Deemed dividend under section 23A cannot be split into capital gains in the shareholder's hands.

Section 23A of the Income-tax Act, 1922 treats undistributed company income as dividend received by the shareholder by statutory fiction for assessment of the shareholder's total income. That fiction cannot be extended to import the company's capital gains character into the shareholder's hands, because capital gains provisions apply to the assessee's own capital asset transactions and the company and shareholder remain distinct entities. The deemed dividend therefore cannot be dissected into a capital gains component. The conclusion stated is that such deemed dividend is taxed as dividend income and not partly as capital gains in the shareholder's assessment.

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Issues: Whether the dividend deemed to be distributed under section 23A of the Income-tax Act, 1922 could be split into a capital gains component and taxed partly as capital gains in the hands of the shareholder.

Analysis: The deemed distribution under section 23A creates a statutory fiction that the undistributed income of the company is treated as dividend received by the shareholder for the purpose of assessing the shareholder's total income. The provisions relating to capital gains under sections 12B and 17 proceed on the basis of capital gains arising to the assessee in respect of the assessee's own capital asset transactions. A shareholder and the company are distinct entities, and nothing in section 23A or the capital gains provisions permits the shareholder's deemed dividend income to be dissected by importing the company's capital gains character into the shareholder's assessment. The legal fiction must be given full effect, but not extended by creating a further fiction that the shareholder himself realised capital gains.

Conclusion: The deemed dividend under section 23A cannot be split up and taxed as capital gains in the hands of the shareholder. The question was answered against the assessee and in favour of the Revenue.

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