Taxability on receipt or accrual: dividend sums retained by company as tax were not income of shareholders.

Income is taxable only when it is actually received or when a vested right to receive it has accrued to the assessee. On the facts noted, amounts deducted from dividend warrants by a Ceylon company and retained by it as tax never became the shareholders' money, because the company was entitled to keep those sums under the Ceylon income tax law and no debt arose in favour of the assessees. The Madras HC therefore treated the deductions as neither receipt nor accrual in the assessees' hands, and held that they were not includible in their total income. The rule relating to salaries deducted at source was held inapplicable because the dividend deductions were never paid over on the assessees' behalf.

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Issues: Whether the amounts deducted by a Ceylon company from dividends and retained by it as tax were includible in the assessees' total income under the Indian Income-tax Act.

Analysis: The relevant test under the Indian Income-tax Act is whether the sums were actually received by the assessees, or had accrued or arisen to them. The amounts deducted from the dividend warrants were not paid to the assessees, and the company was entitled to retain them for itself under the Ceylon Income Tax Ordinance. The assessees never acquired a vested right to receive those sums, and no debt arose in their favour in respect of them. Since the money always remained the company's money, the sums could not be treated as income of the assessees, either on receipt or on accrual principles. The statutory treatment of salaries deducted at source was held to be inapplicable because the dividend deductions were neither the assessees' money nor amounts paid over on their account.

Conclusion: The deducted sums were not includible in the taxable income of the assessees.

Ratio Decidendi: Income can be brought to tax only when it is received or when the assessee acquires a vested right to receive it; amounts retained by a company out of dividends and never becoming the shareholder's money do not accrue to the shareholder.

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