Full Judgment Text
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PETITIONER:
MESSRS. HOWRAH TRADING CO., LTD,
Vs.
RESPONDENT:
THE COMMISSIONER OF INCOME-TAX, CALCUTTA
DATE OF JUDGMENT:
26/03/1959
BENCH:
HIDAYATULLAH, M.
BENCH:
HIDAYATULLAH, M.
SINHA, BHUVNESHWAR P.
KAPUR, J.L.
CITATION:
1959 AIR 775 1959 SCR Supl. (2) 448
CITATOR INFO :
R 1961 SC1019 (8)
F 1963 SC 493 (4)
R 1964 SC1761 (9)
RF 1966 SC 719 (5)
RF 1966 SC1583 (3,7,8)
RF 1973 SC 651 (7,8)
RF 1974 SC1728 (17)
R 1985 SC 520 (21)
ACT:
Income-tax-Assessee acquiring shares by blank transfers-
Receipt of dividend on such shares-If assessee entitled to
grossing up of dividend income and to credit for tax
deducted at source-Indian Income-tax Act, 1922 (XI of 1922),
ss. 16(2) and 18(5).
HEADNOTE:
The assessee acquired shares in certain companies under
"blank transfers " without getting the transfers registered
with the companies and it received dividends in respect of
these shares. It claimed that the dividend income should be
grossed up under s. 16(2) Income-tax Act and that it should
be allowed credit under s. 18(5) for the tax deducted at
source on the dividend in the hands of the companies.
Held, that, the assessee was not entitled to the benefits of
ss. 16(2) and 18(5) as its name was not in the register of
members of the companies. The benefit of s. 18(5) could
only go to a shareholder; and a shareholder in that section
meant the same thing as in the Indian Companies Act, 1913,
i. e., a " member having his name on the register.
The scheme of the Indian Companies Act, 1913, shows that the
words " member ", " shareholder " and " holder of a share "
have been used interchangeably. The words "holder of a
share" are really equal to the word "shareholder" and the
expression " holder of a share " denotes only a person who,
as a shareholder, has his name entered on the register of
members.
In re Wala Wynaad Indian Gold Mining Company, (1882) 21 Ch.
D. 849, Shree Shakti Mills Ltd. v. Commissioner of Income-
tax, [1948] 16 I.T.R. 187, jaluram Bhikulal v. Commissioner
of Income-tax, [1952] 22 I. T.R. 491, Arvind N. Mafatlal v.
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Incometax Officer, [1957] 32 I.T . R. 350, Bikaner Trading
Co. v. Commissioner of Income-tax, [1953] 24 I.T.R. 419,
referred to. -
A company when it pays income-tax does not do so on behalf
of the shareholders, but the shareholders get the benefit of
such payment. The rates of income-tax applicable to the
company are, in most instances, higher than the rates
applicable to individual shareholders and by the process of
grossing up the recipient of the dividend gets some benefit.
Cull v. Inland Revenue Commissioners, (1940) A.C. 51 and
Inland Revenue Commissioners v. Blott, (1921) 2 A.C. 171,
referred to.
440
In blank transfers the transfer deed signed by the
transferor is handed over with the share scrip to the
transferee who may complete the transfer by entering his
name and applying to the company for registration of his
name. The company only recognises those persons whose names
are on the register of members and they alone are legally
entitled to the dividend declared. In the case of a blank
transfer equities exist between the transferor and the
transferee and the transferee has a right to claim the
dividend from the transferor who holds it in trust for him,
but the company is only liable to the transferor and not to
the transferee. Though the transferee is clothed with an
equitable ownership he is not a full owner, since the legal
interest vis-a-vis the company still outstands in the
transferor.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 65 of
1956.
Appeal from the judgment and order dated August 31, 1954, of
the Calcutta High Court in Income-tax Ref. No. 57 of 1953.
N. C. Chatterjee and B. P. Maheshwari, for the appellant.
K. N. Rajagopala Sastri, R. H. Dhebar and D. Gupta, for
the respondent.
1959. March 26. The Judgment of the Court was delivered by
HIDAYATULLAH, J.-Messrs. Howrah Trading Company, Ltd.,
Calcutta (hereinafter called the assessee) obtained on April
28, 1955, a certificate under s. 66A(2) of the Indian
Income-tax Act from the Calcutta High Court, to appeal to
this Court against the judgment dated August 31, 1954, in
Income-tax Reference No. 57 of 1953. The Divisional Bench
(Chakravarti, C. J., and Lahiri, J.) in the judgment under
appeal merely followed their earlier judgment delivered the
same day in Income-tax Reference No. 22 of 1953, since
reported as Hindustan Investment Corporation v. Commissioner
of Income-tax (1). It is the latter judgment which gives
the reasons for the decision.
The facts of the case have been stated with sufficient
fulness, yet briefly, in the statement of the case submitted
by the Income-tax Appellate Tribunal (Calcutta Bench) and
may be conveniently set out in its own words:
(1) [1955] 27 I.T.R. 202.
57
450
" The applicant had received sums of Rs. 3,831, Rs. 6,606,
Rs. 7,954 and Rs. 8,304 in the four assessment years, 1944-
45, 1945-46, 1946-47 and 1947-48 as income from dividends.
The shares in respect of which this dividend income was
received were the property of the Applicant but in the books
of the various companies these stood in the names of other
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persons. It appears that these shares were purchased by the
Applicant from other persons under a blank transfer but the
transfers had not been registered with the various
companies. The Applicant’s claim in these income-tax
proceedings was that these shares although not registered in
the name of the applicant were the property of the
applicant. It was further claimed that this dividend income
should be grossed up under s. 16(2) and credit for the tax
deducted should be allowed to the Applicant under s. 18(5)."
The Income-tax Officer did not accept this claim, and the
appeals of the assessee were rejected by the Appellate
Assistant Commissioner of Income-tax, Calcutta, " A " Range
and by the Appellate Tribunal. The Tribunal, however, on
being moved, referred the following question to the High
Court:
" Whether in the facts and circumstances of this case, the
Applicant (the assessee) was entitled to have this dividend
income grossed up under section 16(2) and claim credit for
tax deducted at source under section 18(5) of the Income-tax
Act? "
The High Court answered the question in the negative, thus
affirming the decisions of the Department and the Appellate
Tribunal.
The assessee contends that the decision of the High Court is
erroneous, and that it is entitled to have the dividend
income I grossed up’ under s. 16(2) and also to claim credit
for tax deducted at source, under s.18(5) of the Income-tax
Act.
The relevant sections are as follows:
" 16(2) : For the purposes of inclusion in the total income
of an assessee any dividend shall be deemed to be income of
the previous year in which it is paid, credited or
distributed or deemed to have been
451
paid, credited or distributed to him, and shall be increased
to such amount as would, if income-tax (but not super-tax)
at the rate applicable to the total income of the company
without taking into account any rebate allowed or additional
income-tax charged for the financial year in which the
dividend is paid, credited or distributed or deemed to have
been paid, credited or distributed, were deducted therefrom,
be equal to the amount of the dividend: (proviso omitted).
18 (5): 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 incometax or super-tax on behalf........ of the
shareholder and credit shall be given to him therefor on the
production of the certificate furnished under.....section
20 ...... in the assessment, if any, made for the following
year under this Act: (proviso omitted).
49B(1): Where any dividend has been paid, credited or
distributed or is deemed to have been paid, credited or
distributed to any of the persons specified in section 3 who
is a shareholder of a company which is assessed to income-
tax in the taxable territories or elsewhere, such person
shall, if the dividend is included in his total income, be
deemed in respect of such dividend himself to have paid
income-tax (exclusive of super-tax) of an amount equal to
the sum by which the dividend has been increased under sub-
section (2) of section 16."
It was contended in the High Court that inasmuch as s. 16(2)
referred to an I assessee, the assessee company was entitled
to have the dividend ’grossed up’ by the addition of income-
tax paid by the various companies at source and consequently
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to have the benefit of the credit allowed under the two
remaining sections. In the opinion of the High Court, an
assessee whose name was not in the register of members of
the companies was not entitled to the benefit of these
provisions. The learned Judges of the High Court were of
the opinion that the word " shareholder " in
452
s.18(5) had the same signification as the word " member "
used in the Indian Companies Act; and that the assessee was
not qualified to be considered as a shareholder, even though
by a blank transfer it had ,purchased the relevant shares.
In our opinion, the High Court was right in its conclusion.
A company when it pays income-tax, does not do so on behalf
of the shareholders. It is itself chargeable under the Act,
In Cull v. Inland Revenue Commissioners (1), Lord Atkin
stated the law (which in substance is also the law in our
country) thus:
My Lords, it is now clearly established that in the case of
a limited company the company itself is chargeable to tax on
its profits, and that it pays tax in discharge of its own
liability and not as agent for its shareholders......... At
one time it was thought that the company, in paying tax,
paid on behalf of the shareholder; but this theory is now
exploded by decisions in this House, and the position of the
shareholders as to tax is as I have stated it."
When the company pays its own income-tax and declares a
dividend from the balance of its profits, it deducts from
such dividend a proportionate part of the amount of the tax
paid by it. This principle is explained in another English
case, and it is substantially also the law in this country.
In Inland Revenue Commissioners v. Blott (2), Viscount Cave
stated the law in these words:
" Plainly, a company paying income-tax on its profits does
not pay it as agent for its shareholders. It pays as a tax-
payer, and if no dividend is declared, the shareholders have
no direct concern in the payment. If a dividend is
declared, -the company is entitled to deduct from such
dividend a proportionate part of the amount of the tax
previously paid by the company; and, in that case, the
payment by the company operates in relief of the
shareholder. But no agency, properly so called, is
involved."
The share-holders, however, get the benefit of the payment
of the tax by the company. Though under
(1) [1940] A.C. 51, 56 ; (1939) 22 Tax Cas. 603, 636.
(2) [1921] 2 A.C. 171, 201.
453
s.16(2) of the Act their dividend is increased by a
proportionate amount of tax paid by the company, the payment
of the tax by the company is deemed tinder ss. 18(5) and
49B(1) to be payment by the shareholders. The rates of
income-tax applicable to the company are, in most instances,
higher than the rates applicable to the individual
shareholders, and by this process of ’grossing up’, as it is
commonly called, the recipient of the dividend gets some
benefit.
The position of a shareholder who gets dividend when his
name stands in the register of members of the company causes
no difficulty whatever. But transfers of shares are common,
and they take place either by a fully executed document such
as was contemplated by Regulation 18 of Table A of the
Indian Companies Act 1913, or by what are known as blank
transfers’. In such blank transfers, the name of the
transferor is entered, and the transfer deed signed by the
transferor is handed over with the share scrip to the trans-
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feree, who, if he so chooses, completes the transfer by
entering his name and then applying to the company to
register his name in place of the previous holder of the
share. The company recognises no person except one whose
name is on the register of members, upon whom alone calls
for unpaid capital can be made and to whom only the dividend
declared by the company is legally payable. Of course,
between the transferor and the transferee, certain equities
arise even on the execution and handing over of ’a blank
transfer’, and among these equities is the right of the
transferee to claim the dividend declared and paid to the
transferor who is treated as a trustee on behalf of the
transferee. These equities, however, do not touch the
company, and no claim by the transferee whose name is not in
the register of members can be made against the company, if
the tranferor retains the money in his own hands and fails
to pay it to him.
A glance at the scheme of the Indian Companies Act, 1913,
shows that the words " member ", " shareholder " and "
holder of a share " have been used interchangeably in that
Act. Indeed, the opinion of most of the writers on the
subject is also the same.
454
Buckley on the Companies Act, 12th Edition, page 803 has
pointed out that the right of a transferee is only to call
upon the company to register his name and no more.- No
rights arise till such registration ,takes place.
Section 2(16) of the Indian Companies Act, 1913, defines "
share " as " share in the share capital of the company
Section 5 deals with the mode of forming incorporated
companies, and in the case of companies limited by shares,
the liability of the members is limited to the amounts, if
any, unpaid on the shares respectively held by them. By s.
18, Table A is made applicable to companies, unless by the
Articles of any company the terms of Table A have been
excluded or modified. Regulation 18 of Table A reads as
follows:
" The instrument of transfer of any share in the company
shall be executed both by the transferor and transferee, and
the transferor shall be deemed to remain holder of the share
until the name of the transferee is entered in the register
of members in respect thereof. "
The words " holder of a share " are really equal to the word
shareholder and the expression " holder of a share denotes,
in so far as the company is concerned, only a person who, as
a shareholder, has his name entered on the register of
members. A similar view of the Companies Clauses
Consolidation Act, 1845, was taken in Nanney v. Morgan(1).
The learned Lord Justices held that under s. 15 of that Act,
the transferee bad not the benefit of a legal title till
certain things were done, which were indicated by Lopes,
L.J., in the following passage:
" Therefore the transferor, until the delivery of the deed
of transfer to the secretary, is subject to all the
liabilities and entitled to all the rights which belong to a
shareholder or stockholder, and, in my opinion until the
requisite formalities are complied with, he continues the
legal -proprietor of the stock or shares subject to that
proprietorship being divested, which it may be at any
moment, by a compliance with the requisite formalities.
(1) (1888) 37 Ch. D. 346, 356.
455
The same position obtains in India, though the completion of
the transaction by having the name entered in the register
of members relates it back to the time when the transfer was
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first made. See Nagabushanam v. Ramachandra Rao (1).
During the period that the transfer exists between the
transferor and the transferee without emerging as a binding
document upon the company, equities exist between them, but
not between the transferee and the company. The transferee
can call upon the transferor to attend the meeting, vote
according to his directions, sign documents in relation to
the issuance of fresh capital, call for emergent meetings
and inter alia, also compel the transferor to pay such
dividend as he may have received. See E. D. Sassoon & Co.
Ltd. v. Patch-(2) approved in Mathalone v. Bombay Life
Assurance Co. Ltd. (3 ). But these rights though they, no
doubt, clothe the transferee with an equitable ownership-,
are not sufficient to make the transferee a full owner,
since the legal interest vis-a-vis the company still
outstands in the transferor; so much so, that the company
credits the dividends only to the transferor and also calls
upon him to make payment of any unpaid capital, which may be
needed. The cases in Black v. Homersham (4) or Wimbush, In
re Richards v. Wimbush (5) hardly advance the matter further
than this. The position, therefore, under the Indian Com-
panies Act, 1913, is quite clear that the expression "
shareholder " or " holder of a share " in so far as that Act
is concerned, denotes no other person except a " member ".
The question that arises in the present case is whether by
reason of ss. 16(2) and 18(5) the assessee, who was a
transferee on a blank transfer’ is entitled to the benefits
of the grossing up of the dividend income. Learned counsel
for the assessee strenuously contends that the assessee
being an owner in equity of the shares and thus also of the
dividend is entitled to this benefit. He refers to the use
of the word I assessee in s. 16(2). The Department, on the
(1) (1922) I.L.R. 45 Mad. 537.
(3) [1954] S.C.R. 117.
(2) (1922) 45 Bom. L.R. 46.
(4) (1878-79) L. R. 4 Ex. D. 24.
(5) [1940] 1 Ch. D. 92.
456
other hand, says that the dividend can be increased under s.
16(2) and credit allowed under s. 18(5) if the assessee is a
’shareholder’, because the benefit of s. 18(5) can go only
to the shareholder, i. e., a person with his name on the
register of members, and not to a person holding an equity
against such shareholder. The assessee contends that the
word " shareholder " includes even a person who holds a
share as a result of a blank transfer, and does not
necessarily mean a member of the company, whose name is on
the register of members.
Authorities on this point are not wanting, and indeed, in
the judgment of the Calcutta High Court they have all been
referred to. They are all against the assessee. See Shree
Shakti Mills Ltd. v. Commissioner of Income-tax (1), Jaluram
Bhikulal v. Commissioner of Income-tax (2), Arvind N.
Mafatlal v. Incometax Officer (3) and Bikaner Trading Co. v.
Commissioner of Income-tax (4).
The question that falls for consideration is whether the
meaning given to the expression "shareholder" used in s.
18(5) of the Act by these cases is correct. No valid reason
exists why " shareholder " as used in s. 18(5) should mean a
person other than the one denoted by the same expression in
the Indian Companies Act, 1913. In In re Wala Wynaad Indian
Gold Mining Company (5), Chitty, J., observed:
" I use now myself the term which is common in the Courts, I
a shareholder’, that means the holder of the shares. It is
the common term used, and only means the person who holds
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the shares by having his name on the register. "
Learned counsel for the assessee cited a number of
authorities in which the ownership of the dividend was in
question, and it was held that the transferee whose name was
not registered, was entitled to the dividend after transfer
had been made. These cases are Commissioners of Inland
Revenue v. Sir John Oakley (6), Spence v. Commissioners of
Inland Revenue (7)
(1) [1948] 16 I.T.R. 187.
(3) [1957] 32 I.T.R. 350.
(5) (1882) 21 Ch. D. 849, 854.
(2) [1952] 22 I.T.R. 490.
(4) [1953] 24 I.T.R. 419.
(6) (1925) 9 Tax Cas. 582,
(7) (1941) 24 Tax Cas. 311.
457
and others cited at page 367 in Multipar Syndicate, Ltd. v.
Devitt (1).
No one can doubt the correctness of the proposition in these
cases, but from an equitable right to compel the transferor
to give up the dividend to the transferee, to a claim to the
dividend by him as a " shareholder " against the company is
a wide jump. In so far as the company is concerned, it does
not even issue the certificate under s. 20 of the Income-tax
Act in the name of an unregistered transferee but only in
the name of the transferor whom it recognises, because his
name is borne on its books. Section 20 lays down:
" The principal officer of every company shall, at the time
of distribution of dividends, furnish to every person
receiving a dividend a certificate to the effect that the
company has paid or will pay income-tax on the profits which
are being distributed, and specifying such other particulars
as may be prescribed. "
The meaning of s. 20 as also of s. 18(5) is clear if they
are read with s. 19A, under which information regarding
dividends has to be supplied by the company when demanded by
the Income-tax Officer. It lays down:
" The principal officer of every company ... shall, on or
before the 15th day of June in each year, furnish to the
prescribed officer a return in the prescribed form and
verified in the prescribed manner of the names and of the
addresses, as entered in the register of shareholders
maintained by the company, of the shareholders to whom a
dividend or aggregate dividends exceeding Such amount as may
be prescribed in this behalf has or have been, distributed
during the, preceding year and of the amount so distributed
to each such shareholder. " (Italics supplied).
Section 19A makes it clear, if any doubt existed, that by
the term " shareholder " is meant the person whose name and
address are entered in the register of " shareholders "
maintained by the company. There is but one register
maintained by the Company. There
(1) (1945) 26 Tax Cas. 359.
58
458
is no separate register of " shareholders " such as the
assessee claims to be but only a register of " members ".
This takes us immediately to the register of members, and
demonstrates that even for the purpose of the Indian Income-
tax Act, the words ’,member and " shareholder " can be read
as synonymous.
The words of s. 18(5) must accordingly be read in the light
in which the word " shareholder " has been used in the
subsequent sections, and read in that manner, the present
assessee, notwithstanding the equitable right to the
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dividend, was not entitled to be regarded as a "shareholder"
for the purpose of s. 18(5) of the Act. That benefit can
only go to the person who, both in law and in equity, is to
be regarded as the owner of the shares and between whom and
the company exists the bond of membership and ownership of a
share in the share capital of the company.
In view of this, we are satisfied that the answer given by
the Calcutta High Court on the question posed by the
Tribunal was correct.
The appeal fails, and is dismissed with costs.
Appeal dismissed.
459