LAGADAPATI SUBBA RAMAIAH Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE question referred to us for decision is :

(2.) THE facts are these. THE assessee, Lagadapati Subba Ramayya, was a partner of a registered firm "Umamaheswara Motor Service" which was a shareholder of a private limited company styled,

(3.) A dividend involves a distribution of the company's current or accumulated profits and a company cannot pay dividends otherwise than out of such profits. Under s. 16(2) of the IT Act, a dividend is deemed to be the shareholder's income of the year in which it is paid, credited or distributed regardless of when the profits out of which the dividend is paid were earned by the company. A company is a corporate body distinct from the shareholders and, under the IT Act, is chargeable to tax on its profits as a distinct taxable entity. The company pays tax in discharge of its own liability and not on behalf of or as agent for the shareholders. The shareholder himself is taxable on the dividends which he must include in his total income. Under s. 49B of the Act when a dividend is paid to a shareholder by a company which is assessed to tax, the income-tax in respect of such dividend is deemed to have been paid by or on behalf of the shareholder at the rate applicable to the total income of the company. As the income-tax in respect of the dividend is deemed, under s. 49B, to have been paid by the company on behalf of the shareholder, credit for the tax is given to the shareholder in his assessment under s. 18(5) of the Act. Not only is the shareholder not liable to pay income-tax again on the dividend but he is entitled to claim a refund under s. 48 if the maximum rate of income-tax with which companies are charged is not applicable to him. If the dividend has been paid partly out of profits which have not been charged to tax in the hands of the company, then under s. 16(2) proviso, the credit given to the shareholder in the assessment under s. 18(5) is calculated upon the proportion which the company's taxable profits bear to its total profits.