TaxTMI 
TaxTMI 
1978 (5) TMI 2
X X X X Extracts X X X X
X X X X Extracts X X X X
....e in respect of the shares held by it amounted to Rs. 15,266 after deduction of the British income-tax of Rs. 9,881, the amount being stated in rupee equivalent of the pound sterling. For the assessment year 1960-61, the relevant previous year being the calendar year 1959, the assessee applied for relief under section 49D of the Indian Income-tax Act, 1922 (for short "the Act"). The Income-tax Officer declined to grant the relief but the reasons for the decision were not made explicit. In appeal by the assessee, the Appellate Assistant Commissioner confirmed the decision of the Income-tax Officer observing that even if it be held that the net dividend income suffered U.K. tax by deduction, there is nothing to show that the tax deducted was paid to U. K. revenue and, therefore, section 49D is not attracted. In further appeal by the assessee, the Tribunal accepted the contention of the assessee and, at the instance of the revenue, referred the question hereinabove set out, to the High Court. The High Court, after an exhaustive examination of the relevant provisions of the Income-tax Act of U.K. and the decisions bearing on the question, confirmed the decision of the Tribunal. The ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re is no reciprocal arrangement for relief or avoidance of double taxation between India and U.K. The assessee has received dividend income. A specimen dividend warrant issued in favour of the assessee reads as under: "Stockholders are particularly requested to notify the company of any change of address. 12125 J. LYONS AND COMPANY LIMITED.ORDINARY & 'A' ORDINARY STOCK. Annexed is a warrant in payment of Interim Dividend on your Stock on account of the year ending 31st March, 1960. Gross Dividend of is. Od. per 1 unit on pound ...... Ordinary Stock…….. } pound 96 120 pound 1932 'A' Ordinary Stock…… } pound 37 88 Less--Income-tax at 7/9d. in the pound Net Dividend pound 59 34 THE CLIVE INSURANCE CO. LTD., CLIVEBUILDINGS, 8, NETAJI SUBHAS ROAD, CALCUTTA. I hereby certify that income-tax on the profits of the company, of which profits this dividend forms a portion, has been or will be duly paid to the proper officer for the receipt of taxes. This voucher will be accepted by the Inland Revenue as proof of the deduction of the tax in claiming the exemption from or return of income-tax. H. E. Lofthouse, Secretary, 1st Dece....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nor was there any machinery prescribed for assessing to income-tax the dividend income accrued to a shareholder. The company having been charged to tax on its income, the dividend income in the hands of shareholders was not chargeable to income-tax in the hands of shareholders. It was further said that to work out the mechanics of relief to be granted it must be shown that the dividend income in the hands of the assessee must be assessed at some rate of income-tax in U. K. and then comparison call be made with Indian rate of income-tax to grant relief. Initially, the difference that stares in our face in respect of deduction of income-tax from dividends paid by companies under U. K. income-tax law and our Act must be noticed. Under U. K. law the company has to pay tax on its profits or gains as its liability and not as agent of members to whom dividend is distributed out of profits. Therefore, if dividend is distributed after profit or gain of the company is charged to tax it is optional with the company either to deduct or not to deduct the income-tax paid by it from the dividend paid to members and if it chooses to exercise the option, it can do so at the standard rate. Under ....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., 518, 519 (HL) observed as under: "Their taxation would seem to be logical, but it would be destructive of joint stock company enterprise, so the Act of 1842 has apparently proceeded on the idea that for revenue purposes a joint stock company should be treated as a large partnership, so that the payment of income-tax by a company would discharge the quasi-partners. The reason for their discharge may be the avoidance of double taxation, or to speak accurately, the avoidance of increased taxation. But the law is not founded upon the introduction of some equitable principle as modifying the statute; it is founded upon the provisions of the statute itself; and the statute carries the analogy of a partnership further, for it contemplates a company declaring a dividend on the gross gains, and then on the face of the dividend warrant making a proportionate deduction in respect of the duty, so that the shareholder whose total income is so small that he is exempt from income-tax or pays at a lower rate, can get the income-tax which has been deducted on the dividend warrant returned to him." It would appear that a company for tax purpose being treated as a large partnership was not me....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s of Inland Revenue [1964] 41 TC 666; [1966] 59 ITR 331 (HL) has reaffirmed the earlier view which becomes abundantly clear from the speech of Viscount Radcliffe. After quoting the relevant sentence from the speech of Lord Phillimore in Bradbury's case [1923] 8 TC 481 (HL), the noble Law Lord observed that this analysis of treating the company as a large partnership so that payment of income-tax by a company would discharge the quasi-partners is now accepted as being correct and it remains essential to the application of the whole system even though the connection between any particular fund of profits and a dividend paid has now become in effect untraceable and the rule that the company recoups itself at the standard rate of tax that is current at the date of payment means that company and shareholder do not necessarily equate their respective positions as completely as the theory of the matter would require. Proceeding further, it was observed that if the dividends have borne tax in the hands of the paying company and if they were, therefore, franked income in the hands of the respondent as receiving shareholder, the revenue could not enter them as receipt in its trading account ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 49D should be interpreted having regard to the scheme of our Act and in harmony with other relevant provisions, and it should not be interpreted by reference to English statutes not in pari materia or decisions of courts in England interpreting those statutes. It was pointed out that the course adopted in England in relation to dividend income has been described as anomalous. Undoubtedly, to be entitled to relief under section 49D, the requirements for eligibility therein prescribed must be satisfied by the assessee. One such requirement is that income in respect of which relief from double taxation is sought, is the income in respect of which he has paid income-tax by deduction or otherwise under the law in force in the country in which the income accrued. While examining the question whether the assessee has fulfilled this requirement, it will have to be ascertained what is the law bearing on income-tax in the country in which income has arisen and whether, according to that law, the said income has suffered tax by deduction or otherwise again according to the law in that country. According to the income-tax law in U.K., dividends represent the distribution of a taxed fund and a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... out with certainty consistent with the provisions of paragraph (iii) of the Explanation. The assessee thus on the interpretation put by us in respect of the dividend income has paid tax at the standard rate and that is the rate of tax of the foreign country for the purpose of paragraph (iii) of the Explanation. Mr. Desai submitted that the expressions "paid", "by deduction or otherwise" and "rate of tax of the said country" and the Explanation to section 49D clearly postulate that relief can be granted under that section only in respect of the tax on income charged, assessed and actually paid by the assessee, to the revenue of the foreign country. In other words, it was said that the income in the hands of the person who now claims relief against double taxation must be assessed as his income and income-tax must be paid by him to the revenue of the foreign country or even if it is paid by the company in respect of dividend income, it must be shown as agent of the shareholder collecting it on behalf of the shareholder and paying it to the revenue of the foreign country on behalf of the shareholder. Some of the facets of this submission have already been examined and dealt with b....