Supreme Court Dismisses Revenue Appeal in Income Tax Act Case on Deemed Dividend Assessment Against Legal Representative. Assessment of Deemed Dividend Under Section 23A on Administrator of Deceased Shareholder Held Invalid as No Machinery Exists Under Section 24B to Tax Income After Year of Death.

Case Note & Summary

The appeal before the Supreme Court arose from an income-tax reference made by the Income-tax Appellate Tribunal, Bombay, concerning the validity of an assessment made on James Anderson as administrator of the estate of Henry Gannon, a deceased shareholder of Gannon Dunkerley & Company, a private limited company. The Commissioner of Income-tax, Bombay, challenged the Bombay High Court's decision holding that the assessment on the administrator was not valid in law. Henry Gannon, registered holder of 2674 shares in the company, died on May 13, 1945, leaving a will. The National Bank of India Ltd. obtained probate in the United Kingdom and appointed James Anderson as attorney to administer the estate in British India. Anderson obtained Letters of Administration 'durante absentia' on August 14, 1946. Of the shares, 450 were specifically bequeathed and handed over to legatees; the remaining 2224 shares were agreed to be sold to one Morarka by an agreement dated August 14, 1946, and share certificates with transfer deeds were handed over on October 12, 1946, against payment at Rs. 140 per share. However, Morarka failed to present the transfer deeds for registration, and Gannon's name remained on the register of shareholders at all material times. In the assessment of the company for the assessment years 1946-47 and 1947-48, the Income-tax Officer made an order under s.23A of the Income-tax Act, 1922, on March 26, 1953, deeming certain undistributed parts of the assessable income as dividends distributed among shareholders as at the dates of the general meetings, namely May 26, 1947, and December 22, 1947. The deemed dividends in respect of the shares were Rs. 61,051 and Rs. 3,73,099. The Income-tax Officer then issued a notice under s.34(1)(b) on March 28, 1953, to 'James Anderson, Administrator to the Estate of late Mr. Henry Gannon' for the assessment year ending March 31, 1949, proposing reassessment. Anderson filed a return but did not include the deemed dividends. The Income-tax Officer included the dividends in Anderson's total income and levied tax. Anderson's appeals to the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal were unsuccessful. The core legal issue was whether the Income-tax Act contained machinery for assessing dividends deemed to be distributed under s.23A in respect of shares held by a shareholder, when before the date on which the fiction of distribution became effective, the registered shareholder had died and his legal representatives had not been substituted in the register of the company. The Revenue contended that the principle that 'shareholder' means registered shareholder applied only when the registered shareholder was alive and beneficial ownership vested by inter vivos transfer, but not where representation was granted to the estate. The assessee argued, in effect, that no machinery existed to assess such deemed income in the hands of the legal representative after the death of the shareholder, and s.24B did not apply to income deemed to be distributed in later years. The Supreme Court held that the expression 'shareholder' in s.23A of the Income-tax Act, 1922, means shareholder registered in the books of the company, and such shareholder alone is liable to be taxed in respect of the dividend deemed to be distributed. The legal representative does not acquire in all cases the rights of a shareholder. There is no special machinery devised by the Act enabling assessment and levy of tax in respect of such deemed income from the estate of the shareholder in the hands of the legal representative when the order under s.23A becomes effective after the death of the shareholder. Section 24B has limited application; it imposes liability for tax on income actually received or deemed fictionally to be received in the year of account in which the taxpayer died, not on income received by the legal representative after the expiry of that year. Accordingly, the assessment on the administrator for the deemed dividends was not valid in law, and the appeal was dismissed.

Headnote

Issue of Consideration

Final Decision

Appeal dismissed; Supreme Court upheld High Court's decision that assessment on administrator was not valid in law. The Income-tax Act contains no machinery to assess deemed dividend under Section 23A in the hands of a legal representative when the order becomes effective after the death of the shareholder, and Section 24B does not apply to income deemed to be distributed after the year of death.

Law Points