Dividend income accrual and deemed accrual turned on declaration, share situs, and the limits of the dividend explanation.

Dividend income was treated as accruing where the dividend came into existence by declaration and payment, and on the stated facts that place was Navsari in the former Baroda State rather than British India. The later merger of the State did not alter the factual place of accrual. The same income was nevertheless deemed to accrue in British India under section 42(1) because the shares were situated in Bombay, while the special dividend explanation to section 4(1) was confined to non-resident shareholders and did not protect a resident assessee. The result was that the income was factually accrued outside British India but statutorily deemed to accrue within it.

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Issues: (i) Whether the net dividend income of Rs. 47,120 actually accrued to the assessee in the former Baroda State; (ii) Whether, even if it so accrued, it was deemed to have accrued in British India under the Indian Income-tax Act, 1922.

Issue (i): Whether the net dividend income of Rs. 47,120 actually accrued to the assessee in the former Baroda State.

Analysis: The source of the assessee's dividend income was held to be the shares themselves, not the mere declaration of dividend. Although the company declared the dividends at Navsari, made them payable there, and the accumulated funds were kept in the former Baroda State, the place of declaration and payment did not determine accrual by themselves. The dividend came into existence when declared, and on the facts the declaration and payment were both in Navsari, which was then in the former Baroda State. The subsequent merger of the State could not alter the factual place of accrual.

Conclusion: The dividend income actually accrued to the assessee in the former Baroda State, not in British India.

Issue (ii): Whether, even if it so accrued, it was deemed to have accrued in British India under the Indian Income-tax Act, 1922.

Analysis: The situs of the shares was in Bombay, and that made the dividend income income deemed to have accrued in British India under section 42(1). The third explanation to section 4(1) was held to apply only to dividends paid to non-resident shareholders by an Indian company outside the taxable territories, and not to a resident assessee. The extensions and deeming provisions relating to merged States did not change the factual accrual, but section 42(1) supplied the statutory deeming consequence for the resident assessee's income.

Conclusion: The income was deemed to have accrued to the assessee in British India under section 42(1).

Final Conclusion: The dividend income accrued in the former Baroda State in fact, but for tax purposes it was deemed to have accrued in British India, so the reference was answered against the assessee and in favour of the Revenue.

Ratio Decidendi: For dividend income, the factual place of accrual depends on where the dividend comes into existence by declaration and payment, but the income may still be deemed to accrue in British India where the statutory conditions for deemed accrual are satisfied; the special dividend explanation to section 4(1) is confined to non-resident shareholders.

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