KISHANCHAND LUNIDASINGH BAJAJ vs. COMMISSIONER OF INCOME-TAX, MYSORE

CIVIL APPEAL No. 234/1965Supreme Court[1966] 3 S.C.R. 57310 February 1966Bench: 5 JudgesAuthor: P.B. GAJENDRAGADKAR, K.N. WANCHOO, J.C. SHAH, S.M. SIKRI, V. RAMASWAMI A B9 pages
AI SummaryDismissed

What were the facts?

Kishanchand Bajaj (B) and his sons constituted a Hindu Undivided Family (HUF) that owned shares in public limited companies. These shares were registered in B's name but credited as capital in the books of a money-lending firm. Two sons separated, and a partnership was formed with B (as Karta of the HUF) and the two separated sons. Under this partnership, the separated sons were entitled to a share, and the remaining shares belonged to B as Karta. Dividends from these shares were credited to the firm's profit and loss account. During assessment for the firm for AY 1959-60, it was claimed the shares belonged to the firm, not the HUF. The Income-Tax Officer rejected this, holding the HUF as the real and legal owner. This was confirmed by the Appellate Assistant Commissioner and the Income-Tax Appellate Tribunal. The Tribunal referred a question to the High Court.

What did the Supreme Court hold?

The Supreme Court held that the contention of the assessee must fail. Tax is charged on dividend income under Section 3 of the Income-tax Act, and such income is chargeable in the hands of the person to whom it accrues or by whom it is received. While a company recognizes only the registered shareholder, the shares may belong to a real owner other than the registered shareholder, and the dividend for tax purposes is deemed to accrue or arise to the real owner. Section 16(2) does not operate as an exemption nor does it stipulate that tax liability arises only when the recipient is the real owner. The scheme of 'grossing up' under Section 18(5) is a corollary to Section 16(2) and does not mean that dividend income is only the income of the registered shareholder. The Court clarified that previous judgments, like Howrah Trading Company, dealt with the 'grossing up' benefit and credit for tax paid, not the fundamental liability to tax on dividend income in the hands of the real owner. The appeal was dismissed.

What were the issues?

1. Whether, on the facts and circumstances of the case, the dividend income from shares standing in the name of Kishanchand Lunidasingh Bajaj and acquired with the funds of the Hindu undivided family of which the said person was the karta, was assessable in the hands of the assessee family? (Question of law and fact turning on the interpretation of the Indian Income-tax Act, 1922, particularly Sections 3, 4, 16(2), and 18(5)). Assessee's contention: The assessee argued that where a registered shareholder is one taxable entity and the real owner is another, only the registered shareholder is liable for tax on the dividend. Therefore, Kishanchand alone should be taxed, not the HUF, relying on Section 16(2) and observations in Howrah Trading Company Ltd. v. Commissioner of Income-tax. Revenue's contention: The revenue contended that dividend income is chargeable to tax in the hands of the person to whom it accrues or by whom it is received, regardless of who the registered shareholder is. The High Court affirmed this, and the HUF appealed.

Which sections of the Income-tax Act were involved?

Section 3,Section 4,Section 16(2),Section 18(5),Section 66(1)

AI-generated summary — verify with the full judgment below

' .. A B c D KISHANCHAND LUNIDASINGH BAJAJ v. COMMISSIONER OF INCOME-TAX, MYSORE February 10, 1966. (P. B. GAJENDRAGADKAR, C. J., K. N. WANCHOO, J.C. SHAH, S. M. SIKRI AND V. RAMASWAMI, JJ.J Indian Income-tax Act, 1922 (11 of 1922), s. 16(2)-Rea/ owner mid registered owner of shares different-Tax liability on dividend on wh•m. B and his sons constituted a Hindu undivided family which owned certain shares in public limited companies.

The family started busineu in money lending in the name of a tirm and in the books of account of the firm the shares which stood registered in the name of B with the companies were credited as the capital of the business. Two sons sepa- rated from the family, each receiving •urns in lieu of his share, and theJ formed a partne:sbip with the rest of the- members of the family for carrying business in the name of the same firm.

Under the partnership the two separated sons were entitled to their shares and the remaining shares were to belong to B as Karta of the farnilJ.

Dividends received in respect of the shares were credited to the profit and loss ac::ount of the firm.

In assessment proceedings, it was claim,..d that the sha

The order continues below.

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