JUDGMENT

1. These four references involve a common question of law, namely, whether the dividends distributed by a company to its shareholders out of agricultural income can themselves be treated as agricultural income within the meaning of the Income-tax Act. It is admitted that the only income which the companies have is agricultural income within the meaning of the companies have is agricultural income and that, as such, it is exempt from tax in the hands of the companies themselves.

2. Upon a reading of the relevant provisions of the Act, we should have had no difficulty in returning an affirmative answer. But two recent decisions of Indian High Courts and one of the Supreme Court of India, to the contrary, have given us considerable food for thought; and having examined them again and again. We have ventured to differ from them. We had to be very clear in our mind before we could differ from decisions of such weight and authority, and at the very outset I should state that I am clear about two matters. Firstly, in emphasizing the distinction between the company and its shareholders, the Indian Courts have been carried away more by the outward form than by the substance of the distinction. Secondly, they have not considered the effect of certain provisions of the Act, particularly section 18(5) and section 49B. According to which the payment of income-tax by the company shall be deemed to be payment by the shareholders.

It is necessary to reproduce the relevant parts of the Act here, and also. In some places, to bring out the difference between the provisions of the Act of 1922 before and after the very substantial amendments of 1939. Under section 3, tax is charged in respect of the "total income" of the previous year of every individual, company and other bodies at a rate fixed every year by the Central Legislature. The total income of a person means, under section 4(1). All income, profits and gains "which are received or are deemed to be received" in the country "by or on behalf of such person" or accrue or arise to him etc, under sub-section (3) of section 4 "any income. Profits or gains falling within the following classes shall not be included in the total income of the person receiving them," and of these classes "agricultural income" occurs in the eighth clause, "agricultural income" has been defined in section 2(1) as meaning, among other things, "any rent or revenue derived from land which is used for agricultural purposes. And is............... assessed to land revenue."

Now since one of the Indian decisions has built an argument on "the person receiving them" occurring in sub-section (3) of section 4, it would be profitable at this stage to see how sections 3 and 4 stood before the amendment, section 3 then required the charge of tax to be made. Not on "total income," but "in respect of all income," stated that "this Act shall apply to all income, profits and gains............ accruing, or arising, or received in British India,..............." Sub-section (3) of section 4 stood in this from. "This Act shall not apply to the following classes of income," and one of these classes then, as now, was "agricultural income". Whether this has made any difference to the intention of the Act will be seen later.

Next, I shall reproduce section 14 of both Acts. since it has a direct bearing on dividends :

Before amendment

Section 14(1), the tax shall not be payable by an assessee in respect of any sum which he receives as a members of a Hindu undivided family.

(2) The tax shall not be payable by an assessee in respect of

(a any sum which he receives by way of dividend as a shareholder in a company where the profits and gains of the company have been assessed to income-tax : or

(b) such an amount of the profits or gains of any firm which have been assessed to income-tax as is proportionate to his share in the firm.

After amendment

Section 14(1). The tax shall not be payable by an assessee in respect of any sum which he receives as a m