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Commissioner Of Income-Tax, Delhi And Rajasthan v. L. Bansi Dhar.
Structured Summary of the Opinion
Factual and Procedural Background
The Income-tax Appellate Tribunal (Delhi Bench “B”) framed two questions for this Court relating to exclusion from the assessee's total income of dividend amounts for assessment years 1955-56 and 1956-57 (Rs. 1,511 and Rs. 1,771 respectively). The dividends in dispute arose from shares of Messrs. Madan Mohan Lall & Sir Shri Ram & Co. (Private) Ltd., a private company formed in 1932 to take over family assets of L. Shri Ram. The company’s articles of association contain article 7(e), which prescribes that if shares of a deceased shareholder are succeeded to by his sons or their descendants, certain portions of dividends shall be paid to the widow for life and to the daughters so as to secure particular fractional shares of dividend, and that such payments are a first charge on the dividends and may be made by the company directly.
L. Murlidhar (father of the assessee, L. Bansi Dhar) died in 1949 leaving two sons and two daughters. In accordance with article 7(e), the company paid the relevant portions of dividends directly to the daughters (Smt. Sushila and Smt. Gayatri). The Income-tax Officer regarded these payments as a voluntary application of the assessee’s income and therefore taxable in the assessees' hands; the Appellate Assistant Commissioner confirmed that view. The Appellate Tribunal disagreed, applying the Privy Council's rule in Raja Bejoy Singh Dudhuria and held that the payments represented a diversion by overriding title and thus should be excluded from the assessee’s income. The matter was brought before this Court for answers to the two questions.
Legal Issues Presented
- Whether the income of Rs. 1,511 from dividends should be excluded from the total income of the assessee for the assessment year 1955-56?
- Whether the income of Rs. 1,771 from dividends should be excluded from the total income of the assessee for the assessment year 1956-57?
Arguments of the Parties
Revenue's Arguments (Shri A.N. Kirpal)
- The dividends constituted the income of the registered shareholder (the assessee) and payments by the company on his behalf to the daughters do not change that character; therefore the amounts were assessable to the assessee.
- Relied on recent Supreme Court decisions (Commissioner of Income-tax v. Sitaldas Tirathdas and Commissioner of Income-tax v. Thakar Das Bhargava) to support the contention that dividends are assessable to the shareholder.
- Submitted that “shareholder” should mean the person registered in the books of the company, citing Commissioner Of Income Tax, Bombay City II v. Shakuntala and fortified this view by reference to Howrah Trading Co. v. Commissioner of Income-tax.
- Attempted to distinguish the Privy Council authority relied upon by the Appellate Tribunal (Raja Bejoy Singh Dudhuria).
- In reply, emphasised that the owner of shares (registered holder) is also the owner of dividends and drew distinctions between a charge on income and an obligation to be discharged out of income; he asserted that there was no charge divesting the assessee of the income before receipt. He cited Provat Kumar Mitter and the Privy Council decision in P.C. Mullick in support of his position.
Assessee's Arguments (Shri B. Sen)
- Relied on section 36 of the Companies Act, 1956 (substantially the same as section 31 of the old Companies Act, 1913) to contend that the articles of association are binding on both the company and the shareholders; clause 7(e) should be treated as valid and binding for the purposes of the question put by the Tribunal.
- Argued that clause 7(e) creates a first charge in favour of the widow and daughters and entitles the company to pay the specified portion of dividends directly to them; this is a diversion of income at the source rather than an application of the assessee's income.
- Placed reliance on Raja Bejoy Singh Dudhuria's case and other authorities (Estate of Lata Shankar Shah v. Commissioner of Income-tax; Sitaldas Tirathdas; Commissioner of Income-tax v. Woodlands Co.) to support the contention that such a diversion excludes the amounts from the assessee's taxable income.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax [1933] 1 I.T.R 135 P.C. | Privy Council rule applied to cases of diversion by overriding title (used to classify payments made under an overriding charge as not having become the assessable income of the registered shareholder). | The Appellate Tribunal applied this rule; the Court accepted the principle that a diversion by overriding title at the source prevents the amount from being assessable in the hands of the registered shareholder and treated this authority as consistent with its reasoning in the present case. |
| Commissioner of Income-tax v. Sitaldas Tirathdas [1961] 41 I.T.R 367 (S.C.) | Referred to by revenue counsel to support the submission that dividends constitute the income of the shareholder (as understood from the counsel’s reliance). | The Court noted the revenue's reliance on this decision but proceeded to decide the present case on the basis of diversion at the source under article 7(e); the Court's reasoning did not accept the revenue's contention as overriding the effect of the articles in this instance. |
| Commissioner of Income-tax v. Thakar Das Bhargava [1960] 40 I.T.R 301 | Referred to by revenue counsel in support of the proposition that dividends are assessable to the shareholder. | Noted by the Court as cited by revenue; the Court's decision turned on the effect of the articles and diversion at source rather than on the proposition relied upon from this authority. |
| Commissioner Of Income Tax, Bombay City II v. Shakuntala [1961] 43 I.T.R 352 S.C. | Invoked by revenue to support the submission that “shareholder” means the person registered in the books of the company. | The Court observed the revenue's point but held that registration of shares in the assessee's name was not material where the articles create a direct payment to others; the Court treated the company's entitlement to pay the ladies directly as controlling. |
| Howrah Trading Co. v. Commissioner of Income-tax [1959] 36 I.T.R 215 | Referred to by revenue counsel to fortify the view that the shareholder's registration and resultant income characterisation should control. | Cited by revenue; the Court's analysis focused on diversion at the source under article 7(e) and concluded the diverted dividends were not assessable to the assessee. |
| Estate of Lata Shankar Shah v. Commissioner of Income-tax | Referred to by the assessee in support of the argument that diversion under overriding title excludes the amount from the deceased’s (or successor’s) assessable income. | Cited by the assessee; the Court's reasoning aligned with the principle that diversion at source prevents assessment on the registered successor. |
| Commissioner of Income-tax v. Woodlands Co. | Referred to by the assessee as supporting authority for diversion-at-source principles. | Noted by the Court as an authority relied upon by the assessee; the Court’s conclusion is consistent with the line of authorities that a diversion by overriding title excludes the amount from the successor’s assessable income. |
| Provat Kumar Mitter v. Commissioner of Income-tax | Reference made by revenue counsel in reply (context: supporting revenue submissions). | Referred to by revenue counsel; the Court did not adopt the revenue's submissions and decided the case on the basis of article 7(e) effect—diversion at source. |
| P.C. Mullick v. Commissioner of Income-tax [1938] 6 I.T.R 206 P.C. | Privy Council decision cited by revenue counsel in reply (used in argument about character of dividends/ownership). | Referred to by revenue counsel; the Court's ultimate finding rested on the articles' operation and the concept of diversion at source rather than on the positions advanced from this authority. |
Court's Reasoning and Analysis
The Court set out the applicable legal position in stages:
- The registered shareholder is ordinarily to be considered the owner of the shares and of dividends arising from them, and such dividends are ordinarily assessable to that shareholder.
- However, for income to be assessable it must come to the hands of the shareholder, either actually or constructively. Constructive receipt includes cases where the law treats a person as having received income even though not actually received.
- If, before the dividend reaches the shareholder, it is diverted by an overriding title (that is, an obligation or charge operative before the shareholder can assert control), the amount so diverted cannot be treated as the taxable income of the shareholder under the charging provisions of the Income-tax Act.
- The Court illustrated the concept of diversion by reference to decrees for maintenance and to testamentary provisions under which income is directed to be paid to beneficiaries (for example minors) by executors; where revenue is diverted by an overriding charge, the original person cannot be treated as having the income in his power of control.
- Applying these principles to the facts, the Court observed that article 7(e) of the company’s articles prescribes that certain fractions of dividends are to go to the widow and daughters and that such payments are a first charge on the dividends and may be made by the company directly. Thus the very source from which the assessee’s right to succeed to the shares arises provides for diversion of part of the dividends before the assessee could obtain control over them.
- The Court concluded that the company was entitled, notwithstanding registration of the shares in the assessee’s name, to make direct payment to the ladies pursuant to article 7(e). Such payments were not payments made for or on behalf of the assessee and were not an application of the assessee's income after accrual; instead they were a diversion at the source.
- On that basis the Court held that the diverted portions of dividends could not be treated as assessable income of the assessee.
The Court therefore accepted the legal doctrine of diversion by an overriding title and applied it to the facts created by the operative provision in the articles of association (article 7(e)).
Holding and Implications
HOLDING: The Court answered both questions in the affirmative and held that the amounts of dividends involved in the two questions should be EXCLUDED from the total income of the assessee (L. Bansi Dhar). The Court allowed the respondent his costs of Rs. 200.
Implications:
- The direct effect is that the assessee is not liable to be assessed on the portions of dividends paid to the widow and daughters under article 7(e) — those amounts were diverted at the source and did not form part of the assessee’s taxable income.
- The opinion notes that the diverted dividends "may perhaps be liable to assessment in the hands of the ladies," indicating that assessment consequences for the recipients were a distinct question (the Court did not decide their tax liability in this opinion).
- No broader or novel departure from established law was portrayed in the opinion; the Court applied the established principle that an overriding charge or diversion at the source prevents the amount from being assessable to the registered successor. The opinion confines itself to answering the Tribunal’s questions on the facts before the Court.
Costs awarded to the respondent: Rs. 200.
1. The Income-tax Appellate Tribunal (Delhi Bench “B”) has by its order dated May 30, 1963, formulated the following two questions for answer by this court:
“1. Whether the income of Rs. 1,511 from dividends should be excluded from the total income of the assessee for the assessment year 1955-56?
2. Whether the income of Rs. 1,771 from dividends should be excluded from the total income of the assessee for the assessment year 1956-57?”
2. It is obvious that though these two questions relate to two separate orders of assessment, the question to be answered is in substance only one.
3. In order to understand the precise nature of the question, it is desirable to reproduce the pedigree-table of the assessee, L. Bansi Dhar:
(*) Adopted by L. Girdhari Lal.
4. The shares, dividends of which are the subject-matter of the controversy, are of a private limited company known by the name of Messrs. Madan Mohan Lall & Sir Shri Ram & Co. (Private) Ltd. (hereinafter described as the company), which was floated on April 18, 1932, to take over the assets of the family of L. Shri Ram, the grandfather of the assessee, L. Bansi Dhar. It may be pointed out that the family of which the pedigree-table has been reproduced earlier, is popularly known as Sir Shri Ram Group and this group controls the Delhi Cloth and General Mills Company Limited, which itself is a big unit comprising of several industries. The controversy before us centres round the construction to be placed on article 7(e) of the articles of association of the company which so far as relevant is in the following terms:
“7. Succession to the shares of a deceased shareholder shall be in accordance with Hindu (Mitakshara) law subject so the following conditions, 1 namely:……
(e) If the shares of a deceased shareholder are succeeded to by his sons or their descendants, then the sons or their descendants and their successors shall pay out of the dividends on the said shares:
(1) to the widow of the deceased shareholder for life one-fourth share of the said dividends as they fall due and,
(2) to all the daughters (collectively) of the deceased shareholder from time to time, such portion of the said dividend as will give, when divided between the daughters, to each living daughter one-fourth of what may be left to each of the sons or his descendants or the successors of the descendants.
The payments mentioned in sub-clauses (1) and (2) hereof shall be a first charge on the said dividends and may be made direct by this company out of the said dividends.”
5. L. Murlidhar, father of L. Bansi Dhar, assessee, died in an air crash in 1949, leaving behind two sons L. Shri Dhar and L. Bansi Dhar, along with two daughters, Smt. Sushila and Smt. Gayatri. The company, it seems, in terms of article 7(e) paid the proportionate dividends to Smt. Sushila and Smt. Gayatri direct. The Income-tax Officer considered this payment to be a voluntary application of income on the part of the assessee and, therefore, liable to be taxed and not open to exclusion from the income of the assessee. This was confirmed by the Appellate Assistant Commissioner on appeal. The Appellate Tribunal, however, disagreeing with the view of the Appellate Assistant Commissioner and of the Income-tax Officer, came to the conclusion that the rule laid down by the Privy Council in Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax [1933] 1 I.T.R 135 P.C. was applicable to the case and, therefore, payment of the dividends to the two ladies being a case of diversion by overriding title, this amount was liable to be excluded from the total income of L. Bansi Dhar.
6. Before us, the learned counsel for the revenue, Shri A.N Kirpal, has submitted that in the present case, the amount of dividends constitutes the income of the assessee, L. Bansi Dhar, and payment whether by him or by the company on his behalf to the two ladies, does not deprive the dividends of the character of the income of the assessee, with the result that it should be held to have been wrongly excluded from the assessee's income by the Appellate Tribunal. The learned counsel has in this connection drawn our attention to a recent decision of the Supreme Court in Commissioner of Income-tax v. Sitaldas Tirathdas [1961] 41 I.T.R 367 and to Commissioner of Income-tax v. Thakar Das Bhargava [1960] 40 I.T.R 301. He has also submitted that the word “shareholder” must mean the shareholder registered in the books of the company and for this submission, he has referred to a decision of the Supreme Court in Commissioner Of Income Tax, Bombay City Ii v. Shakuntala [1961] 43 I.T.R 352 S.C.. This view is sought to be fortified by the ratio of a still earlier decision of the Supreme Court in Howrah Trading Co. v. Commissioner of Income-tax [1959] 36 I.T.R 215. Shri Kirpal has in this connection tried to distinguish the Privy Council decision relied on by the Appellate Tribunal in Raja Bejoy Singh Dudhuria's case.
7. Shri B. Sen, learned counsel for the assessee-respondent, has, to begin with, placed reliance on section 36 of the Companies Act, 1956, which is substantially the same as section 31 of the old Act of 1913 and has urged that the articles of association of a company are binding both on the company and the shareholders. He has also emphasised that this court is only expected to answer the question which arises out of the order of the Tribunal. This submission has been made in support of the argument that clause 7(e) should be assumed to be both valid and binding on the parties and its validity should not be allowed to be impeached on the advisory side of this court's jurisdiction under the Income-tax Act. This clause, according to Shri Sen, creates a first charge in favour of the ladies in question and the company is entitled to make the payment to them direct without first passing it on to the assessee. This payment is a condition of holding the shares and, therefore, it also attaches to the succession: there is in fact a diversion of income at the source, contends Shri Sen. Our attention has in support of this argument been drawn to Raja Bejoy Singh Dudhuria's case, Estate of Lata Shankar Shah v. Commissioner of Income-tax, Sitaldas Tirathdas's case and Commissioner of Income-tax v. Woodlands Co.
8. Shri Kirpal has in his reply submitted that a shareholder is the owner of the shares and also of the dividends, with the result that the dividends must be considered to be his income. He has also tried to draw a distinction between a charge on an income and an obligation to be discharged out of income. In the present case, according to him, there is no charge but only distribution of income and the time of the receipt of the income is the crucial test, says Shri Kirpal. He has also made a reference to the decision of the Supreme Court in Provat Kumar Mitter v. Commissioner of Income-tax and to a decision of the Privy Council in P.C Mullick v. Commissioner of Income-tax [1938] 6 I.T.R 206 P.C..
9. The true legal position, in our view, is that the person in whose name the shares of a company stand registered is to be considered to be the owner thereof and the income by way of dividends yielded by such shares is ordinarily to be considered as assessable income, but the dividends must in law come to his hands, whether in actual fact or constructively. The constructive receipt would include cases where the law creates a fictional or notional income not in fact received by a shareholder. In cases where the amount of dividends is diverted by an overriding title before it reaches the hands of the shareholder, it cannot be considered to be his assessable income within the charging provisions of the Income-tax Act. Such diversion may be illustrated by cases like those where decrees for maintenance are obtained by widows creating charge on their husband's estate or where by will a testator bequeaths some income from his estate to be paid regularly as allowances or otherwise to his minor son or grandson or other members of the family. In the latter case, the executors authorised by the testator to do business out of a part of the estate may not be held to have received the income diverted under the will by means of payment to the beneficiaries like minor sons, grandsons and other members of the family. To put it in plain language, if the revenue of an individual is diverted by an overriding charge, it cannot be considered to have reached him as his income. Such obligation, from its very nature, becomes operative before the individual concerned can claim the revenue to be within his power of control and it would be incorrect to say that it is out of a part of his income that he is discharging the said obligation.
10. In the case in hand, the very source from which the assessee claims his right to succeed to the shares in question provides that a part of the dividends on those shares are to go to the widow and the daughters of the deceased shareholder. This would, in our opinion, clearly show.that the amount of dividends is diverted at the source by an overriding title before it started flowing into the channel which was to reach the assessee concerned. This diverted amount of dividends may perhaps be liable to assessment in the hands of the ladies, but the assessee before us is certainly not liable to be assessed on this amount. The amount required under the articles of association to be paid to the widow and the daughters can by no means be reasonably considered to be an instance of the application of the respondent's own income after it had accrued to him. On the other hand, it was a diversion at the source from which both the assessee's right and that of the widow and the daughters of the deceased started flowing in different channels. The fact that the shares continued to remain registered in the name of the respondent is in the circumstances not at all material for, the company, notwithstanding such registration, is entitled to make the payment direct to the ladies. Such payment on the facts and circumstances of this case cannot be held to have been made for and on behalf of the assessee-respondent: it is to be held to have been made pursuant to the directions contained in article 7(e) of the articles of association which controls both the right of the assessee and of the ladies.
11. As a result of the foregoing discussion, we hold that the amount of dividends involved in the two questions should be excluded from the total income of the assessee and we accordingly answer the question in the affirmative. The respondent is entitled to his costs which we fix at Rs. 200.
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