COMMISSIONER OF INCOME-TAX, BOMBAY CITY II vs. SHAKUNTALA AND TWO OTHERS ETC.

CIVIL APPEAL No. 125/1960Supreme Court[1962] 2 S.C.R. 87118 July 1961Bench: 3 JudgesAuthor: S.K. DAS, M. HIDAYATULLAH, J.C. SHAH10 pages
AI SummaryDismissed

What were the facts?

The assessee, a Hindu undivided family (HUF), was the beneficiary of 1842 shares in a company, Cotton Export and Import Limited. These shares were registered in the names of different family members. For the assessment year 1949-50, the Income-tax Officer invoked Section 23A of the Indian Income-tax Act, 1922, deeming the undistributed portion of the company's assessable income as distributed dividend. The proportionate dividend amount for the 1842 shares, after grossing up, was added to the HUF's income. The assessee contended that this deemed dividend should be assessed in the hands of the registered shareholders, not the HUF. The Income-tax Officer and Appellate Assistant Commissioner rejected this, but the Income-tax Appellate Tribunal, while noting the purpose of Section 23A might be defeated, followed a High Court precedent and allowed the assessee's appeal. The Commissioner of Income-tax then filed a reference to the Bombay High Court.

What did the Supreme Court hold?

The Supreme Court held that the dividend income deemed to have been distributed under Section 23A of the Indian Income-tax Act, 1922, is assessable only in the hands of the registered shareholders of the company and not in the hands of the Hindu undivided family (HUF), even if the HUF is the beneficial owner of the shares. The Court reasoned that Section 23A expressly states that the proportionate share of each 'shareholder' shall be included in the total income of the 'shareholder'. The term 'shareholder' in Section 23A refers to the person registered as such in the company's books, not the beneficial owner. The Court found no basis to interpret 'shareholder' differently in Section 23A than in Section 18(5) of the Act, where it has been held to mean the registered shareholder. The Court also noted that a HUF is not a member of a company. The Court concluded that the fiction enacted by the legislature must be restricted to the plain terms of the statute and that the High Court had correctly answered the question in favour of the assessee. The appeals were dismissed.

What were the issues?

1. Whether the dividend income deemed to have been distributed under Section 23A of the Indian Income-tax Act, 1922, is assessable in the hands of the Hindu undivided family (HUF) or its registered shareholders. Assessee's contention: The deemed dividend under Section 23A should be assessed in the hands of the registered shareholders, as the HUF is not a registered shareholder of the company. They relied on the decision in S. G. Cambatta v. Commissioner of Income-tax, Bombay. Revenue's contention: The HUF should be considered the shareholder within the meaning of Section 23A, given the scheme of the section and the ordinary dictionary meaning of 'shareholder'. They argued that the interpretation favouring the assessee would defeat the purpose of Section 23A and that the legal fiction of deemed distribution should be carried to its logical conclusion, treating the HUF as having received the dividend.

Which sections of the Income-tax Act were involved?

Section 23A,Section 18(5)

AI-generated summary — verify with the full judgment below

• ; '. 2 S.C.R. SUPREME COURT REPORTS s7i COMMISSIONER OF INCOME-TAX, BOMBAY CITY II v . SHAKUNTALA AND TWO OTHERS ETC. (S. K. DAS, M. HrnAYA'.l'ULLAH and J. C. SHAH, JJ.)

Jncome-~f.1ax-8hares 1egistered in names of members of Hindu undivided family-Undistributed incorne deemed to be distributed dividrnd- Whether assessable in hands of farnily- lndian Income-tax Act, 1922 (11of1922), s. 23A. A Hindu undivided family was the beneficiary of 1842 shares in a company; but the !:hares ~'ere held in the nan1es of different members of the family. For the assessment year 1949-50 the Income. tax Officer applied ,the provisions of s. 23A of the Income-tax Act, 1922 (as it stood at that time) and ordered that the undisuibuted portion of the assessable income of the company in the previous year shall be deemed to have been distributed as dividend among the shareholders.

The proportionate amount of dividend in respect of the I 842 shares after being grossed up was added to the income of the joint family. The assessee-family contended that the divi- dend deemed to have been distributed under s.23A should be assessed in the hands of the shareholders and not in the hands

The order continues below.

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