SHAKTI MILLS LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee, which is a company, purchased certain shares during the accounting year and in respect of those shares received an amount of Rs. 3,628 representing dividends paid on those shares. In the return which they made they claimed that this sum of Rs. 3,628 be processed in terms of Sections 16(2) and 18(5) of the Indian Income-tax Act. THE assessee was called upon to produce the relevant certificates issued by the companies concerned under Section 20 of the Act. THE assessee failed to produce the certificates as they had not been registered by the company in their books as the shareholder in respect of these shares. THEreupon the taxing authorities refused to grant to the assessee the rights and concessions permissible under Section 18(5) and Section 16(2) of the Act.

(2.) THE question submitted to us is, whether in the absence of a certificate under Section 20 the assessee s claim in respect of Rs. 3,628 under Sections 18(5) and 16(2) can be validly entertained. Before we consider the question of the certificate under Section 20, a more fundamental question arises as to the right of the assessee to claim any relief under Section 18(5) or 16(2) of the Act. Turning to these two Sections 16(2) and 18(5), the principle is fairly clear. Dividends received are net dividends and they are paid after the company has paid the tax on its profits. In order to avoid double taxation, the law permits the assessee to gross up the net dividend and to show under Section 16(2) what was the gross income as against the net income represented by the dividend. THEn, under Section 18(5) the assessee is entitled to deduct the tax paid by the company on this gross amount. Section 16(2) speaks of dividends being paid, credited or distributed to the assessee. It is clear that the dividend can only be paid by a company and it can only be paid to its registered shareholder. If there were any doubt as to the construction of Section 16(2), which in my opinion there is none, that doubt is removed when one looks at the language of Section 18(5) which expressly uses the expression "shareholder." Mr. Somjee says that a shareholder is not a registered shareholder but a person who is the owner of the shares. It is impossible to accept that contention. A shareholder can only have one legal connotation. He is the person who owns certain shares and who is shown as a shareholder in the register of the company. In this case the real position in law was that the assessee purchased the shares and did not get itself transferred in the books of the company as the shareholder. THErefore, the shareholder from whom the shares were purchased received the dividend from the company and quae the assessee the shareholder became a bare trustee with regard to the dividend received by him and the shareholder would be liable to pay to the assessee an amount representing the dividend. But in no view of the case the assessee was either the shareholder of the company or did it ever receive any dividend from the company. It only received an amount representing the dividend from the registered holder of the shares. THErefore, in my opinion, it is only the shareholder of a company to whom dividends are paid who is entitled to the procedure of processing permissible under Section 16(2) and Section 18(5). A person who buys shares or who comes in possession of shares without getting himself transferred in the books of the company and without becoming a shareholder and without being entitled to dividends cannot avail himself of the procedure laid down under these two sections.

(3.) THERE are two conditions that must be fulfilled before Section 16(2) can be invoked. The first is that dividend must be paid by the only person who can pay it, viz. the company. The second is that it must be paid to the assessee. It is not enough that an amount equivalent to the dividend comes into the possession of the assessee through the intervention of a shareholder. Neither of these two conditions is satisfied in the present case. THERE is no payment whatever by the company to the assessees. The payment, if any, was made by the company to the shareholder himself; and the shareholder in his turn paid an equivalent amount to the assessees before us. In my opinion, therefore, Section 16(2) has no application to the facts of this case. I am strengthened in coming to this conclusion by the words specifically employed in Section 18(5). The relevant portion of that sub-section for the purposes of this reference is : "any sum by which a dividend has been increased under Sub-section (2) of Section 16 shall be treated as a payment of income-tax on behalf of the shareholder." Those words make it perfectly plain that the person to whose income certain amounts have to be added under Section 16(2), in addition to the dividend, is the shareholder and no other. In my opinion, therefore, the assessees in the present case are not entitled to the benefit of either of those sections.