PETITIONER: PURSHOTTAMDAS THAKURDAS Vs. RESPONDENT: COMMISSIONER OF INCOME-TAX, BOMBAY DATE OF JUDGMENT: 04/12/1962 BENCH: DAS, S.K. BENCH: DAS, S.K. KAPUR, J.L. SARKAR, A.K. HIDAYATULLAH, M. DAYAL, RAGHUBAR CITATION: 1963 AIR 1066 1963 SCR Supl. (2) 668 ACT: Income Tax-Advance payment of tax-Dividend income deducted from total income-If allowable-"Deduction of income-tax at the time of payment", Meaning of-Company paying tax on dividend-Payment of dividend to share-holder--Whether tax deducted at the time of payment-Indian Income-tax Act, 1922 (11 of 1922), ss. 16, 18, 18-A, 49-B. HEADNOTE: The assessee submitted his estimate of income for advance payment of tax under s. 18-A, in which he did not include his dividend income. The Income-tax Officer held that under s. 18-A(2) the assessee was bound to include in his estimate, and to pay advance super-tax, on his dividend income. Since that was not done and the advance tax paid was less than 800% of the tax determined on regular assessment, he levied penal interest under s. 18-A(6) in respect of the super-tax payable on the dividend income. The assessee contended (i) that the dividend income was income in respect of which provision was made under s. 18 for "deduction of income-tax at the time of payment" and as such s. 18-A was not applicable to it, and (ii) that since s. 18(5) was applicable to dividend income the penal provisions of s. 18-A(6) were not attracted. Held, (per Das, Kapur and Hidayatullah, jj., Sarkar and Dayal,JJ., dissenting) that s. 18(5) read with ss. 16(2) and 49-B provided for the deduction 'of income-tax at the time of payment" in respect of dividend income and therefore s. 18.A did not apply to such income. A shareholder's right to the dividend arises upon its declaration. Under the leg,-Al fiction 669 introduced by s. 49-B, when dividend is paid to a shareholder 'by a company which is assessed to tax, the income-tax (but not super-tax) in respect of such dividend is deemed to have been paid by the shareholder himself and credit is given therefore to him under s. 18(5). If the shareholder was deemed to have paid the tax himself at the time when the company paid the dividend, the payment was "deduction of income-tax at the time of payment" within the meaning of s. 18-A(1). Per Sarkar and Dayal, JJ-The dividend income should have been included in the estimate of income and the penal interest was properly levied on the assessee. Dividend income is not one on which tax was deducted at the time of payment under s. 18. Payment of tax by the assessee, fictional or otherwise, on income received by him was not a deduction of tax under s. 18 by the person who paid the income to the assessee. for purposes of s. 18-A there had to be a deduction under s.18; deduction under other provisions was not relevant. Under s. 18(5) credit for the tax paid by the company was to be given to the shareholder not at the time of payment of the dividend but later at the time of assessment, Further, the provisions of s. 18-A(6 ) were applicable in respect of dividend income. The words "Income to which provisions of s. 18 do not apply" in s. 18,A(6) refer to that type of income in respect of which s. 18 provides for deduction of tax at the source and they do not include dividend income. JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 597 of 1961.
Appeal from the judgment and order dated July 3, 1959, of
the Bombay High Court in 1. T. Reference No. 45 of 1958.
A. V. Viswanatha Sastri, N. A. Palkhivala, J. B.
Daduchanji, O. C. Mathur and Ravinder Narain, for the
appellant.
K.N. Rajagopal Sastri and R. N. Sachthey, for the
respondent.
1962. December 4. The judgment of Das, Kapur and
Hidayatullah, jj., was delivered by Das, J. The judgment of
Sarkar and Dayal, jj., was delivered by Sarkar, J.
670
S.K. DAs, J.-This is an appeal on a certificate of
fitness granted by the High Court of Bombay under s. 66.A(2)
of the Indian Income-tax Act, 1922.
The short facts giving rise to the appeal are these. The
original assessee was Purshottamdas Thakurdas, a well-known
businessman of Bombay. He died sometime after the
proceedings in the High Court had terminated and the
appellants herein are his legal representatives. As nothing
turns upon the distinction between the assessee an& his
legal representatives in this case, we shall ignore it for
the purpose of this judgment. By a notice issued under s.
18-A(1) of the Act the Income-tax Officer concerned required
the assessee to make advance payment of tax in respect of
the assessment year 1947-1948. On September 15, 1946, the
assessee submitted an estimate of his income under sub-s,
(2) of s. 18-A. In this estimate the assessee showed his
total income at Rs. 4,64,000/-. He deducted the sum of Rs.
3,64,000/-, stated to be his dividend income, on the ground
that s. 18 of the Act applied to such income. After
claiming credit for Rs. 10,000/- on the ground of double
taxation relief, the assessee estimated the advance tax
payable by him at Rs. 2,67,752/-. The Income-tax Officer
took the view that under s. 18-A(2) of the Act the assessee
was bound to include in his estimate, and to pay advance
super-tax on, his dividend income. Since that was not done
and the advance tax paid was less than eighty per cent of
the tax determined on the basis of the regular assessment,
he levied penal interest on the assessee under sub-s. (6) of
s. 18-A of the Act in respect of the super-tax payable on
the dividend income. There was an appeal to the Appellate
Assistant Commissioner who confirmed the view of the Income-
tax Officer. On a further appeal, the Appellate Tribunal
held by its order dated October 25, 1957, that sub-s. (6) of
s. 18-A did not apply to dividend income and the assessee
was not
671
liable to pay penal interest in respect of the dividend
income. The Commissioner of Income tax, Bombay City,
respondent before us, moved the Appellate Tribunal to state
a case to the High Court of Bombay on the following question
of law which arose out of the Tribunal’s order :
“Whether on the facts and circumstances of the
case, the assessee is liable to pay interest
in respect of dividend income as provided
under s. 18-A(6) of the Income-tax Act
The Tribunal stated a case on the aforesaid question and the
reference made by the Tribunal was dealt with by a Division
Bench of the High Court of Bombay by its judgment dated July
3, 1959. The question framed by the Tribunal was slightly
altered by the High Court , but the alteration made is not
material for our purpose. Mr. justice J. C. Shah came to
the conclusion that dividend income was not income in
respect of which s. 18 made any provision “‘for deduction of
income-tax at the time of payment” within the meaning of
sub-s. (1) of S. 18-A and though the phraseology used in
sub-s. (6) of s.18A was slightly different from the
phraseology used in sub s. (1) of s. 18-A, the two sub-
sections substantially had the same meaning. Accordingly,
he answered the question in the affirmative and against the
assessee. Mr. justice S. T. Desai also gave the same answer
to the question, though he reached a somewhat different
conclusion. He held that on a proper construction of sub-s.
(6) of s. 18-A an assessee was liable to pay interest in
respect of tax on dividend income to the extent that sub-s.
(5) of s. 18 did not apply to the same. He said
“An assessee who is called upon to make
advance payment of tax under s. 18-A (1) may
under sub-s. (2) of that section pay such
amount as accords with his own estimate, If he
672
excludes the amount of super-tax on dividend
income from his estimate he takes the risk of
the application of the ratio of eighty per
cent resulting in a shortfall and he would
have to pay interest “upon the amount by which
the tax so paid falls short of the said eighty
per cent.” The eighty per cent would be of the
amount of tax determined on the basis of the
regular assessment. so far as such tax relates
to income to which the provisions of s. 18 do
not apply. The provisions of s. 18(5) as I
have already pointed out do not apply to
super-tax and the amount of super-tax on the
dividend income must be included and taken
into consideration in the computation
necessary for the purpose of fixing the
quantum of tax to which the ratio of eighty
per cent is to be applied. I would,
therefore, answer the question as framed by us
in the affirmative.”
The assessee then moved the High Court for a certificate of
fitness and having obtained such certificate preferred this
appeal to this court.
On behalf of the assessee, the contention is that the answer
given by the High Court to the question referred to it is
not correct and this contention is based on two grounds.
The first ground is that on a proper construction of sub-s.
(2) of s. 16, sub-s. (5) of s. 18 and s. 49-B of the Act,
dividend income is income in respect of which provision is
made under s. 18 for “‘deduction of income-tax at the time
of payment” and therefore s. 18-A is not attracted to it.
The second ground which has been taken in the alternative is
that sub-s. (6) of s. 18-A clearly states that where in any
year an assessee has paid tax under sub-s. (2) on the basis
of his own estimate and the tax so paid is less than eighty
per cent of the tax determined on the basis of the regular
assessment, so far as such tax relates to income
673
to which the provisions of s. 18 do not apply, simple
interest at the rate of; six per cent per annum etc. shall
be payable by the assessee upon the amount by which the tax
so paid falls short of the said eighty per cent, It is
submitted that thephraseology used in sub. s. (6) of s.
18-A is “to whichthe provisions of s. 18 do not apply.
Thealternative argument is that sub-s. (5) of s. 18 is
undoubtedly a provision which applies to dividend income and
therefore under sub-s. (6) of s. 18-A the assessee was
not liable to pay penal interest by his failure to pay
advance tax On that head of income. Put differently, the
alternative argument is that sub-s. (6) of s. 18-A refers to
a category of income wider than what is referred to in sub-
s. (1) of s. 18-A and if there is some provision in s. 18
relating to a head of income, namely, dividend income,
(though that provision may not amount to deduction of
income-tax at the time of payment’), failure to pay advance
tax- on that head of account will not attract the penal
provisions of sub-s. (6) of s. 18-A.
We proceed now to consider these two arguments advanced on
behalf of the appellants and the replies thereto on behalf
of the respondent.
First as to the argument that on a, proper construction of
sub-s. (2) of s. 16, sub-s. (5) of s. 1 8 and s. 49-B of the
Act, dividend income is income in respect of which provision
is made under s. 18 for “deduction of income-tax at the time
of payment.” To appreciate this argument it is necessary
first to refer to the scheme of ss. 18 and 18-A of the Act.
Under the Indian Income-tax Act 1922, tax is assessed and
paid in the succeeding year upon the results of the previous
year of account. The legislature has by enactings. 18-A,
made a provision for imposing a liability uponthe tax-
payers who had been previously assessedand even upon
those who had not been so assessedto make advance
payment of
674
tax in respect of income, exceeding a certain amount, for
which provision is not made under s. 18 for deduction of tax
at the time of payment. Sections 18 and 18-A between
themselves exhaust all categories of taxable income. The
Act provides for two modes of collecting taxes …direct
levy and levy by deduction at the source. The ordinary
method of collection is-direct collection of the tax from
the assessee which is dealt with by. ss.,19, 45 and-46.
Deduction of tax at the source is provided for only in
certain specified cases mentioned in s. 18. Sub-s. (2) of
s. 18 relates to salaries and makes the, person responsible
for paying any income chargeable under the head salaries” to
make deduction of income-tax and super-tax on the amount
payable at a rate representing the average of the rates
applicable to the estimated total income of the assessee
under that head. Sub-s. (3) relates to interest on
securities and makes the person responsible for paying any
income chargeableunder the head “,,interest on
securities”.. unless otherwise prescribed in the case of any
security of the Central Government, to deduct at the time of
payment income-tax but not super-tax on the amount of
interest payable at the maximum rate. Sub-ss. (3-A) to (3-
E) relate to certain other cases which are not very material
for our purpose. We need not therefore refer to those sub-
sections. Sub. S. (4) of s. 18 says that all sums deducted
in accordance with the provisions of this section shall, for
purposes of computing the income of an assessee, be deemed
to be income received. Then there is sub-s. (5) which in so
far as it is relevant for our purpose is in these terms
“Any deduction made and paid to the account of
the Central Government in accordance with the
provisions of this section and any sum which a
dividend has been increased under sub-section
(2) of section 16 shall be treated as a
payment of income.-tax or super-tax on behalf
675
of the person from whose income the deduction
was made, or of the owner of the security or
of the shareholder, as the case may be, and
credit shall be given to him therefor on the
production of the certificate, furnished under
subsection (9) or section 30, as the case may
be in the assessment, if any, made for the
following year under,this Act
Provided that, if such person or such owner
obtains, in accordance with the provisions of
this Act, a refund of any portion of the tax
so deducted, no credit shall be given for the
amount of such refund:
xx xx xx xx
xx xx xx xx
Put briefly, the scheme of s. 18 is to provide for deduction
of income-tax at the source in respect of certain categories
of income. With regard to two of the categories, namely,
“”salaries” and “interest on securities, there is no
difficult. The difficulty arises with regard to the
category of income, referred. to in sub-s.(5) of s.18,:
namely, dividend income, and to this difficulty we shall
come later.
S.18-A which was inserted in 1944 deals with advance
payment of tax. It was introduced as a war measure probably
to combat inflation, but, like many other innovations in
taxation legislation it has outlived the exigency which
necessitated it. The section applies to those assessees
whose total income in the latest assessment, and also to
those hitherto unassessed whose total income of the previous
year, exceeded by a certain sum the maximum amount not
chargeable to tax. The section attempts to reconcile the
principle of advance payment of tax with the ,scheme of the
Act which is to tax the income of the previous year. The
basis of the section is the
676
principle of “”pay as you earn that is, paying tax ‘by
instalments in respect of the income of the very year in
which the tax is paid. Sub.s. (1) provides for the payment
of tax in respect of the income of ” the latest previous
year” while under sub.s. (II) the tax so paid is treated as
having been paid in respect of the income of the year of
payment and credit therefore is given to the assessee in the
regular assessment made in the next financial year. The
‘advance” payment ‘of taxis only provisional, and if after
the regular assessment is made the tax paid in advance is
found to be in excess of the tax payable, the assessee would
be entitled to a refund of such excess. Further, it is
worthy of note that the provision for advance payment of tax
under s. 18-A is only in respect of income from which the
tax is not deductible at the source, under s. 18. Where the
tax is deductible at the source, that in itself amounts to
advance payment of tax and therefore such income is left out
of the purview of the section. Sub-s. (2) of s. 18-A
enables an assessee to make his own estimate if in his
opinion, the income of the year is likely to be less than
that on which he has been asked to make advance payment of
tax’ in accordance with the provisions contained in sub-s.
(1). Sub-s. (6) of S. 18-A so far as it is material for our
purpose is in these terms
“Where in any year an assessee has paid tax
under sub-section (2) or sub-section (3) on
the basis of his own estimate, and the tax so
paid is less than eighty per cent of the tax
determined on the basis of the regular
assessment, so far as such tax relates to
income to which the provisions of section 18
do not apply and so far as it it not due to
variations in the rates of tax made by the
Finance Act enacted for the year for which the
regular assessment is made, simple interest at
the rate of six per cent per annum from the
1st day of January in the financial
677
year in which the tax was paid up to the date
of the said regular assessment shall be
payable by the assessee upon the amount by
which the tax so paid falls short of the said
eighty per cent
xx xx xx
xx xx xx
xx xx XX.
It provides for cases where the assesee’s estimate turns out
to be too low and it lays down inter alia that where an,
assessee has paid advance tax under sub-s. (2) and the
amount so paid is less than eighty per cent of the final
assessment of his income for the particular year, he is
liable to pay interest at six per cent. There is however
the necessary qualification that this is in the context of
“income to which the provisions of s. 18 do not apply. “‘
Having regard- to the scheme of ss. 18 and 18A explained
above, the first question before us is this: can it be said
that sub-s. (5) of s. 18 in its true scope and effect treats
dividend income as income from which a deduction of income-
tax has been made at the time of payment of the dividend ?
The contention on behalf of the assessee is that sub-s. (5)
of s. 18 read with sub-s. (2) of s. 16 and s. 49-B has that
‘effect. The argument on behalf of the respondent is that
it has not that effect. In our opinion the contention urged
on behalf of the assessee is correct. Sub.s. (2) of s. 16
declares in the first part thereof that any dividend shall
be deemed to be income of the year in which it is paid etc.
regardless of the question as, to when the profits out of
which the dividend is paid were earned. A shareholder’s
right to dividend arises upon its declaration. Under the
second part of the sub-section, the net dividend paid to the
shareholder is to be “,grossed up” before in., clusion in
the shareholder’s total income, by adding
678
thereto the amount of income-tax paid by the company. In
general law the company is chargeable to tax on its profits
as a distinct taxable entity and it pays the tax in
discharge of its own liability and not on behalf of or as
agent for its shareholder-. This aspect of the matter has
been rightly emphasised by learned counsel for the
respondent in his reply. While it is true that the company
pays its own tax, a legal fiction is introduced by s. 49-B
of the Act. Under that section when a dividend is paid to a
shareholder by a company which is assessed to tax, the
income-tax (but not super-tax) in respect of such dividend
is deemed to have been paid by the shareholder himself Since
the income-tax in respect of the dividend is deemed under s.
49-B to have by been paid by the shareholder himself on his
own income, though in reality it was tax paid by the company
in discharge of its own liability, credit is given therefore
to the share. holder in the assessment, under sub-s. (5) of
s. 18. He is not liable to pay income-tax again in respect
of the dividend and may claim a refund under s. 48, if the
maximum rate of income-tax, which is applicable to
companies, is not applicable to him The combined effect of
sub-s. (2) of s. 16, s. 49B and sub-s. (5) of s. 18 is that
the tax-free dividend is not really a dividend of the amount
received, but a dividend of a larger sum less the tax
thereon, and as in the case of tax-free salaries and tax-
free securities, it is the gross amount which is included in
the shareholder’s total income, because the income-tax paid
by the company remains part of the income derived from the
shareholding. If this be the true effect of the section
referred to above, then s. 18 in sub-s. (5) does provide
“‘for deduction of income-tax at the time of payment” within
the meaning of that clause in sub-s. (1) of s. 18-A.
Learned counsel for the respondent has, however, drawn our
attention to that part of subs. (5) of s. IS which refers
to ‘,any deduction made and paid to
679
the account of the Central Government in accordance with the
provisions of this section” and “any sum by which a dividend
has been increased under sub-s. (2) of s. 16.” His argument
is that the sub-section talks of two different matters : one
is deduction of tax referred to in the earlier sub-sections
and the other is addition of a sum to the dividend. These
two, according to learned counsel, stand on a different
footing; one is in reality “‘deduction of income-tax at the
time of payment” and the other, namely, the sum added to
dividend income under sub-s. (2) of s. 16, is not really
“‘deduction of income-tax at the time of payment” but is
included in the sub-section merely for the purpose of giving
credit to the shareholder for the amount which has been
added to his dividend. We are of opinion that this line of
argument does not give full effect to the legal fiction
created by s. 49-B under which the tax paid by the company
is deemed to have been paid by the shareholder himself in
respect of his dividend income grossed up under sub-s. (2)
of s. 16. If the shareholder is deemed to have paid the tax
himself at the time when the company.paid the dividend, we
do not see why this payment is not “‘deduction of income-tax
at the time of payment” within the meaning of that clause in
sub-s. (1) of s. 18A. Deduction at the source is only a
mode of collecting tax from the person from whose income the
deduction is made-. The tax paid by the company at the time
of payment of the dividend is treated as part of the income
of the shareholder and the gross amount has to be included
in his total income; on the same principle, the tax deducted
at the source and paid to the Government is treated as
having been paid by the shareholder himself. In this view
of the matter, sub-s. (5) merely works out the principle of
sub-s. (41 of s. 18, namely, that all sums deducted in
accordance with the provisions of the section shall, for the
purpose of computing the income of an assessee, be deemed to
be income received.
680
There was some argument before us as to the omission of the
word “shareholder” in the first proviso to sub-s. (5) of s.
18. The Amending Act of 1939 which added the reference to
the “‘shareholder” in the substantive part of the sub-
section did not make similar addition to the first two
provisos; whether this was an over-sight, as one commentator
has said, or not is not a matter which need be decided in
this case. We have rested our conclusion on the substantive
part of sub-s. (5).
In the view which we have taken on the main argument urged
on behalf of the appellant, s. 18-A is not attracted to the
dividend income of the assessee in this case. The assessee
was not therefore liable to penal interest under sub-s. (6)
of s. 18-A. It becomes unnecessary, therefore, to decide
this case on the alternative argument presented on behalf of
the appellant which is based on the phraseology of sub-s.
(6). We need only point out that sub-s. (6) uses the
phraseology “income to which the provisions of s. 18 do not
apply.” It is difficult to see how it can be said that sub-
s. (5) of s. 18 does not “apply” to dividend income. It
refers to dividend income in express terms. The argument on
behalf of the respondent is that sub-s. (6) of s. 18A will
be unworkable in the matter of dividend income., unless it
has the same meaning as in sub s. (1). Learned counsel has
relied on two decisions of this court : Commissioner of
Income-tax v. Teja Singh (1) and Gursahai Saigal v. The
Commissioner of Income-tax, Punjab (2). The first decision
lays down that in construing the scope of a legal fiction it
would be proper and even necessary to assume all those facts
on which the fiction can operate…… a decision which is
really against the respondent on the main argument. The
second decision related to sub-s. (8) of s. 18-A and
proceeded on the rule that it is proper to give a machinery
provision an interpretation which makes it workable. We do
not think that sub-s. (6)
(1) [1959] Supp. 1 S.C.R. 394.
(2) [1963] 48 I.T.R. 1.
681
of s. 18-A will be unworkable, even if it refers to an
income wider in category than that referred to in sub-s.
(1).
It is unnecessary, however, to go into this point more
elaborately. Our conclusion is that sub-s. (5) of s. 18
read with sub-s. (2) of s. 16 and s. 49-B provides for
“‘deduction of income-tax at the time of payment” in respect
of dividend income; therefore,
s. 18-A does not apply to such income.
We would accordingly allow this appeal, set aside the
judgment of the High Court, and answer the question referred
to the High Court in the negative and in favour of the
assessee: The appellants will be entitled to their costs of
this court an in the High Court;
SARKAR, J.-Under.the Income-tax Act, 1922, the usual rule
is to charge tax for a year on the income of the previous
year. Section 18A of the Act makes a departure from this
usual rule and provides for advance payment of tax, that is,
payment of tax on income during the year in which the income
is earned. The question in this appeal is as to the
interpretation of certain provisions in s. 18A and of a few
other sections of the Act. The contention advanced in this
case can be appreciated only after these provisions have
been referred to.
Sub-section (1) of s. 18A states, “In the case of income in
respect of which provision is not made under section 18 for
deduction of income-tax at the time of payment, the Income-
tax Officer may……… require an assessee to pay
quarterly………………… an amount equal to one
quarter of the income-tax and super-tax payable on so much
of such income as is included in his total income of the
latest previous year in respect of which he has been
assessed.” This liability to pay arises only however if the
total income of the latest previous year exceeds a certain
682
amount mentioned in the subsection. Under this sub-section,
therefore, the amount demanded as payment of tax in advance
is calculated on income found in a previous assessment. Now
it may so happen that the assessee thinks that his income
for the period for which the demand had been made would be
less than his income in that previous assessment. Sub-
section (2) provides that in such a case the assessee may
“send to the Income-tax Officer an estimate of the tax
payable by him…………… and shall pay such amount as
accords with his estimate in equal
instalments…………….. So under sub-s.(2) the assessee
is given the liberty to make his own estimate of the tax
payable in advance instead of paying according to a previous
regular assessment by the revenue authorities. As in the
case of sub-s. (1), in making the estimate of the tax under
sub-s. (2), the assessee is only to take into account income
in respect of which provision is not made under s. 18 for
deduction of income-tax at the time of payment. Sub-section
(3) provides for the case of an assessee who has never been
assessed before but whose total income is likely to exceed
the amount upon which tax is payable in advance under sub-s.
(1). it requires such an assessee to “send to the Income-tax
Officer an estimate of the tax payable by him on that art of
his income to which the provisions of S. 18 do not apply”,
and to pay that amount on certain specified dates. Here
also the assessee makes his own assessment. Payment of tax
in advance under sub-ss. (1), (2) or (3) is only provisional
and the assessee would be entitled to a refund if on regular
assessment after the year it is found that he had paid more
than he is liable to pay; or he may be called upon to pay
more if he had ‘paid less than what is due from him.
As the responsibility for making the assessments under sub-
ss. (2) and (3) is on the assessee, sub-s. (6) is intended
to provide a machinery whereby the
683
assessee is put under a certain disadvantage if it is found
that his estimate is erroneous beyond a certain limit. This
appeal turns largely on this sub-section and, so far as
relevant, it is in these terms
“Where in any year an assessee has paid tax
under sub-section (2) or sub-section (3) on
the basis of his own estimate, and the tax so
paid is less than eighty percent of the tax
determined on the basis of the regular
assessment, so far as such tax relates to
income to which the provisions of section 18
do not apply…………………… simple
interest at the rate of six percent per
annum…………… shall be payable by the
assessee upon the amount by which the tax so
paid falls short of the said eighty per cent.”
This sub-section also prescribes the period for which the
interest payable under it is to be calculated but it is not
necessary to trouble ourselves with such period in this
appeal.
Now, Purshottamdas Thakurdas, the assessee in this case,
sent an estimate under sub-s. (2) of, s. 18A of the tax
payable by him in advance in the year 1947-48. In that
estimate he did not include the dividends received on shares
held by him. Upon regular assessment it was found that the
tax estimated by him was less than eighty per cent of the
regular assessment and on this shortfall he was held liable
to pay interest under sub-s. (6) of s. 18A. The shortfall
would not have arisen if the assessee had taken the
dividends into account in making the estimate of the tax
payable by him. Against this decision the assessee appealed
to the Appellate Assistant Commissioner but his appeal
failed. He then appealed to the Income-tax Appellate Tribu-
nal and was successful there. Thereafter, at the instance
of the respondent Commissioner of Income-tax, the Tribunal
referred under s. 66 (1) of the Act
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the following questions for the decision of the High Court.
“Whether on the facts and circumstances of the
case the assessee is liable to pay interest in
respect of dividend income as provided under
Section 18A(6) of the Income-tax Act?.
The High Court answered the question in the affirmative
though the reasons upon which the learned judges
constituting the bench deciding the case based themselves
were somewhat different. The assessee has now come to this
Court in further appeal. Pending the appeal here, the
assessee died and his legal representatives have been
substituted in his place and are the appellants now.
The real question in, this appeal is whether in making an
estimate under s. 18A (2) of the tax payable by him, the
assessee should have taken into account the dividends
received by him. Now, it is not in dispute that in making
this estimate only that income “in respect of which
provision is not made under s. 18 for deduction of income-
tax at the time of payment” is to be taken into account.
Learned counsel for the appellants contends that dividend is
income in respect of which provision is made under s. 18 for
deduction of income-tax at the time of payment. If this
contention is sound, then of course no interest is payable
under s. 18A (6).
Now, the appellants’ contention was based on sub-s. (2) of
s. 16, sub-s. (5) of s. 18 and s. 49B of the Act. The first
of these, that is, sub-s. (2) of s. 16, says that for the
purpose of inclusion in the total income of an assessee, a
dividend shall be deemed to be income of the previous year
in which it is paid and shall be increased in a certain
manner, and without going into the question of the increase
in great detail, which would be unnecessary for the
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purposes of this case, it would perhaps be right to say that
the increase is to be substantially by such amount as would
be payable by the company as income-tax on the amount of the
dividend at the rate applicable to it in the financial year
in which the dividend is paid. Sub-section (5) of s. 18
provides.
“Any deduction made and paid to the account of
the Central Government in accordance with the
provisions of this section and any sum by
which a dividend has been increased under sub-
section (2) of section 16 shall be treated as
a payment of income-tax or super-tax on behalf
of the person from whose income the deduction
was made, or of the owner of the security or
of the shareholder, as the case may be, and
credit shall be given to him therefor on the
production of the certificate furnished under
sub-section (9) or section 20, as the case may
be, in the assessment, if any, made for the
following year under this Act;”
Lastly, s. 49B states that “Where any dividend has been
paid……… or deemed to have been paid…… to any of
the persons specified in Section 3 who is a
shareholder…. …such person shall, if the dividend is
included in his total income, be deemed in respect of such
dividend himself to have paid the income-tax (exclusive of
super-tax) of an amount equal to the sum by which the
dividend had been increased under sub-section (2) of section
16.”
Now, the contention of the learned counsel for the
appellants is that as a result of the two provisions last
referred to, there is a fictional deduction of tax on
dividends which fiction must be given effect to and,
therefore, in making an estimate of income under s. 18A (2)
dividends have to be excluded and
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they have to be treated in view of the fiction, as income in
respect of which tax has been deducted at the time of
payment.
We are wholly unable to accept this argument All that the
provisions on which the learned counsel for the appellants
relies, show is that a shareholder who received dividends on
his shares is entitled in his assessment to have a certain
sum.. paid or payable as tax by the company, treated as paid
as tax on his behalf and to require that sum to be deemed to
have been paid as tax by himself. We are not concerned with
payment of tax by or on behalf of the assessee. We are
concerned with income, income-tax on which has been deducted
at the time of payment by the payer of it under s. 18.
Payment of tax by the assessee or on his behalf is not
deduction of tax on the income by the payer of that income.
We are wholly unable to agree that payment of tax by the
assessee, fictional or otherwise, on income received by him
is in any sense a deduction of tax under s. 19 by the person
who pays the income to the assessee. Clearly there is no
deduction as contemplated by s. 18. We do not see that ss.
16 (2), 18(5), and 49B require any fiction of a deduction
under s. 18 to be raised. Indeed s. 18(5) by mentioning
expressly and separately “Any deduction made……………
in accordance with…………………. this section” and
“‘any sum by which a dividend has been increased under sub-
section (2) of section 16” shows that these two are
different, or, in other words, that the increased amount is
not a deduction under s. 18. It is important also to
remember that for s. 18A(1), (2) and (3) there has to be a
deduction under s. 18 to exclude a part of the income;
deduction under other provisions will not do.
Then again, under s. 18(5) an assessee is entitled to credit
for the amount to be added to the dividend under s. 16(2) as
tax paid on his behalf
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but this only at the time of the assessment, if any.. for
the following year. Obviously, there is no question of
giving any credit till assessment later, that is to say,
later than the time of payment of the dividend to the
assessee. This again shows-that dividends are not income in
respect of which tax is deducted under s. 18 at the time of
payment. We would also point out that if there is no
assessment of the assessee, then no tax can be treated as
having been paid by him. The position under s. 49B is the
same. If tax is deducted at the source under s. 18, it
would be deducted in all cases and the deduction would not
depend on any assessment. This is a further reason for
saying that dividends are not income on which tax is
deducted at the time of payment under s. 18.
The appellants then contend that even if dividends are not
income from which tax is deducted at the time of payment,
still no interest is chargeable in this case under s. 18A(6)
for another reason. It was said that in finding out the
shortfall under subs. (6) of s. 18A you have to compare the
amount of tax paid by an assessee on his own estimate with
the amount of tax ascertained on the regular assessment
taking into account only that part of the income “‘to which
the provisions of section 18 do not apply.” Hence it is
contended that in ascertaining for the purpose of this sub-
section the tax payable on regular assessment that part of
the assessee’s income should be kept out of consideration to
which the provisions of S. 18 apply. Then it is pointed out
that sub-s. (5) of that section applies to income received
in the shape of dividends. Therefore, in finding out the
amount of tax payable on regular assessment under sub-s. (6)
of s. 18A, dividends have to be kept out of account and if
that is done, then the shortfall would disappear. It is
true that if the dividends were excluded from the regular
assessment as also the estimate, then there would be no
shortfall.
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Now, it seems to us that this argument is fallacious. The
words are “”tax determined on the basis of the regular
assessment, so far as such tax relates to income to which
the provisions of s. 18 do not apply”. Obviously, these
words refer to tax on income of a certain type, namely,
income of any one of the different varieties mentioned in
any of the provisions in s. 18. Only income of such types
is to be left out of consideration for the purpose of making
the regular assessment under s. 18A (6). Let us turn to s.
18. It consists of a very large number of sub-sections.
Sub-section (1) has been omitted. We may also leave out of
consideration sub-ss. (2A), (2B), (4) and (6) to (9), for
they do not deal with any particular kind of income which
has not been dealt with in the other sections. Each of the
rest of the sub-sections, excepting sub-s. (5), deals with
deduction of tax at the source from one particular kind of
income. In some of the cases, both income-tax and super-tax
are deducted while in others, only income-tax is deducted.
It is not necessary to discuss this distinction for the
purpose of this judgment. We will now have to refer to the
various sub-sections dealing with deductions from different
kinds of income. Sub-section (2) deals with deduction from
salaries, sub-s. (3 ) from interest on securities in the
case of residents, sub-s. (3A) from interest on securities
in the case of non-residents, sub-s. (3B) from interest not
being interest on securities or any other sum chargeable
under the provisions of this Act in the case of non-
residents, sub-s. (30) from any sum chargeable under this
Act other than interest payable to a non-resident and sub-s.
(3D) from dividends payable to nonresidents. As the section
stood at the relevant time, there was no provision in it for
deduction of income-tax from dividends paid to a resident
shareholder. Indeed, it is because of this that all this
argument has arisen. Sub-section (5), it would have been
noticed, does not deal with any particular or individual
type of income but it deals
689
with all the various kinds of income mentioned earlier as
also with dividends payable to a resident. Therefore, it
seems to us that this sub-section is not one of those
provisions in s. 18 which is contemplated in s. 18A (6). It
does not particularise any kind of income which has to be
kept out of account in considering the amount due on regular
assessment under sub-s. (6) of s. 18A. It seems to us,
therefore, that the words in that subsection now under
discussion refer to the provisions of s. 18 which specify
particular kinds of income and provide for deduction of tax
from them.
It is clear that any other view of the matter would produce
anomalous results which could not have been intended. In
the view that we have taken on the first contention of the
appellants, it is obvious that under sub-s. (1) of s. 18A
dividend income cannot be left out of account for the
purpose of calculating tax payable in advance. Under sub-s.
(2) the position ‘is the same. Now if sub-s. (2) requires
dividend income to be taken into account in making an
estimate, then how is that requirement to be enforced if
interest under sub-s. (6) is not made payable on the failure
to take dividends into account. Question of interest under
sub-s. (6) arises only on regular assessment. The amount
found due on regular assessment can be realised in the usual
way but that would not enable the obligation imposed by sub-
s. (2), namely, payment in advance, to be enforced. On such
reading, there would be no effective provision for payment
of tax in advance in a case where the assessee makes his own
estimate. That could not have been intended.
It is of interest to note that sub-s. (3) contains the same
words “‘income to which the provisions of s. 18 do not
apply”. Now if these words are interpreted in the way
suggested by the appellants, then in a case under this sub-
section dividends need not
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be included in the income for the purpose of computation of
tax payable in advance. But clearly dividends would be
liable to be included in cases where sub-s. (1) or (2)
applies. It is impossible to imagine that the legislature
could have intended to provide differently for a case coming
under sub-s. (3). As we have already said, the main purpose
of s. 18 is to provide for deduction of tax at the source.
Therefore, it is correct to interpret the words “‘income to
which provisions of s. 18 do not apply” as referring to that
type of income in respect of which s. 18 provides for
deduction of tax at the source. That fits in also with the
scheme of s. 18A. If once tax has been deducted, then no
question of paying tax on it again in advance or otherwise
would arise. For all these reasons, it seems to us that
income contemplated in the words “‘income to which
provisions of s. 18 do not apply” does not include dividends
payable to a resident assessee.
For these reasons we would dismiss the appeal with costs.
By COURT: In accordance with the opinion of the majority,
this appeal is allowed with costs.
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