Avadh Behari Rohatgi, J.:— This is a reference under s. 66(1) of the Indian I.T Act, 1922 (the Act), by the Commissioner of Income-tax.

2. The assessee, Shri R. Dalmia, was holding 2,50,000 shares of Jaipur Udyog Ltd. in the name of his nominee, Shri S.N Dudani, since 1955. He was the real owner of these shares. By an agreement dated May 21, 1955, the assessee agreed to purchase certain properties of the value of Rs. 49,25,000 from Bharat Insurance Company Ltd. (BIC). As a security for the purchase price he deposited with BIC blank transfer deeds with share certificates. The agreement was that he will make the payment of the purchase price in instalments together with interest. Clause (6) of the agreement provided that so long as the instalments of the purchase price and interest and other moneys payable by the assessee to BIC under the agreement are duly and regularly paid and the assessee otherwise observes and performs all other terms and conditions of the agreement to be observed and performed on his part, the dividends on the said securities shall belong to and be paid to the nominee of the assessee, namely, Dudani. On 8th February, 1965, the ITO issued a notice to the assessee under s. 23(3) of the Act saying:

“It appears that you have received dividends on 2,50,000 shares of Jaipur Udyog Ltd., which you have not declared. Please specify the date on which the shares were actually transferred and the details of dividends actually received by you (during the previous year) till such date. Please file the dividend warrants.”

3. On receipt of this notice, the assessee sent the following reply on 8th March, 1965:

“The abovementioned shares of Jaipur Udyog Ltd. (2,50,000 ordinary shares) were made over by me to the Life Insurance Corporation of India (BIC) with effect from September 1, 1957, as per my agreements with them. Hence whatever dividend was, received in respect of these shares from the said date was the income of the Life Insurance Corporation of India and was only routed through me. Accordingly, a sum of Rs. 1,87,500 received by me on their behalf on October 6, 1958 (being interim dividend on 2,50,000 ordinary shares at 7½% for the year ending 1958 declared by Jaipur Udyog Ltd. on August 21, 1958) was duly made over to the Life Insurance Corporation of India. Similarly, another sum of Rs. 1,25,000 received by me in this respect on their behalf on March 23, (being the final dividend for the year ended March 31, 1958, at 0.50 np. per share declared on the above-said shares on February 28, 1959) was also duly made over by me to the Life Insurance Corporation of India.

You will appreciate that as there was an overriding charge on the dividend income even before it accrued, the said dividend cannot be considered as my income at all. In fact, this was the income of M/s. Bharat Insurance Company Ltd. and they must have been taxed on the said income. In the circumstances, the question of dividend warrants does not arise.”

4. The ITO included a sum of Rs. 6,25,000 as the dividend income of the assessee in the assessment year 1960–61, with which we are concerned in this reference. The assessee had already disclosed a sum of Rs. 3,12,500 in the previous assessment year 1959–60, and had paid tax thereon. The ITO took the view that the amount of Rs. 3,12,500 ought to have been assessed properly in the year 1960–61 and, therefore, this amount also be included in the assessment year 1960–61. As regards the balance of Rs. 3,12,500 he took the view that this was the income of the assessee and ought to have been disclosed in the income-tax return.

5. From the order of the ITO, the assessee appealed to the AAC. He upheld the order of the ITO and dismissed the appeal. The assessee took the matter in appeal to the Income-tax Appellate Tribunal. The Tribunal by an order dated August 23, 1969, accepted the appeal and deleted the entire sum of Rs. 6,25,000 from the year in question.

6. Two questions were argued before the Tribunal. One was whether the amount of Rs. 3,12,500 having been assessed once in the assessment year 1959–60, could be assessed over again in 1960–61. The ITO as well as the AAC took the view that if the amount was properly assessable in law in the assessment year 1960–61, there was no bar in their doing so in that year. The Tribunal did not accept this view. They held that the inclusion of the same income of Rs. 3,12,500 in the assessment year 1960–61 over again offended the well-known principle against double taxation.

7. On the second question, the Tribunal held that on a proper construction of the agreement dated May 21, 1955, which was entered into by the assessee on the one hand and BIC on the other at the time of the purchase of the property as well as the supplemental agreement dated August 31, 1959, it was quite clear that 2,50,000 shares pledged by the assessee as a security for debt were actually transferred on 1st September, 1957, in favour of BIC and, therefore, no longer remained the property of the assessee. They found that the assessee, after the transfer of the shares in favour of BIC on September 1, 1957, was bound in law to pass on the dividend declared by Jaipur Udyog to BIC. On this basis, they came to the conclusion that the amount of Rs. 3,25,000 was no part of the income of the assessee and the amount could not be taxed in his hands.

8. The following two questions of law have been referred to us by the Tribunal under s. 66(1) of the Act:

“i. Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the dividend of Rs. 3,12,500 (out of dividend of Rs. 5,00,000 received by the assessee on October 6, 1958, on 2,50,000 shares of Jaipur Udyog Ltd.) which was included by the assessee in his return of income for the assessment years 1959–60 and assessed therein, was not includible in the assessment for the assessment year 1960–61?

ii. Whether, on the facts and circumstances of the case, the Tribunal was right in holding that in respect of dividend of Rs. 1,87,500 (out of the dividend of Rs. 5,00,000 received by the assessee on October 6, 1958, on 2,50,000 shares of Jaipur Udyog Ltd.) and dividend of Rs. 1,25,000 on the said share received on March 23, 1959, there was an overriding charge in favour of Bharat Insurance Co. and the said sum of Rs. 3,12,500 was rightly excluded from the assessment for the year 1960–61?”

First question:

9. It is not disputed that the assessee had disclosed the amount of Rs. 3,12,500 in the assessment year 1959–60 as his income. The ITO and the AAC took the view, and this is what counsel for the revenue contends before us, that it was properly assessable in the assessment year 1960–61. This was mainly because of a pronouncement of the Supreme Court in J. Dalmia v. CIT, [1964] 53 ITR 83, then recently delivered, where it was held that dividend becomes the income of the assessee when it is declared by the company at the general meeting. In the present case, this was done in the assessment year 1960–61. On this basis, the authorities took the view that the department must follow the Supreme Court and must assess the amount of Rs. 3,12,500 in the assessment year 1960–61.

10. The assessee protested. He said that there can be no double taxation. He went even further. He made an application under s. 35 of the Act for rectification to the ITO. This application was disallowed. He then went in revision to the Commissioner under s. 33A. This was also rejected. Having exhausted his remedy he appealed to the Tribunal on the ground that there was no other course left to him now but to subject himself to double taxation which the department was in fact doing to him. The Tribunal agreed with the assessee and held that under law there can be no double taxation. They accepted the assessee's plea that after rectification and revision had been declined, the orders of the I.T authorities attained finality and that it was no longer open to the department to contend that they would assess this amount over again in the assessment year 1960–61.

11. In our opinion, this approach of the Tribunal is perfectly correct. The taxing of the same item twice in the hands of the same person is not allowed in law. “The principle of the I.T Acts is to charge all income with tax, but in the hands of the same person only once.” (per Viscount Haldane in Sugden v. Leeds Corporation, [1913] 6 TC 211, 253 (HL). Taxing twice for the same purpose cannot be permitted.

12. Counsel for the revenue referred us to Bhim Sen Khosla v. CIT [ITR No. 31 of 1970 decided on April 30, 1980] (S. Ranganathan and Mrs. Leila Seth JJ.) [since reported in [1982] 133 ITR 667 (Delhi)]. In that case, the question of double taxation arose. The assessee there raised the objection that he was being subjected to double taxation. The learned judges held that the department was in equity bound to grant refund of the amount of tax realised in the earlier assessment and only then could assess according to law. We can find nothing in this judgment which helps the revenue. The principle against double taxation was clearly recognised. The judges ordered the department to give relief to the assessee in order to avoid double taxation.

13. In the present case, the assessee sought rectification which the ITO refused. Similarly, the Commissioner declined to accept the revision. In these circumstances, we think the Tribunal rightly held that the orders of the I.T authorities having become final it was no longer open to the department to assess the amount of Rs. 3,12,500 again in the assessment year 1960–61.

14. We answer the first question in the affirmative.

Second question:

15. In order to understand the nature of the controversy it is necessary to recount the history of this transaction. On 21st May, 1955, the assessee agreed to purchase certain properties for Rs. 49,25,000 from BIC. He agreed to pay the amount in instalments. As a security for the debt he pledged 2,50,000 shares of Jaipur Udyog Ltd. with the BIC. The agreement dated May 21, 1965, provided in cl. 6 that if the assessee observes and performs the conditions of the agreement his nominee, namely, Dudani, will continue to receive the dividend on the shares from Jaipur Udyog.

16. BIC was nationalised. It was taken over by the Controller of Insurance on behalf of the Government of India. The Controller of Insurance appointed Mr. M.J Rao as Administrator on September 6, 1955.

17. On June 12, 1957, the Administrator sent a notice to the assessee. In this notice it was said that the assessee had committed default and he should pay up the arrears of instalments, etc., within a period of one month in terms of the agreement dated May 21, 1955. The assessee was unable to pay. Disputes arose between the parties. A settlement was reached between them. On September 1, 1957, the assessee transferred his entire holding 2,50,000 shares at an agreed valuation in favour of BIC. Two other terms were also agreed upon at this time. It was agreed that the assessee would be entitled to retain the dividend for the year ending March 31, 1957. But, as regards the dividend for and in respect of the year ending March 31, 1958, he agreed that any dividend, interim or final declared and which may be declared would be paid over to BIC and if he, the assessee, received the same he would make it over to the BIC. It was in terms of this clause that the amount of Rs. 3,12,500 which the assessee received later on, once on October 6, 1958 (i.e, Rs. 1,87,000), and a second time on March 25, 1959 (i.e, Rs. 1,25,000), he handed over to the BIC. This is what is recorded in the agreement dated August 31, 1959. This is what the assessee said in his letter to the ITO on March 8, 1965.

18. It is necessary to understand the real nature of the transaction which the assessee entered into with BIC in 1955. On a combined reading of the two agreements certain facts appear to be well established. As a security for debt there was a mortgage of shares. The blank transfer deeds duly signed by the assessee's nominee with share certificates were handed over to BIC. If the assessee performed the terms of the agreement his nominee was to receive the dividend from the company. The assessee defaulted in the payment of instalments. The Administrator called upon him to pay the balance of the purchase price then outstanding against him, vide notice dated June 12, 1957. The matter was settled on September 1, 1957. The assessee transferred on that date the shares at an agreed valuation and “renounced” his right to dividend for the year ending March 31, 1958.

19. The two agreements of 1955 and 1959 have not been doubted by any of the I.T authorities. They were accepted as genuine documents. The answer to the second question will depend on the construction of these two agreements.

20. The agreement of August 31, 1959, recites the events that had happened after the execution of the first agreement on May 21, 1955. In this “supplemental” agreement, as it is called, it is clearly recited that 2,50,000 shares of Jaipur Udyog Ltd. were transferred to BIC and were taken over as on September 1, 1957, by the BIC at an agreed valuation. It also recites that the dividend for the period ending March 31, 1957, was to go to the assessee and the dividend for the year ending March 31, 1958, was to come to BIC.

21. Now, there are two important things. One is the nature of the transaction., It is quite clear that it was a case of mortgage of shares. The property in the shares passed to the BIC on the execution of the blank transfer deeds and the delivery of share certificates. We were referred to Colonial Bank v. John Cady, [1890] 15 AC 267 (HL). There, Lord Watson pointed out that where a transferor delivers a blank transfer along with the certificate of the shares, he thereby transmits to the transferee both his legal and equitable title to the shares. After parting with his title he is not further concerned with the shares. A transfer in blank when accompanied by the share certificate or scrip carries to the transferee both the legal and equitable right in the shares and also the right to call upon the company to register the transfer. In the words of Lord Watson (p. 277):

“The person to whom it, (i.e, the blank transfer alone with the certificate) is delivered can effectually transfer his interest by handing his certificate to another, and the document may thus pass from hand to hand until, it comes into the possession of a holder who thinks fit to insert his own name as transferee, and to present the document to the company for the purpose of having his name entered in the register of shareholders and obtaining a new certificate in his own favour.”

22. This shows that the equitable title to the shares had passed to the BIC at the time they were mortgaged on May 21, 1955. With the title to the shares the right to receive the dividend would have also passed but for the term contained in cl. 6 of the agreement. This clause provided that if the assessee observed and performed the terms and conditions of the agreement then his nominee will continue to receive the dividend. It logically follows that if the assessee did not observe the terms and conditions of the agreement and did not pay the instalments then his nominee was not entitled to receive the dividend. In that event, BIC was entitled to receive the dividend. This is how we read cl. 6 of the agreement.

23. It will, therefore, appear that after the default committed by the assessee as is evidenced by the notice dated June 12, 1957, he had no right to receive the dividend from Jaipur Udyog Ltd. In terms of cl. 6 he clearly forfeited that right. It was only as a part of the settlement which was arrived at at the time of the transfer of shares on September 1, 1957, that he was allowed to receive and retain the dividend for the year ending March 31, 1957. On a true interpretation of this clause we are not prepared to hold that the dividends which the assessee received on October 6, 1958, and March 23, 1959, could in any sense be termed as his income after the completion of the transfer on September 1, 1957. He was a trustee for the BIC, the beneficial owner, for these amounts. BIC was not the registered holder of shares. As a result of the transfer on September 1, 1957, there was a fiduciary obligation on the transferor to pay the amount to the transferee. This is why the assessee remitted the amounts to BIC. True it is that they were routed through him because his nominee was the registered holder of shares. But this does not mean that the assessee remained the owner of shares even after the transfer.

24. The other important thing is the transfer of shares on September 1, 1957. It is recited in the agreement that the parties agreed to compose their differences. The shares were transferred by the assessee on September 1, 1957, at an agreed valuation. If we keep this crucial fact in mind, there is nothing for the revenue to argue. This outright transfer of September 1, 1957, is clearly mentioned in the agreement of August 31, 1959. It is not true to say that the transfer took place on August 31, 1959, which is the date of the supplemental agreement, as is contended by counsel for the revenue. The true fact is that this agreement of 1959 recites the history of this transaction from 1955 and is essentially a record of past events. It recounts in detail all that had happened after 1955. It is a repository of a completed transaction, a fait accompli. The Government was a party to this agreement. They accepted that they had become the owners of the shares on September 1, 1957, when at an agreed valuation the assessee agreed to transfer them. The shares thus became the property of BIC and the assessee had thereafter nothing to do with them. What began as a pledge of shares ended in a complete transfer in favour of BIC on September 1, 1957.

25. The real nature of the transaction was this. It was an equitable mortgage of shares, inaccurately described as a pledge. As is observed in Palmer's Company Law, Vol. I, 22nd Edn., p. 412:

“A person taking a blank transfer and certificate by way of security is an equitable mortgagee, not a pledgee, and can sell after reasonable notice: Stubbs v. Slater, [1910] 1 Ch 632 (CA).”

26. The mortgagor, or Dudani his alter ego, remained the registered holder of the shares, thereby retaining the legal title. The deposit of the share certificates with the mortgagee with a blank transfer of shares executed by the mortgagor's nominee was of the essence of the transaction. In such like cases the mortgagee can convert the mortgage into a legal one by completing the blank transfer with his own name as transferee and sending it to the company for registration. Until he does so, however, his interest in the shares is merely equitable.

27. The legal relationship of the assessee with BIC was that of borrower and the mortgagee. The borrower executed a document which set out the terms of the transaction, the manner in which the loan was to be repaid, the rate of interest on the loan, and the powers of the mortgagee to realise his security if the borrower defaulted. If the loan is not repaid, the mortgagee, may sell the shares. But, if the loan is repaid, the mortgagee, on the redemption of the equitable mortgage, must return the share certificate to the borrower together with the blank transfer executed by him so that it may be destroyed. (See Pennington's Company Law, 4th Edn., pp. 342-344 and Gower's Modern Company Law, 4th Edn., pp. 464-465).

28. What happened here was this. The mortgagee obtained blank transfers from the borrower with share certificates. There was equitable charge in favour of the mortgagee to secure the indebtedness. The terms of the transaction were reduced to writing on May 21, 1955. The mortgagee was entitled to sell the shares after notice of one month. He had the implied authority to complete the blank transfer. (In re Tahiti Cotton Co., [1873] LR 17 EQ 273).

29. When the borrower, the assessee in this case, was unable to pay the instalments of principal, interest, etc., the mortgagee issued notice dated June 12, 1957. The borrower was unable to pay. He made an outright transfer to the mortgagee. This was a sale outright at an agreed price in discharge of the obligation.

30. The assessee transferred the shares, as the Tribunal said, “Willy nilly”, more nilly than willy. The borrower was in default. The mortgagee was not prepared to wait. As the borrower was unable to pay in spite of notice of one month he agreed to transfer the shares absolutely to the mortgagee. On transfer on September 1, 1957, the right, title and interest in the shares vested in the BIC. What was an “overriding charge” became, on transfer, an outright sale. The pledge was perfected into an absolute transfer. The mortgagee was at liberty to fill up the blank and perfect his security by getting himself registered. In a word the mortgagee became the purchaser.

31. Counsel for the revenue says that as the amount of Rs. 3,12,500 was received by the assessee before the agreement dated August 3, 1959, was executed, it should be held to be the income of the assessee. This is a misreading of the supplemental agreement. Transfer of shares on September 1, 1957, is the foundation of the transaction. This is the central fact in this case. The transfer as on September 1, 1957, was accepted by both the parties in the document of August 31, 1959. September 1, 4957, is thus a dividing line. After September 1, 1957, the income from dividend could not be said to be the income of the assessee. We are in complete agreement with the Tribunal that the amount of Rs. 6,25,000 was no part of the income of the assessee in the assessment year 1960–61. In our opinion, the Tribunal was right in deleting it. Our answer to the second question also is in the affirmative.

32. The parties are left to bear their own costs.