COMMISSIONER OF INCOME TAX BOMBAY CITY Vs. BLUNDELL SPENCE AND CO LTD

JUDGEMENT

(1.) The following question of law was referred to the High Court : "Whether on the true construction of Sections 16(2) and 49B, Income-tux Ant, the Income-tax Officer was right in grossing up the dividends actually received by the nonresident assessee company from Elephant Oil Mills Co., Ltd., with Indian Income-tax rate of 57 pies in the rupee and also with the United Kingdom income-tax at the rate of 9 shillings in the (equivalent to 86.4 pies in the rupee) ? Chagla, C.J.

(2.) The assessee is a company registered in the United Kingdom find is a nonresident company. In the year of account, which is from 1-11-1945, to 31- 10-1946, and which is relevant for the assessment year 1947-48, it received a net dividend of Rs. 1,40,000 front the Elephant Oil Mills Co, in which the company hold 7,000 shares on which this dividend was declared. The Incometax Officer grossed up the dividend income by adding to it the tax payable in the United Kingdom at 9 shillings per pound Sterling, which amounted to Rs. 1,14,546, and Indian income-tax which amounted to Rs. 59,112. On this grossing up, the Income-tax Officer came to the conclusion that the dividend income of the assessee was Rs. 3,13,658. The Appellate Assistant Commissioner took the view that to the sum of Rs. 1,40,000 only Rs. 59,112 should be added and the gross dividend of the assessee should be RS. 1,99,112. The Tribunal agreed with the Appellate Assistant Commissioner, and the Commissioner has now come before as on a reference made by the Tribunal.

(3.) Now, before we look at the scheme of the Income-tax Act, certain principles must be borne in mind. A company pays tax of its profits, and having paid tax it distributes dividends to its share-holders. 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 share-holders. But for certain sections of the Income-tax Act; to which I shall presently draw attention, when an assessee receives dividends from a company, of which he is a shareholder, that dividend constitutes his income and he would have to pay tax on that income without any relief whatsoever. But in order to avoid tax being paid on the same Commissioner of Income-tax, Bombay City vs. Blundell Spence & Co. Ltd. (31.08.19... Page 2 of 4 amount both by the company and by the share-holder the Income-tax Act has provided certain machinery which gives relief to the share-holder, and that machinery is provided in Section 16 (2) and Section 18 (5). Section 16 (2) provides for the grossing up of dividend income. The scheme of that sub section it that a person's income is not really the dividend which he receives from a company, but it is the dividend plus the tax paid by the company relating to that dividend. Therefore, by grossing up, you ascertain the real income of the assessee as far as dividend is concerned. Now, when we turn to Section 16 (a), it provides that the grossing up must be on the basis of the income-tax payable by the company on its total in some. It is clear that this section can only apply to the income-tax paid by the company in India and at the rate laid down in the Finance Act: it cannot possibly apply to tax paid by a company outside India. Then we come to Section 18 (6), and that sub-section provides for the relief to the assessee. The assessee's income having been grossed up, relief would have to be given to him in the amount which bas already been paid for tax by the company, and Section 18 (5) provides that ". . . any sum by which a dividend has been increased under Subsection (2) of Section 16 shall be treated as a payment at income-tax on behalf of the share-holder ... and credit shall be given to him therefore in the assessment, if any, made for the following year under the Act." (I am only quoting the relevant portion of the section) Therefore, it is by this section that relief is given to the share-holder in his assessment in respect of the amount which has been increased under Sub-section (2) of Section 16. The increase under Section 16 (a) would affect the rate at which the assessee would have to pay income-tax or super-tax. But relief is given in respect of the actual amount of tax already paid by the company, and it is by this section that the legal fiction is introduced that the company pays the tax on the dividend of the share holder on his behalf. If this scheme is borne in mind, then it is clear that both the Appellate Assistant Commissioner and the Tribunal were right in coming to the conclusion that the amount of tax paid in respect of the dividends in the United Kingdom has no bearing whatever as far as Sections 16 (a) and 18 (5) are concerned. And unless the Commissioner satisfies us that this case falls under some provision of the Income tax Act, no grossing up would be permissible at all. If the only section which permits grossing-up is Section 16 (2), then, as I pointed out, under that section the grossing-up can only be in the manner indicated in that sub-section. And that grossing-up relates only to the adding to the dividend of a shareholder the tax payable by the company, of which he is a shareholder, in India, on the total income of the company. Therefore, there is no provision whatever in the Income-tax Act for adding to the dividend of a share, holder the tax paid by the company outside India.