S. K. DAS, J - (1.) THE Judgment of the court was delivered by
(2.) THESE three appeals, with special leave ofthis court.. have been heard together. They arise out ofthree Income-tax References made to the High court ofBombay, namely, Income-tax Reference No. 29 of 1957, Income-tax Reference No. 30 of 1957 and Incometax Reference No. 37of 1957. The facts are similar in the three cases and thequestion of law which the High court had to answer was thesame in each of the cases. The High court gave its answerin its leading judgment in. Income-tax Reference No. 29 of1957, and the other two References were disposed of inaccordance with. that answer. For the purposes of theseappeals, it would be enough if we state the facts ofReference No. 29 and then indicate the question which arosefor decision and the answer which the High court gave to it. One Nanalal Haridas was the karta of a Hindu undividedfamily which admittedly was the beneficiary of 1842 sharesin a company called the Cotton Export and Import Limited(hereinafter referred to as the Company). The shares wereheld in the names of different members of the family asgiven below. JUDGEMENT_719_AIR(SC)_1966Html1.htm The Company was one in which the public were notsubstantially interested. For the assessment year 1949-50the Income-tax Officer concerned applied the provisions ofs. 23A of the Indian Income-tax Act, 1922 (as it stoodprevious to :the amendment of 1955) and ordered that theundistributed portion of the assessableincome of theCompany of the relevant previous year, as computed forincome-tax purposes and reduced by the amount of income-taxand supper-tax payable by it in respect thereof, shall bedeemed to have been distributed as dividend among theshareholders as at the date of the relevant General Meetingof the-Company. The:proportionate;amount of dividend of the1842 shares, after being grossed up, came to Rs. 54,307.00.This amount the Income-tax Officer added to the income ofthe joint family. The assessee family claimed that thedividend deemed to have been distributed under s. 23A shouldbe assessed in the hands of the shareholders, that is, thepersons in whose names the, shares stood registered in thebooks of the Company, and not in the hands of the Hinduundivided family though ;admittedly it was the beneficiaryof the shares. The Income-tax Officer and the AppellateAssistant,Commissioner rejected ,this contention. Thematter them went in appeal to the Income-tax AppellateTribunal. The Department contended before the tribunal thathaving regard to the scheme of s.23 A and the ordinarydictionary meaning of the word 'share holder, there was noreason why the joint family should not be held to be theshareholder within the meaning of s 23 A. The tribunal byits order dated 15/02/1957, expressed the view thatthe interpretation of s. 23A for which the assesseecontended would defeat the very purpose of that section, butheld that it was bound by the decision of the Bombay HighCourt in S. C. Cambatta V. Commissioner of Income,-tax,Bombay (1). Accordingly, the tribunal allowed the appealand directed the Income-tax Officer concerned to delete thedeemed dividend income from the income of the Hinduundivided family. The Commissioner of Income-tax, Bombay,then moved the tribunal to refer the following question oflaw to the High court of Bombay:'Whether the dividend income of Rs. 54,307.00is to be assessed in the hands of theassessee, the Hindu undivided family?The tribunal was of the view that the question did arise outof its order and made a reference to the High courtaccordingly. The High court by its order dated 25/09/1957,answered the question in favour of the assessee. It heldthat in respect of an income which was deemed to bedistributed under the provisions of s. 23A, the S. interms provided that the proportionate share of theshareholders in such distribution should be included intheir income; and as the Hindu undivided family was not andcould not be a registered shareholder of the Company, theamount in question could not be treated as the income of theHindu undivided family under the provisions of that section.The High court re-affirmed the view it had expressed in itsearlier decision in S. C. Cambatta v. Commissioner ofIncome-tax, Bombay (1). The High court having refused leave to appeal to this courtfrom its decision in question, the Commissioner of Income-tax, Bombay, applied to this court for special leave andhaving obtainedsuch leave has brought these appeals to this court. It is necessary now to read the relevant portion of s. 23Aas it stood prior to its amendment by the Finance Act, 1955.'23A: Power to assess individual members ofcertain companies.(1) where the Income-tax Officer issatisfied that in respect of any previous yearthe profits and gains distributed as dividendsby any company up to the end of the sixthmonth after its accounts for that previousyear are laid before the company in generalmeeting are less than sixty per cent of theassessable income of the company of thatprevious year, as reduced by the amount ofincome-tax and super-tax payable by thecompany in respect thereof he shall, unless heis satisfied that having regard to lossesincurred by the company in earlier years or tothe smallness of the profits made, the paymentof a dividend or a larger dividend than thatdeclared would be unreasonable, make with theprevious approval of the Inspecting AssistantCommissioner an order in writing that theundistributed portion of the assessable incomeof the company of that previous year ascomputed for income-tax porposes and reducedby the amount of income-tax and super-taxpayable by the company in respect thereofshall be deemed to have been distributed asdividend amongst the shareholders as at the date of the general meeting aforesaid, andthereupon the proportionate share thereof ofeach shareholdershall be included in thetotal income of such shareholder for thepurpose of assessing his total incomeProvided further that this Ss. shallnot apply to any company in which the publicare substantially interested or to a sub-sidiary company of such a company if the wholeof the share capital of-' such subsidiarycompany is held by the parent company or bythe nominees thereof.'The S. in effect creates a fictional or notionaldividend-income which is not in fact received by theshareholder. The notional dividend is deemed to have beendistributed' as on the date on which the accounts of theprevious year were laid before the. company in a generalmeeting. It is clear from the section that an order madeunder it is not in itself an order of assessment-, it has tobe followed by an assessment on the shareholder either unders. 23 or under s.34. Under the express terms of the section,the artificial or notional income has to be included in thetotal income of the shareholders for the purpose ofassessing his total income. The High court has referred toits earlier decision in S.C. Cambatta. Thee Commissioner ofIncome tax, Bombay(1). That decision laid down that where ashare, stood registered in two or more names, the registeredholders treated as an association of persons must beregarded I as the ,shareholder' under s.23A and' they mustbe assessed accordingly. It further laid down that's. 23Adid notsay anything about equities or beneficial owner-ship; it was a procedural section not a charging section.It created a notional incomes which was wholly artificialand did not in fact exist in the pocket of any shareholder.In a later provision in Shree-Shakti Mills Ltd. v.Commissioner of,' Income-tax, Bombay, City(2) the. same HighCo-art held that the, expression 'shareholder' mentioned ina. 18(5) of the Act meant the person who was shown as 'ashareholder in the, register of the company and it was only,the shareholder of a company who was entitled to theprocedure (1) 1946) 14 I.T.R. 748. (2) 1948) 16 I.T.R.187.of processing permissible under ss. 16 (2) and 18(5 of theAct. This view was accepted by this court in Howrah TradingCo., Ltd. Commissioner of Income-tax, central Calcutta (1)where it said that no valid reason existed as to why theexpression 'shareholder' as used in s. 18(5) should mean aperson other than the one denoted by the same expression inthe Indian Companies Act, 1913. A reference was made to thedecision of the Bombay High court in Shree Shakti Mills Ltd.v. Commissioner of Income-tax, Bombay City(2) and otherdecisions bearing on the subject. Similarly, we see noreason why the expression 'shareholder' in s. 23A should nothave the same meaning, namely, a shareholder registered inthe books of the company. It would be anomalous if theexpression 'shareholder' has one meaning in S. 18(5) and adifferent meaning in s. 23A of the Act ; for that would meanthat a Hindu undivided family treated as a shareholder forthe purpose of s. 23A would not be entitled to the benefitof s. 18(5) of the Act.
(3.) THE learned counsel for the appellant has urged two pointsin support of his contention that the expression'shareholder' in s. 23A means the person who owns the share,irrespective of the circumstance whether that person isregistered in. the books of the company as a shareholder ornot. His first point is that the very object of the sectionis to prevent avoidance of super-tax by the shareholders ofa company, and if the beneficial owner of the shares is aHindu undivided family, that family will not come within thepurview of s. 23A, because a Hindu undivided family as suchcannot be a shareholder in a company. THE argument is thatthe narrow interpretation put on s.23 A will defeat the verypurpose of the section. THE second point urged is that theprinciple that alegal fiction must be carried to its logical conclusioncannot be overlooked in construing s. 23A. THE legal fictionenjoined by the section is that the profits must be 'deemedto have been distributed as dividend amongst theshareholders as at the date of the general meeting'. Thislegal fiction must be carried to its logical conclusion byholding that the dividend had been actually distributed andreceived by the Hindu undivided family. It is pointed outthat if the same dividend were actually distributed by thecompany, it would certainly be income in the hands of theHindu undivided family which would be liable to pay alltaxes on its income, whether actual or artificial. We do not think that either of thetwo points urged by theappellant is really decisive of the question. The questionis really one of interpretation of s. 23A, and we mustinterpret s. 23A with reference to its own terms. Thesection in express terms says that 'the proportionate shareof each shareholder shall be included in the total income ofthe shareholder for the purpose of assessing his totalincome'. The section does not talk of the beneficial ownerof the share. It talks of the shareholder only. Section18(5) of the Act deals with grossing up of dividend and twoexpressions occur therein 'owner of the security' and the','shareholder'. So far as the expression ''owner of thesecurity' is concerned it may perhaps include a beneficialowner ; but it has been decided by this court that the-expression 'shareholder' in s.18 (5) means the shareholderregistered in the books of the company. As we have earliersaid, no good reason exists as to why the expression'shareholder' in s. 23A shall not have the same meaning.Sub-sections (3) and (4) of s. 23A also make the positionclear: they talk of members of the company and a Hinduundivided family as such is not a member of the company. The position of a Hindu undivided family vis-a-vis apartnership was considered by this court in CharandasHaridas v. Commissioner of Income-tax Bombay (1) andCommissioner of Income-tax, Bombay v. Nandlal Gandalal (?).It is not disputed that the Hindu undivided family as suchwas not a shareholder of the company in the present case.Therefore, so far as the notional income is concerned, wemust go by the terms of s.23A and if there is any lacuna inthe wording of the section, we cannot cure it in the guiseof interpretation. The question here is not one of decidingthe matter from the point of view of partnership law, orHindu law, as was the question in Commissioner of Income-tax, Bombay v. Nandlal Gandalal (2) which led to adifference of opinion. The question here is one ofinterpretation only and that interpretation must, be basedon the terms of the section. The fiction enacted by theLegislature must be restricted by the plain terms of' thestatute. Nor do we see flow it can be said that theinterpretation put on s.23A that it is confined to ashareholder registered in the books of' the company defeatsthe very purpose of the section. The S. will stillapply to shareholders of the company and to their incomewill be added the notional income determined under s. 23A.We are unable to accept the argument that the principle thata legal fiction must be carried to its logical conclusionrequires us to travel beyond the terms of the S. orgive the expression 'shareholder' a meaning which it doesnot obviously bear. ;