Sir Cawasji Jehangir, 1st Bart." and a sum of Rs. 1,26,305/- in the case of each of the five other share-holders.

(2) The contention of the assessees before the Income-tax Officer and the Appellate Assistant Commissioner was that the portion of S. 23A dividend attributable to capital gains in the hands of the company should be taxed in the hands of the share-holders also at the rate appropriate to "capital gains" as indicated in S. 17 (6) of the Act. The Income-tax Officer as well as the Appellate Assis-tant Commissioner negatived that contention. The matter was carried in appeal by the assessees to the Tribunal and the Tribunal also dismissed that contention. The view taken by the Tribunal was that S. 23A dividend that is included in the total income of an assessee share-holder cannot be dissected as urged on behalf of the assessees for the purpose of determining the income-tax and super-tax payable by them on the "deemed dividend income." The assessees have now come before us on these references.

(3) The question which we are called upon to determine is:

"Whether the S. 23A dividend of Rs. 6,31,527/-can be dissected into two parts in the ratio of Rs. 7,86,900/-. Rs. 20,63,016/- for the purpose of determining the amount of income-tax and super-tax payable by the assessee share-holder on his total income and if so, whether that smaller portion of Rs. 6,31.527/- is liable to be taxed at the rates applicable to "capital gains" as laid down in S. 17 (6) of the Income-tax Act, 1922." We may state that the same question of law arises in the case of all the share-holders, the only difference being that in the case of one share-holder, the amount is Rs. 6,31,527/- and in the case of other Rs. 1,26,305/-. each.

(4) Two contentions have been pressed before us by Mr. Palkhiwala, learned counsel for the assessees. The first contention is that the actual distribution of dividend by the company out of the capital gains would be

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