LexKISHANCHAND LUNIDASINGH BAJAJ versus COMMISSIONER OF INCOME-TAX, MYSORE
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' .. A B c D KISHANCHAND LUNIDASINGH BAJAJ v. COMMISSIONER OF INCOME-TAX, MYSORE February 10, 1966. (P. B. GAJENDRAGADKAR, C. J., K. N. WANCHOO, J.C. SHAH, S. M. SIKRI AND V. RAMASWAMI, JJ.J Indian Income-tax Act, 1922 (11 of 1922), s. 16(2)-Rea/ owner mid registered owner of shares different-Tax liability on dividend on wh•m. B and his sons constituted a Hindu undivided family which owned certain shares in public limited companies. The family started busineu in money lending in the name of a tirm and in the books of account of the firm the shares which stood registered in the name of B with the companies were credited as the capital of the business. Two sons sepa- rated from the family, each receiving •urns in lieu of his share, and theJ formed a partne:sbip with the rest of the- members of the family for carrying business in the name of the same firm. Under the partnership the two separated sons were entitled to their shares and the remaining shares were to belong to B as Karta of the farnilJ. Dividends received in respect of the shares were credited to the profit and loss ac::ount of the firm. In assessment proceedings, it was claim,..d that the shares which stood registered in the name of B belonged not to the Hindu undivided family but to the firm. The claim was rejected. In appeal to this Court it was contended that where one taxable entity is the registered holder of shares in ·a company and the real owner of the shares is another taxable entity, the registered shareholder alone is liable to be ascessed to tax in respect of the dividend from these sharee, and therefore B aione was liable to be taxed in respect of the divideond income from the shares, and not the Hindu undivided family. HELD : The contention must fail. Tax being charged by s. 3 of the Income-tax Act upon dividend in· come and not being exclud~d under s. 4(3), such income would be chargeable to income-tax under the Act in the hands of the person to whom it accru .. or by whom it is received. A company for its purpoaea does not recognize any trust or equitable ownership in shares; it merely recognizes the registered shareholder as the owner and pays the dividend to that shareholder. But the shares may, because of a trust or other fiduciary relationship, belong to a person other than the registered share- holder and the dividend distributed by the company would for the pnrpose of tax be deemed to accrue or arise to the real owner of the shares. [576 A-CJ G Sub-section (2) of s. 16 does not operate .. an exemption from t.ba pale of either s. 3 or s. 4( I) of the Act nor does it provid<i that liabi· lity to tax arises only when the person by whom dividend is received from the company is the real owner of the •hares. Sub-section (5) of s. 18 also does not lead to that result. Insofar as it deals with dividend which is "grossed up", sub-s. (5) of s. 18 forms a corollary to s. 16(2). Therefore when tax is paid on behalf of a shareholder and dednctioo Is made from dividend, credit is giYen to the shareholder for the tax paid H in his final assessment. But the scheme of "grossing up" is not aua-- ceptible of the interpretation that the income from dividend is to be re- garded as the income only of the registered shareholder and not of tho real owner of the share. [578 G-579 BJ Ml 1 Sup. CI/66-' 574 SUPREME COURT REPORTS (1966] 3 S.C.R. Income-tax Officer, North Satara \'. Arl"ind N. Ma/at/a/ & Ors .. 45 A l.T.R. 271 and Commirsioner of Income-tax, Bo:nbay City fl v. Shakunta/a and Ors., 43 l.T.R. 352, referred to. Howrah TradinR Company I .. td,. v. Commissr'oner of lnco1ne-tax, Cmrral, Calcutra, 36 J.T.R. 215, explained. C1v1L APPEi.i.ATE Jt•RISIDC'TION : CiYil Appeal No. 234 of 1965. n Appeal by special leave from the judgment and order dated July 19, 1963 of the Mysore High Court in I. T. R. c. No. 6 of 1963. K. Srinil'asan and R. Gopalakrislman, for the appellant. C. K. Daphtary, Aflorney-General, R. Gmrapat/Jy Iyer, R. !/. Dhebar and R. N. Sachthey, for the respondenl. The Judgment of the Court was delivered by Shah, J. Kishanchand Bajaj and his seven sons formed a Hindu undivided family which owned shares exceeding Rs. 91,000 in value, in public limited companies. The family commenced business in money-lending and as commission agents on May 16, 1956 in the name of Messrs. Mangoomal Kishanchand and in the books of account of the firm the shares which s
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