Income Tax Appellate Tribunal - Nagpur
Sir Maneckji B. Dadabhoy vs Commissioner Of Income Tax, C.P. And ... on 3 December, 1947
Equivalent citations: [1949]17ITR561(NAG)
JUDGMENT
POLLOCK, J. - This is a reference under Section 66(1) of the Income-Tax Act. During 1941-42, rage year previoius to the year of assessment, the assessee, Sir Maneckji Dadahoy, received dividends from two companies registered in the United Kingdom and carrying on business in British India. The dividend warrants, as required by law, showed the gross amounts of the dividends declared, the tax deducted by the company, and the net amounts paid to the assessee. A dividend is defined in clause (a) of Section 2(6a) of the Act as including "any distribution by a company of accumulated profits, whether capitalized or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company." The question referred to us is, "whether, upon the facts found by the Tribunal, the gross amount of dividends shown in the dividend warrants have correctly been treated as dividend in terms of sub-clause (a) of Section 2 (6A) of the Income Tax Act ?"
The two companies from which the assessee received these dividends were the C.P. Manganese Ore Company Limited and the Attack Oil Company Limited. The dividend warrant of the former company showed a gross dividend of $ 5,551-9-7 (equivalent to Rs. 74,019) out of which, after deduction of tax, the assessee actually received & 4,094-4-3 (equivalant to Rs. 54,589-8-0), and that of the latter company showed a gr oss dividend of Pounds 72-8-0 (equivalent to Rs. 965), out of which the assessee actually received & 42-4-8 (equivalent to Rs. 563-2-0).
Section 16(2) of the Act runs as follows :-
"For the purpose of inclusion in the total income of an assessee any dividend shall be deemed to be income of the previous Year in which it is paid, credited or distributed... to him, and shall be increased by the amount of income-tax (but not super-tax) payable thereon calculated at the rate applicable to the total income of company for the financial year in which the dividend is paid, creditor or distributed..."
The rate applicable to the total income of each company was 450 pieces in the rupee. For the purposes of Section 16(2) the Tribunal took the gross dividends of Rs. 74,019 and Rs. 965 and "grossed them up" at the rate of 40 pies in the rupee, making them Rs. 93,498 and Rs. 1,2919 respectively, and included these amounts in the income of the assessee. The assessee contend that it should have taken the net dividends and "grossed them up" and included only these amounts in the income of the assessee.
In our opinion, the amounts released by the companies to the assessee were the amounts actually paid to him, and the Tribunal should therefore have "grossed Up" the net dividends and not the gross dividends. Under English law, "A company paying income-tax on its profits does not pay it as agent for its shareholders. It pays as a taxpayer, and if no dividend is declared the shareholders have no direct concern in payment. If the dividend is declared, the company is entitled to deduct from such dividend a proportionate part of the amount of the tax previously paid the company, and in that case the payment by the company operates in relief of the shareholder. But no agency, properly so called is involved." See Konstams Law of Income-Tax, 9th edition, at page 231, and the case there cited. The term "grossing up" implies that it is the net dividend that is to be "grossing up", for it is inappropriate to speak of a "grossing up" a gross dividend, and in Sundarams Law of Income-tax, it is assumed, at page 714 of the 5th edition, that it is the net dividend that is to be "gross up."
Section 18(5) of the Act provides that any sum by which a dividend has been increased under Section 16(2) shall be treated as a payment of income-tax or super-tax on behalf of the person from whose income the deduction was made and credit shall be given to him therefore in the assessment, if any, made got for following year. In our opinion, the Tribunal should have taken the net dividends, Rs. 54,589-8-0 and Rs. 563-2-0, "grossed these up" at the rate 40 pies per rupee by the addition of Rs. 14,365-10-0 and Rs. 148-3-0 respectively, and so have included in the assessees income Rs. 68,955-2-0 and Rs. 711-5-0 and have given the assessee credit for Rs. 14,365-10-0 and Rs. 148-3-0 in the following year. If this view is correct, the gross dividend, on which the company has paid the tax, is included in the assessees income merely for the purpose of affecting the rate at which he pays income, and he is given credit for the tax, paid by the company.
The position will be clearer if the figures are simplified. Let us assume that a company pays income-tax at 4 annas in the rupee, that this is the maximum rate payable by an individual, and that the gross and net dividends are respectively Rs. 4,000 and Rs. 3,000. According to the Tribunals view, the gross dividend of Rs. 4,000 is "grossed up" to Rs. 5,333, ignoring fractions, and this sum, a purely fictitious sum that has no relation to the facts, is included in the assessees income, while he is given credit for Rs. 1,333, though the company paid only Rs. 1,000. According to our view, the net dividend of Rs. 3,000 should be "grossed up" to Rs. 4,000, and this amount, i.e., the gross dividend, should be included in the assessees income, while he should be given credit Rs. 1,000, the tax actually paid by the company. It seems to us that the latter is a fair and reasonable procedure and that the former is not, while the giving of credit for more than the company paid as tax might lead to curious results, to the benefit of the assessee. We realize of course that the rules for assessment of income-tax are not necessarily fair or reasonable, but a reasonable interpretation should be preferred to an unreasonable one.
In the Income-tax Act, as originally enacted in 1922, Section 14(2) provided that the tax should not be payable by an assessee in respect of any sum which he received by way of dividend as a shareholder in a company where the profits or gains of the company had been assessed to income-tax, and Section 16 provided that in computing the total income of the assessee any sum exempted under Section 14(2) should be and such sum should be increased by the amount of income-tax payable by the company in respect of the dividend received. The amendment of 1941 seems to have been designed to maid it clear that the sum received by way of dividend Rs. 3,000, if we go back to our hypothetical figures, it be increased by the amount of income-tax payable on Rs. 4,000 and not on Rs. 3,000.
This appears to us to be also the position in the United Kingdom, for by Section 7(2) of the English Finance Act of 1931, cited in the order of reference, a dividend paid by a company shall be deemed to represent income of such an amount as would, after deductions of tax, be equal to the net amount received. In Neumann v. Commissioners of Inland Revenue Lord Tomlin at pages 362-363 remarked :- "They (the dividends) are.... liable where the dividend are made out of the profits or gains charged On the company, to suffer deductions of a sum equal to tax..... on the gross amount of the dividends is the income-tax income to be taken into account, whether it be for computing the amount of tax which the shareholders is entitled to have returned, for our fixing his liability to surtax."
Our answer to the question referred to us therefore No. The Tribunal should have proceeded in the way we have indicated. The assessee will be allowed his costs in this Court. Counsels fee Rs. 300.