Case Note & Summary
The appeal arose from a certificate of fitness granted by the High Court of Calcutta under Section 66A(2) of the Indian Income-tax Act, 1922. The assessee, Provat Kumar Mitter, was the registered holder of 500 ordinary shares of the Calcutta Agency Ltd. By a written instrument dated January 19, 1953, he assigned to his wife, Ena Mitter, the right, title and interest to all dividends and sums of money which might be declared or become due on account or in respect of those shares for the term of her natural life. The shares themselves remained the property of the assessee; only the income arising therefrom was sought to be assigned. During the accounting year ended March 31, 1953, the dividend declared on the shares amounted to Rs. 12,000. The Income-tax Officer included the said sum in the assessee's income for assessment year 1953-54 under Sections 16(1)(c) and 16(3) of the Act. The assessee contended that since the settlement was for the lifetime of his wife, the third proviso to Section 16(1)(c) applied and the dividend received by his wife could not be deemed to be his income; alternatively, he argued that Section 16(3) was inapplicable because there was no transfer of the shares to his wife. The Appellate Assistant Commissioner dismissed the appeal accepting the Department's contentions that the third proviso was repugnant to the main provisions of Section 16(1)(c) and that the transfer of dividend was merely an application of income. The Income-tax Appellate Tribunal rejected the repugnancy contention, but gave effect to a new contention that the unregistered deed was invalid as a transfer of dividend income; it did not expressly decide the application-of-income issue. Both parties sought reference, and the Tribunal referred three questions to the High Court under Section 66. The High Court answered the first two questions (whether deed void for non-registration; whether third proviso repugnant) in favour of the assessee, but answered the third question (whether payment of dividend to wife was merely application of income) against the assessee. The assessee appealed to the Supreme Court limited to the third question. The Supreme Court first rejected the appellant's preliminary objection that the third question did not arise out of the Tribunal's order, holding that the Tribunal's statement of case showed the question was raised and by implication decided against the respondent, and no objection was taken in the High Court. On merits, the Court construed the instrument and held that it was not a transfer of any existing property of the assessee; it was in its true nature a contract to transfer or make over in future every dividend and sum of money which may be declared or become due. Since the company could pay the dividend only to the registered shareholder or under his orders, the income continued to accrue to the assessee though applied subsequently towards payment to the wife under the terms of the contract. The Court distinguished Bacha F. Guzdar, relied on Howrah Trading Co. Ltd., and concluded that the income was assessable in the hands of the assessee. Accordingly, the appeal was dismissed and the High Court's answer to the third question was affirmed.
Headnote
A) Income Tax - Taxability of Dividend Income Assigned to Spouse - Deed Assigning Future Dividends to Wife Not Transfer of Existing Property - Indian Income-tax Act, 1922, Sections 16(1)(c), 16(3) - Assessee, registered holder of shares, executed deed assigning right to all future dividends to wife for life; during relevant year dividend Rs.12,000 declared; ITO included in assessee's income; Court held deed constituted only a contract to transfer future dividends, not transfer of existing property, since dividend had not accrued; income continued to accrue to assessee as registered shareholder; tax liability remained with assessee; Held, income assessable in hands of assessee (Paras Not mentioned). B) Income Tax - Interpretation of Third Proviso to Section 16(1)(c) - Applicability When Income Is Merely Applied After Accrual - Indian Income-tax Act, 1922, Section 16(1)(c) third proviso - Assessee argued since settlement for wife's lifetime, third proviso applicable and dividend not deemed his income; High Court held case outside main clause of s.16(1)(c) because only application of income, so third proviso irrelevant; Supreme Court agreed, finding deed not transfer of existing property but contract to pay over future dividends; Held, third proviso not relevant because income accrued to assessee first (Paras Not mentioned). C) Income Tax - Reference to High Court - Question Arising Out of Tribunal's Order - Indian Income-tax Act, 1922, Section 66 - Appellant contended third question did not arise out of Tribunal's order; Court held though Tribunal did not state specific finding, statement of case indicated question raised and by implication decided against respondent; no objection taken in High Court; so question arose; Held, preliminary objection overruled (Paras Not mentioned). D) Precedent - Distinguishing Bacha F. Guzdar - Right to Dividend as Shareholder's Right - Indian Income-tax Act, 1922, Sections 2(1), 4(3)(viii) - Appellant relied on observations that right to participate in profits exists independently of declaration; Court distinguished, stating those observations not helpful as present question was construction of instrument; Held, the right to future dividends was not existing property at time of deed (Paras Not mentioned).
Issue of Consideration
Whether a deed assigning to the assessee's wife the right to future dividends declared on shares held by the assessee constituted a transfer of existing property such that the dividend income was not assessable in the assessee's hands; whether the third proviso to section 16(1)(c) of the Indian Income-tax Act, 1922 applied; whether the question arose out of the Tribunal's order
Final Decision
The Supreme Court dismissed the appeal and affirmed the High Court's answer to the third question. It held that the deed of January 19, 1953, was not a transfer of any existing property but a contract to transfer or make over in future every dividend and sum of money which might be declared or become due; since the company could pay dividend only to the registered shareholder or under his orders, income continued to accrue to the assessee and the subsequent payment to the wife was merely application of income; the dividend income of Rs. 12,000 was assessable in the hands of the assessee under Section 16(1)(c) of the Indian Income-tax Act, 1922.
Law Points
- Income from dividends declared on shares accrues to registered shareholder
- A deed assigning future dividends not yet declared is not a transfer of existing property but a contract to transfer future income
- Payment of dividend to wife under such deed is application of income after accrual
- Section 16(1)(c) of Indian Income-tax Act
- 1922 requires inclusion of such income in shareholder's total income
- Third proviso to section 16(1)(c) not applicable when case outside main clause
- Question arising out of Tribunal's order can be referred under section 66 of Income-tax Act
- 1922
- Transfer of property requires property in existence at time of transfer
