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Issues: Whether section 14(2)(a) of the Income Tax Act, 1922 exempted a shareholder from tax on the whole dividend received where the company's profits had been assessed to income-tax only in part.
Analysis: The exemption was construed in its ordinary and natural meaning. The phrase "where the profits or gains of the company have been assessed to income-tax" was held to refer to the company's profits as assessed, without splitting dividends by tracing them to particular sources or exempting only a proportion corresponding to taxed profits. A broader distributive construction was rejected because it would introduce uncertainty, require artificial factual inquiries into the source of dividends, and depart from the language used by the legislature.
Conclusion: The dividend was exempt under section 14(2)(a) whenever the company's profits or gains had been assessed to income-tax, and the answer to the reference was in the affirmative against the assessee and in favour of the revenue.
Ratio Decidendi: A statutory dividend exemption expressed in terms of profits or gains of a company being assessed to income-tax is attracted according to the ordinary and natural meaning of the assessment of those profits, not by apportioning the dividend between taxed and untaxed components.
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