Bombay High Court
Commissioner Of Income-Tax vs Ambalal Kilachand And (Late) Tulsidas ... on 12 April, 1994
Equivalent citations: [1994]210ITR844(BOM)
Author: Sujata Manohar
Bench: Sujata V. Manohar
JUDGMENT Mrs. Sujata Manohar, C.J.
1. A common question of law arises in both these references. For the sake of convenience, we are referring to the facts in Income-tax Reference No. 433 of 1982. The assessee is an "individual" and was at all material times a resident of India. The assessee received dividend income from companies in the United Kingdom. The companies in the United Kingdom had paid the corresponding tax to the United Kingdom treasury on the dividends so received. For the assessment years 1970-71 to 1974-75 (which are the concerned assessment years), the assessee received the following amounts which are, for the sake of convenience, referred to as "net dividend", while the amount received plus the corporation tax paid on it by the concerned U. K. company in the United Kingdom is referred to, for the sake of convenience, as "gross dividend". The amounts involved in the five assessment years in question are as follows :
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Assessment Net Tax Gross
years dividend deduction dividend
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Rs. P. Rs. P. Rs. P.
1970-71 3,461.94 2,430.54 5,892.48
1971-72 4,724.46 3,317.58 8,042.04
1972-73 6,333.46 3,411.72 9,765.18
1973-74 7,445.70 4,710.06 12,155.76
1974-75 11,044.08 4,733.10 15,777.18
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2. It is the assessee's contention that only the dividend actually received by him (the net dividend) is includible in his total income, as this is the income which accrued to him and was received by him outside India. It is, however, the contention of the Department that the tax which has been deducted in the United Kingdom is a part of the income of the assessee. Therefore, the income which is includible in the total income is the gross dividend.
3. The Income-tax Officer included gross dividend in the income of the assessee. The Commissioner of Income-tax (Appeals), however, accepted the contention of the assessee. The Department filed appeals before the Tribunal against the order of the Commissioner of Income-tax (Appeals) in the case of the assessee as well as in the case of the assessee in Income-tax Reference No. 130 of 1986 where also a similar contention was raised. The Tribunal rejected the stand of the Department in the case of the other assessee by its order dated January 29, 1980, in Income-tax Appeal No. 27/(Bom) of 1979. Following this decision, the Tribunal has, in the present case also, upheld the contention of the assessee. From this finding of the Tribunal, the following question has been referred to us under section 256(1) of the Income-tax Act, 1961 :
"Whether, on the facts and in the circumstances of the case, the tax deducted by the company in the United Kingdom and paid into the treasury in the United Kingdom after deducting it from the dividends paid to the assessee in the United Kingdom is includible in the chargeable income of the assessee ?"
4. A similar question has also been raised in Income-tax Reference No. 130 of 1986. The assessment years involved in the Income-tax Reference No. 130 of 1986 are the assessment years 1970-71 to 1973-74.
5. In order to answer this question, it is necessary first to consider the provisions of section 5(1) of the Income-tax Act, 1961. Section 5(1), in so far as it is relevant, is as follows :
"5. Scope of total income. - (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which, -
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or
(c) accrues or arises to him outside India during such year :..."
6. Therefore, in respect of income which is received or which accrues in India, the section provides for inclusion also of income which is deemed to be received or deemed to have accrued to the assessee in India. But in respect of the income arising outside India, under section 5(1)(c) what is includible in the total income is only the income which actually accrues or arises to the assessee outside India during the relevant year.
7. In respect of income arising from dividend in India, section 194 of the Income-tax Act, 1961, provides that the company which has made a declaration of dividend and which desires to pay the dividend, shall, before making any payment in respect of any dividend or before making any distribution or payment to a shareholder of any dividend, deduct from the amount of such dividend, income-tax at the rates in force. Under section 198, all sums deducted in accordance with the provisions, inter alia, of section 194 shall, for the purpose of computing the income of an assessee "be deemed to be income received". Therefore, by virtue of the provisions of section 194 read with section 198, in respect of any dividend income received in India, not merely the dividend amount actually received by the assessee but also the income-tax deducted thereon under section 194 is considered as income deemed to be received by the assessee, thus falling under section 5(1)(a). Accordingly, the gross amount of dividend would be includible in the total income of the assessee. These sections, however, do not have any application to a company in the United Kingdom which declares a distribution of dividend or pays tax thereon in the United Kingdom. We have to consider what is the income which accrues to an assessee when he receives a dividend from a company in the United Kingdom in respect of his shareholding in that company. For this purpose, it is necessary to examine briefly the provisions of the relevant law in the United Kingdom. A similar question had come up for consideration before our High Court as well as the Calcutta High Court in respect of the period prior to 1965 as also in respect of the period subsequent to 1965 but prior to 1972 : These periods are relevant because the relevant law in the United Kingdom has undergone some modifications in 1965. There has been a further change by reason of the Finance Act of 1972 of the United Kingdom. In the case of CIT v. Blundell Spence and Co. Ltd. [1952] 21 ITR 28, a Division Bench of this court had considered the provisions of sections 16(2), 18(5) and 49B of the Indian Income-tax Act, 1922. In this case, the Division Bench held that a company pays tax on its profits and having paid the tax, it distributes dividends to its shareholders. In law, the company is the assessee and it is the company that pays the tax. It would not be true to say that the company pays the tax on behalf of its shareholders. However, in view of the provisions relating to grossing up of dividend income contained in section 16(2) of the Indian Income-tax Act, 1922, the income-tax paid by the company in India is added to the assessee's income in the form of dividend received by the assessee. The dividend income accordingly gets increased. The court held that since these sections had no application to dividend income in the United Kingdom, such a grossing up of dividend income in the case of companies in the United Kingdom cannot be done.
8. In the case of CIT v. Shaw Wallace and Co. Ltd. [1981) 132 ITR 466, a Division Bench of the Calcutta High Court considered a similar question, viz., whether the net dividend received by the assessee from certain companies in the United Kingdom and Ceylon were to be included in the total income of the assessee or whether the dividend so received together with the tax paid on it should be taxed as the net income of the assessee. Sabyasachi Mukharji J. (as he then was) considered, in this connection, the provisions of the law relating to income-tax in the United Kingdom. He quoted with approval Simon's Income Tax, Second edition, Vol. I, para 307, wherein it has been stated as follows (at page 472) :
"It is a general principle of the Income-tax Acts in United Kingdom that as far as possible tax is charged at the point where the income first emerges from the source and this is so even if the person primarily in receipt of the income does not ultimately enjoy it but pays it over or accounts for it to another who is the person beneficially entitled to it. In such cases, the person assessed has the right to recoup himself, when making a payment of income to the person entitled thereto, by deducting the tax appropriate to that income, or by crediting himself with the amount when accounting. The author includes dividend income as one such income."
9. He also cited with approval the following observations of Lord Atkin in the case of IRC v. Cull [1939] 22 TC 603 at page 636; [1940] 8 ITR (Suppl.) 1, 4 (HL) :
"My Lords, it is now clearly established that in the case of a limited company the company itself is chargeable to tax on its profits, and that it pays tax in discharge of its own liability and not as agent for its share-holders. The latter are not chargeable with income-tax on dividends, and they are not assessed in respect of them. The reason presumably is that the amount which is available to be distributed as dividend has already been diminished by tax on the company, and that it is thought inequitable to charge it again. At one time it was thought that the company, in paying tax, paid on behalf of the shareholder; but this theory is now exploded by decisions in this House, and the position of the shareholders as to tax is as I have stated it."
10. The Calcutta High Court held that what accrued to the assessee, therefore, was only the net dividend. The company itself had been liable to pay corporation tax on the distribution of the dividend. It was only after payment of such tax that it could distribute the income to its share-holders. By reason of the provisions of the law in the United Kingdom, the company was, however, entitled to recoup itself in respect of the corporation tax so paid. Hence in the absence of any legal provision under which the tax paid which is attributable to the dividend distributed to the assessee, is added back to the dividend income, it cannot be added to his income. Such grossing up cannot be done. Since this is dividend income arising outside India, the provisions for grossing up in respect of dividend income in India in the Income-tax Act, 1961, would not be attracted.
11. In the case of CIT v. Oriental Co. Ltd. [1982] 137 ITR 777, a Division Bench of the Calcutta High Court once again considered a similar question both in connection with the law in the United Kingdom before the Finance Act of 1965 and after the Finance Act of 1965 of the United Kingdom. In the case of dividends declared in the United Kingdom prior to the Finance Act of 1965, it followed its earlier decision in the case of CIT v. Shaw Wallace and Co. Ltd. [1981] 132 ITR 466. In regard to the position in law in the United Kingdom after the U. K. Finance Act, 1965, Sabyasachi Mukharji J. (as he then was) has referred to the provisions of section 47 of the U. K. Finance Act of 1965, which, inter alia, provides that the corporation tax shall not be chargeable on dividends and other distributions of a company resident in the United Kingdom nor shall any such dividend or distribution be taken into account in computing income for corporation tax; but income-tax for a year of assessment after the year 1965-66, shall be chargeable under a new Schedule F in respect of all dividends and other distributions in that year of a company resident in the United Kingdom. For the purposes of income-tax, all such distributions shall be regarded as income, however, they fall to be dealt with in the hands of the recipient. Under Schedule F any such distribution in respect of which a person is entitled to a tax credit shall be treated as representing income equal to the aggregate of the amount or value of that distribution and the amount of that credit and the income under this Schedule shall, accordingly, be charged as though accrued and such tax credit is available only to a company or a person resident in the United Kingdom. In the case of a person or a company, not being resident in the United Kingdom, if the income includes a distribution in respect of which that person is not entitled to tax credit, no assessment can be made of that person in respect of income-tax on that amount or value of the distribution. In other words, such a person is not liable to tax in the United Kingdom on the dividend income received from a company registered in the United Kingdom. Nor is he entitled to any tax credit for the amount of tax deducted by the U.K. company. We respectfully agree with the conclusion of the Calcutta High Court that the tax so deducted by the U.K. company for which the non-resident assessee (in U.K.) gets no tax credit in the United Kingdom cannot be added back to his income in the absence of any such provision in our Income-tax Act, 1961.
12. The law in the United Kingdom after 1973 is governed by the Finance Act, 1972. Under the Finance Act, 1972, section 84 provides that where a company resident in the United Kingdom makes a qualifying distribution after April 5, 1973, it shall be liable to pay an amount of corporation tax (to be known as "advance corporation tax") in accordance with this section. Under sub-section (2) of section 84, this corporation tax is payable at the rate prescribed therein. Under section 85 of the U. K. Finance Act, 1972, advance corporation tax paid by a company in respect of any distribution shall be set against its liability to corporation tax on any income charged to corporation tax for that accounting period and shall correspondingly discharge a corresponding amount of that liability. Section 86 provides for tax credit. It provides that where a company resident in the United Kingdom makes a qualifying distribution after April 5, 1973, and the person receiving the distribution is another such company or a person resident in the United Kingdom, not being a company, the recipient of the distribution shall be entitled to a tax credit under this section. This tax credit is, therefore, not available to a company or a person not resident in the United Kingdom. Section 87, sub-section (5), provides that where in any year of assessment, the income of a person includes a distribution in respect of which that person is not entitled to a tax credit, no assessment shall be made of that person in respect of income-tax at the basic rate on the amount or value of the distribution.
13. Therefore, as held by the Calcutta High Court, the basic scheme under the laws of the United Kingdom appears to be that it is the company which is liable to pay corporation tax on the distributions declared by it. It can recoup this tax from the dividend distributed by it to its shareholders as provided in the Finance Act, 1972. The shareholders resident in the United Kingdom who receive the dividend as reduced by corporation tax, are entitled to tax credit for the amount of tax so deducted from their dividends. In respect of persons and companies resident in the United Kingdom, Schedule F provides for grossing up of that dividend income by the tax so deducted. These provisions, however, do not have any application to persons who are not resident in the United Kingdom. The dividends are received by them as diminished by the deduction of the corporation tax paid on it. As far as we can see, this basic scheme does not appear to have changed even after the Finance Act, 1972. What, therefore, accrues to an assessee in respect of shares held by him in the United Kingdom is the dividend as actually distributed to him. The amount initially available for distribution by the U.K. company cannot be considered as income accruing to the assessee, because the assessee does not have any right to receive the amount so initially declared. He does not have any right to claim any credit for the tax which is deducted on that amount. Therefore, under no circumstances can he claim that the gross amount available for distribution has accrued to him. The company in the United Kingdom is liable to pay certain tax on that amount before the money goes to the hands of its shareholders. A shareholder outside the United Kingdom cannot claim any credit for the tax paid by the company. Therefore, the only entitlement of a shareholder outside the United Kingdom is to receive dividend as reduced by the deduction of the corporation tax. We find support for this view in the above decision of the Calcutta High Court in the case of CIT v. Oriental Co. Ltd. [1982] 137 ITR 777.
14. A similar view has been taken by the Kerala High Court in the case of CIT v. Y. N. S. Hobbs [1979] 116 ITR 20. The Kerala High Court has also held that in the absence of any deeming provision relating to dividend income arising outside India, the income which accrues to an assessee in respect of a dividend from a foreign company is the dividend which is actually received by him. The Kerala High Court followed the decision of the Bombay High Court in the case of CIT v. Blundell Spence and Co. Ltd. [1952] 21 ITR 28.
15. Our attention was drawn to a decision of the Bombay High Court in the subsequent case of Sir Joseph Kay v. CIT [1956] 29 ITR 774. In that case, the assessee who was a resident of India, was entitled to receive annuities from an insurance company in the United Kingdom. But the insurance company deducted tax on these annuities under the English Income-tax Act, 1918. It was held that the entire amount was the income of the assessee and not merely the amount as reduced by the deduction of tax. The court held that the entire amount of annuities was an income from which certain tax was deducted. The relevant payment attracted double taxation relief. The position regarding payment of dividends being quite different from payment of annuities, the ratio of this judgment is not attracted.
16. Our attention was also drawn to a decision of the Supreme Court in the case of CIT v. Clive Insurance Co. Ltd. [1978] 113 ITR 636. This decision deals with double taxation relief. Under section 91 of the Income-tax Act, 1961, if any person who is resident in India in any previous year proves that, in respect of his income which accrued or arose to him during that previous year outside India, he has paid in any country with which there is no agreement under section 90, income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum to be calculated as provided in that section. The Supreme Court in that case was required to consider whether an assessee who receives dividend from a company in the United Kingdom would be entitled to such tax relief under section 91. We have not examined this decision at any length because we do not have to consider whether the assessee is entitled to double taxation relief under section 91 or not.
17. Looking to the provisions of the Finance Act, 1972, under which corporation tax is payable by the company for which the recipient of the distribution resident in the United Kingdom gets tax credit, and looking to the language of section 91 under which the double taxation relief is granted to an assessee in respect of any tax which the assessee has paid in any country to which section 91 of the Act applies, it is a moot point whether the provisions of section 91 would be attracted in any event, after the U. K. Finance Act, 1972, or whether the ratio of the Supreme Court judgment in the case of CIT v. Clive Insurance Co. Ltd. : [1978] 113 ITR 636 would govern the present case. Since the question in the present reference does not relate to double taxation relief, we refrain from expressing any view thereon.
18. In the premises, the question which is referred to us is answered in the negative and in favour of the assessee in Income-tax Reference No. 433 of 1982.
19. The question referred to us in Income-tax Reference No. 130 of 1986 is as follows :
"Whether, on the facts and in the circumstances of the case, the tax deducted by the companies in the United Kingdom and paid into the Treasury in the United Kingdom after deducting the same from the dividends and interest on securities paid to the assessee in the United Kingdom, is includible in the chargeable income of the assessee ?"
20. This question is answered in the negative and in favour of the assessee.
21. In the circumstances, there will be no order as to costs in both the matters.
22. Certified copy expedited.