Case Note & Summary
The appeal arose from an income-tax reference concerning the assessee, Messrs. Howrah Trading Co. Ltd., Calcutta, for the assessment years 1944-45 to 1947-48. The assessee had received dividend income of Rs. 3,831, Rs. 6,606, Rs. 7,954 and Rs. 8,304 in those years in respect of shares which were its property but stood in the names of other persons in the books of the various companies. The shares had been purchased by the assessee from other persons under blank transfers, but the transfers had not been registered with the companies. The assessee claimed that the dividend income should be grossed up under s.16(2) of the Indian Income-tax Act, 1922, 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. The Income-tax Officer rejected the claim, and the appeals to the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal were dismissed. The Tribunal referred the following question to the Calcutta High Court: whether in the facts and circumstances, the assessee was entitled to have the dividend income grossed up under s.16(2) and claim credit for tax deducted at source under s.18(5). The High Court answered the question in the negative, following its earlier decision in Hindustan Investment Corporation v. Commissioner of Income-tax. The assessee then obtained a certificate under s.66A(2) and appealed to the Supreme Court. The core legal issue was whether a person who holds shares under blank transfers but whose name is not on the register of members is a 'shareholder' entitled to the benefits of ss.16(2) and 18(5). The assessee argued that s.16(2) referred to an 'assessee' and therefore the assessee company was entitled to grossing up and credit. The Revenue contended that the benefit of these provisions is confined to a shareholder, meaning a member whose name appears on the register of members of the company. The Supreme Court held that the assessee was not entitled to the benefits. The Court explained that a company when it pays income-tax does not do so on behalf of the shareholders; it is itself chargeable. The shareholders get the benefit of such payment through the grossing up mechanism, but only if they are properly shareholders. The Court observed that the words 'member', 'shareholder' and 'holder of a share' have been used interchangeably in the Indian Companies Act, 1913, and that a shareholder means a person whose name is on the register of members. The company recognises no person except one whose name is on the register, and only such persons are legally entitled to the dividend declared. In the case of a blank transfer, equities exist between transferor and transferee, and the transferee has a right to claim the dividend from the transferor, but the company is liable only to the transferor. The transferee is not a full owner since the legal interest vis-à-vis the company still outstands in the transferor. The Supreme Court dismissed the appeal and affirmed the High Court's decision, holding that the assessee was not entitled to have its dividend income grossed up under s.16(2) or to claim credit for tax deducted at source under s.18(5), because its name was not on the register of members of the companies.
Headnote
A) Income Tax - Dividend Grossing Up - Section 16(2) Indian Income-tax Act, 1922 - Only a registered shareholder is entitled to have dividend income grossed up - The assessee held shares under blank transfers without registration; the Income-tax Officer rejected the claim; the Supreme Court held that the benefit of grossing up is confined to a person whose name appears on the register of members; a mere equitable owner under a blank transfer is not entitled to the benefit (Paras 1-8). B) Income Tax - Tax Deducted at Source Credit - Section 18(5) Indian Income-tax Act, 1922 - Credit for tax deducted at source is available only to a shareholder - 'Shareholder' in s.18(5) means the same as 'member' in the Indian Companies Act, 1913, i.e., a person whose name is on the register - The assessee was not a registered member, so no credit could be allowed (Paras 1-8). C) Company Law - Meaning of Shareholder and Member - Sections 2(16), 5 Indian Companies Act, 1913 - Words 'member', 'shareholder' and 'holder of a share' are used interchangeably; only registered members are recognised by company - Blank transfer creates equitable ownership but no legal right against company until registration - Company is liable to pay dividend only to registered member (Paras 1-8). D) Income Tax - Nature of Company's Tax Payment - Sections 16(2), 18(5), 49B(1) Indian Income-tax Act, 1922 - Company pays income-tax on its own behalf, not as agent for shareholders; shareholders get benefit by grossing up and deemed payment - The scheme of the Act provides relief to registered shareholders but not to unregistered transferees (Paras 1-8).
Issue of Consideration
Whether an assessee who acquired shares under blank transfers but whose name was not registered in the company's register of members is entitled to have dividend income grossed up under s.16(2) and to claim credit for tax deducted at source under s.18(5) of the Indian Income-tax Act, 1922.
Final Decision
The Supreme Court dismissed the appeal and affirmed the High Court's decision, holding that the assessee was not entitled to have its dividend income grossed up under s.16(2) or to claim credit for tax deducted at source under s.18(5), because its name was not on the register of members of the companies. The benefit of these provisions is available only to a shareholder, meaning a registered member under the Indian Companies Act, 1913.
Law Points
- Legal points not extracted
- Under Indian Income-tax Act
- 1922
- ss.16(2)
- 18(5)
- benefit of grossing up and tax credit is available only to a shareholder
- 'shareholder' means member whose name is on register of members under Indian Companies Act
- 1913
- words member
- shareholder
- holder of a share used interchangeably
- company pays income-tax on own behalf not as agent for shareholders
- blank transfer creates equitable rights between transferor and transferee but company recognises only registered members
- transferee under blank transfer not entitled to dividend directly from company or to grossing up
