Delhi High Court
Commissioner Of Income-Tax, Delhi And ... vs L. Bansi Dhar. on 5 September, 1967
Equivalent citations: [1968]67ITR374(DELHI)
JUDGMENT
The Income-tax Appellate Tribunal (Delhi Bench &quto;B&quto;) has by its order dated May 30, 1963, formulated the following two questions for answer by this court :
&quto;1. Whether the income of Rs. 1,511 from dividends should be excluded from the ttoal income of the assessed for the assessment year.
2. Whether the income of Rs. 1,771 from dividends should be excluded from the ttoal income of the assessed for the assessment year 1956-57 ?&quto;
It is obvious that though these two questions relate to two separate orders of assessment, the question to be answered is in substance only one.
In order to understand the precise nature of the question, it is desirable to reproduce the pedigree-table of the assessed, L. Bansi Dhar :
L. Bishambhar Das (deceased) ½ ½ L.Girdhar Lal(deceased) ½ L. Madan Mohan Lall ½ L. Gopal Rai (deceased) ½ ½ Sir Shri Ram ½ ½ Sir Shankar Lal ½ ½ ½ L.Murlidhar L. Bharat Ram L. Charat Ram ½ ½ L. Shri Dhar L. Bansi Dhar The shares, dividends of which are the subject-matter of the controversy, are of a private limited company known by the name of Messrs. Madan Mohan Lall & Sir Shri Ram & Co. (Private) Ltd. (hereinafter described as the company), which was floated on April 18, 1932, to take over the assets of the family of L. Shri Ram, the grandfather of the assessed, L. Bansi Dhar. It may be pointed out that the family of which the pedigree-table has been reproduced earlier, is popularly known as Sir Shri Ram Group and this group controls the Delhi Cltoh and General Mills Company Limited, which itself is a big unit comprising of several industries. The controversy before us centres round the construction to be placed on article 7 (e) of the articles of association of the company which so far as relevant is in the following terms :
&quto;7. Succession to the shares of a deceased shareholder shall be in accordance with Hindu (Mitakshara) law subject so the following conditions namely :......
(e) If the shares of a deceased shareholder are succeeded to by his sons or their descendants, then the sons or their descendants and their successors shall pay out of the dividends on the said shares :
(1) to the widow of the deceased shareholder for life one-fourth share of said dividends as they fall due and, (2) to all the daughters (collectively) of the deceased shareholder from time to time, such portion of the said dividend as will give, when divided between the daughters, to each living daughter one-fourth of what may be left to each of the sons or his descendants or the successors of the descendants.
The payments mentioned in sub-clauses (1) and (2) hereof shall be a first charge on the said dividends and may be made direct by this company out of the said dividends.&quto;
L. Murlidhar, father of L. Bansi Dhar, assessed, died in an air crash in 1949, leaving behind two sons L. Shri Dhar and L. Bansi Dhar, along with two daughters, Smt. Sushila and Smt. Gayatri. The company, it seems, in terms of article 7(e) paid the proportionate dividends to Smt. Sushila and Smt. Gayatri direct. The Income-tax Officer considered this payment to be a voluntary application of income on the part of the assessed and, therefore, liable to be taxed and nto open to exclusion from the income of the assessed. This was confirmed by the Appellate Assistant Commissioner on appeal. The Appellate Tribunal, however, disagreeing with the view of the Appellate Assistant Commissioner and of the Income-tax Officer, came to the conclusion that the rule laid down by the Privy Council in Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax was applicable to the case and, therefore, payment of the dividends to the two ladies being a case of diversion by overriding title, this amount was liable to be excluded from the ttoal income of L. Bansi Dhar.
Before us, the learned counsel for the revenue, Shri A. N. Kirpal, has submitted that in the present case, the amount of dividends constitutes the income of the assessed, L. Bansi Dhar, and Payment whether by him or by the company on his behalf to the two ladies, does nto deprive the dividends of the character of the income of the assessed, with the result that it should be held to have been wrongly excluded from the assesseds income by the Appellate tribunal. The learned counsel has in this connection drawn our attention to a recent decision of the Supreme Court in Commissioner of Income-tax v. Sitaldas Tirathdas and to Commissioner of Income-tax v. Thakar Das Bhargava. He has also submitted that the word &quto;shareholder&quto; must mean the shareholder registered in the books of the company and for this submission, he has referred to a decision of the Supreme Court in Commissioner of Income-tax v. Shakuntala. This view is sought to be fortified by the ratio of a still earlier decision of the Supreme Court in Howrah Trading Co. v. Commissioner of Income-tax. Shri Kirpal has in this connection tried to distinguish the Privy Council decision relied on by the Appellate Tribunal in Raja Bejoy Singh Dudhuria case.
Shri B. Sen, learned counsel for the assessed-respondent, has, to begin with, placed reliance on section 36 of the Companies Act, 1956, which is substantially the same as section 31 of the old Act of 1913 and has urged that the articles of association of a company are binding buth on the company and the shareholders. He has also emphasised that this court is only expected to answer the question which arises out of the order of the Tribunal. This submission has been made in support of the argument that clause 7 (e) should be assumed to be buth valid and binding on the parties and its validity should nto be allowed to be impeached on the advisory side of this courts jurisdiction under the Income-tax Act. This clause, according to Shri Sen, creates a first charge in favor of the ladies in question and the company is entitled to make the payment to them direct without first passing it on to the assessed. This payment is a condition of holding the shares and, therefore, it also attaches to the succession : there is in fact a diversion of income at the source, contends Shri Sen. Our attention has in support of this argument been drawn to Raja Bejoy Singh Dudhurias case, Estate of Lala Shankar Shah v. Commissioner of Income-tax, Sitaldas Tirathdas case and Commissioner of Income-tax v. Woodlands Co.
Shri Kirpal has in his reply submitted that a shareholder is the owner of the shares and also of the dividends, with the result that the dividends must be considered to be his income. He has also tried to draw a distinction between a charge on an income and an obligation to be discharged out of income. In the present case, according to him, there is no charge but only distribution of income and the time of the receipt of the income is the crucial test, says Shri Kirpal. He has also made a reference to the decision of the Supreme Court in Proval Kumar Mitter v. Commissioner of Income-tax and to a decision of the Privy Council in P. C. Mullick v. Commissioner of Income-tax.
The true legal position, in our view, is that the person in whose name the shares of a company stand registered is to be considered to be the owner thereof and the income by way of dividends yielded by such shares is ordinarily to be considered as assessable income, but the dividends must in law come to his hands, whether in actual fact received by a shareholder. In cases where the amount of dividends is diverted by an overriding title before it reaches the hands of the shareholder, it cannto be considered to be his assessable income within the charging provisions of the Income-tax Act. Such diversion may be illustrated by case like those where decrees for maintenance are obtained by widows creating charge on their husbands estate or where by will a testator bequeaths some income from his estate to be paid regularly as allowances or toherwise to his minor son or grandson or toher members of the family. In the latter case, the executors authorised by the testator to do business out of a part of the estate may nto be held to have received the income diverted under the will by means of payment to the beneficiaries like minor sons, grand sons and toher members of the family. To put it in plain language, if the revenue of an individual is diverted by an overriding charge, it cannto be considered to have reached him as his income. Such obligation, from its very nature, becomes operative before the individual concerned can claim the revenue to be within his power of control and it would be incorrect to say that it is out of a part of his income that he is discharging the said obligation.
In the case in hand, the very source from which the assessed claims his right to succeed to the share in question provides that a part of the dividends on those shares are to go to the widow and the daughters of the deceased shareholder. This would, in our opinion, clearly show that the amount of dividends is diverted at the source by an overriding title before it started flowing into the channel which was to reach the assessed concerned. This diverted amount of dividends may perhaps be liable to assessment in the hands of the ladies, but the assessed before us is certainly nto liable to be assessed on this amount. The amount required under the articles of association to be paid to the widow and the daughters can by no means be reasonably considered to be an instance of the application of the respondents own income after it had accrued to him. On the toher hand, it was a diversion at the source from which buth the assesseds right and that of the widow and the daughters of the deceased started flowing in different channels. The fact that the shares continued to remain registered in the name of the respondent is in the circumstances nto at all material for, the company, ntowithstanding such registration, is entitled to make the payment direct to the ladies. Such payment on the facts and circumstances of this case cannto held to have been made for and on behalf of the assessed-respondent : it is to be held to have been made pursuant to the directions contained in article 7 (e) of the articles of association which controls buth the right of the assessed and of the ladies.
As a result of the foregoing discussion, we hold that the amount of dividends involved in the two questions should be excluded from the ttoal income of the assessed and we accordingly answer the question in the affirmative. The respondent is entitled to his costs which we fix at Rs. 200.
Question answered in the affirmative.