Supreme Court Upholds Assessee in Income Tax Case on Deemed Dividend Under Section 23A of Indian Income-tax Act, 1922 — Hindu Undivided Family Not a Shareholder. Registered Shareholders, Not Beneficial Owners, Liable for Notional Dividend Income as Expression 'Shareholder' Refers to Person in Company's Register Under Section 23A.

Case Note & Summary

The dispute arose from income-tax assessments for assessment year 1949-50 concerning the applicability of Section 23A of the Indian Income-tax Act, 1922 to a Hindu undivided family that beneficially owned 1,842 shares in Cotton Export and Import Limited, a company in which the public were not substantially interested. The shares were registered in the names of individual family members: 877 in the name of Tribhuvandas Haridas, 815 in the name of Nanalal Haridas, and 150 in the joint names of Nanalal Haridas and Tribhuvandas Haridas. Nanalal Haridas was the karta of the Hindu undivided family. The Income-tax Officer, invoking Section 23A as it stood before the 1955 amendment, ordered that the undistributed portion of the company's assessable income be deemed to have been distributed as dividend among the shareholders. The proportionate dividend in respect of the 1,842 shares, after grossing up, amounted to Rs. 54,307, which the Officer added to the total income of the Hindu undivided family. The assessee family contended that the deemed dividend should be assessed only in the hands of the registered shareholders, not in the hands of the family, because the family was not a shareholder of the company. The Income-tax Officer and the Appellate Assistant Commissioner rejected the contention. The Income-tax Appellate Tribunal, while observing that the assessee's interpretation might defeat the purpose of Section 23A, felt bound by the Bombay High Court decision in S.C. Cambatta v. Commissioner of Income-tax, Bombay, and directed deletion of the deemed dividend from the family's income. At the instance of the Commissioner, the Tribunal referred the question of law to the Bombay High Court. The High Court, by order dated September 25, 1957, answered the question in favour of the assessee, holding that the deemed dividend could not be assessed in the hands of the family because the family could not be a registered shareholder; it reaffirmed its earlier view. The Commissioner appealed to the Supreme Court. The core legal issue before the Supreme Court was whether the expression "shareholder" in Section 23A meant only a person registered as a shareholder in the company's books, or whether it could include the beneficial owner of shares, such as a Hindu undivided family. The Revenue argued that the object of Section 23A was to prevent avoidance of super-tax by shareholders, and a narrow interpretation would defeat that purpose because a Hindu undivided family cannot be a shareholder in a company. The Revenue further argued that the legal fiction of deemed distribution must be carried to its logical conclusion, meaning the dividend should be treated as actually received by the beneficial owner family. The assessee relied on the express language of Section 23A, which required inclusion of the deemed dividend in the total income of each shareholder, and on consistent precedent. The Supreme Court dismissed the appeals and upheld the High Court. It held that Section 23A created a fictional or notional dividend income not actually received by the shareholder. An order under Section 23A was not itself an order of assessment; it had to be followed by assessment on the shareholder under Section 23 or Section 34. The express terms of the section required the artificial income to be included in the total income of the shareholder. Relying on the Bombay High Court decisions in S.C. Cambatta and Shree Shakti Mills Ltd., and this Court's decision in Howrah Trading Co. Ltd., the Court held that the expression "shareholder" in Section 23A meant the person shown as a shareholder in the register of the company. The section did not refer to beneficial ownership. The Hindu undivided family was not a shareholder of the Company, and therefore the deemed dividend could not be assessed in its hands. The Court rejected the Revenue's arguments, stating that the question was one of interpretation, and the legal fiction must be restricted to the plain terms of the statute. The Court also noted that it would be anomalous if "shareholder" had one meaning in Section 18(5) and a different meaning in Section 23A; a Hindu undivided family treated as shareholder for Section 23A would not be entitled to the benefit of Section 18(5). The appeals were dismissed, confirming that the deemed dividend income of Rs. 54,307 was not to be assessed in the hands of the Hindu undivided family but only in the hands of the registered shareholders.

Headnote

Issue of Consideration

Final Decision

The Supreme Court dismissed the three appeals and affirmed the Bombay High Court's answer. The deemed dividend income of Rs. 54,307 under Section 23A could not be assessed in the hands of the Hindu undivided family; it could be assessed only in the hands of the members who were registered shareholders of the company.

Law Points