# COMMISSIONER OF INCOME TAX WEST BENGAL I, CALCUTTA v. CLIVE INSURANCE CO. LTD., CALCUTTA

- **Citation:** [1978] 3 S.C.R. 844
- **Court:** Supreme Court of India
- **Decided:** 1978-05-02
- **Bench:** Y. V. Chandrachud, D. A. Desai, R. S. Pathak Jj
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-west-bengal-i-calcutta-v-clive-insurance-co-ltd-7445
- **Pages:** 11

## Headnote

Inco1ne-tax Act, 1922, S. 49D-Reliej in respect of incomes accruing or arising
outside the taxable territories-Warran! of payn1ent of interini dii·idend shows
net dividend after deducting at source U.K. income-tax and certified to be so
-Whether relief under s. 49D of the Act pernzissible to the assessee.
The claim f_or relief under s. 49D of the Income Tax Act 1922 made by the
respondent-assessee Company in its return for the assessment year 1'60-61, the
relevant previous year being the calendar year 1959, in respect of the net
dividend income of Rs. 15_.2661- after deduction of
British
income-tax of
Rs. 9,881/- was rejected by the Income-tax Officer without making the reasons
for his decision 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 s. 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 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.
Dismissing the appeal by certificate, the Court
HEW : I. All the requirements of s. 49D of the Income-tax 1922 read
with Explanation have been satisfactorily established by the assessee and therefore the High _Court rightly answered the question in the affi.rmath'e in favour
of the assessee.
[854 F]
2. To be eligible for relief under s. 49D read with its Explanation, the assessee
must establish ~xcluding the non-disputed requirement that (i) the assessee has
income which has accrued or arisen without taxable territory; and (ii) the
assessee has p_aid in any country income-tax by deduction or otherwise under
the Jaw in force in that country; (iii) in that event the assessee would be entitled
to the deduction from Indian income tax payable by him; (iv) a sum calculated
on such doubly taxed income at the Indian rate of tax or the rate of tax of the
said country,
whichever is
lower.
The expression
'rate of tax of the said
country'· must be given the meaning as set out in para (iii) of the explanation
and in doing so the importance of the
words 'income
assessed in the said
country' has to be borne in mind.
[847 F-H]
3. Under U.K. 1aw, the con1pany 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 chargul to tax, it is optional with the company either to deduct or not t9
deduct income tax paid by it from the dividend paid to members and if 1t
chooses to exercise the option it can do so at standard rate. There is no specific
provision under U.K. Income-taJt Act \Vhich would show that dividend income
in U.K. in the hands of the assessee is exempt from payment of income tax. The
company is liable to pay income-tax on its profits and gains and s. 184 enables
the company to deduct from the dividend paid out of profits, tax at the standard
rate for the year in which the amount payable becomes due.
Dividends which
represent the distribution of a taxed Fund are, therefore styled as franked income
so far as concerns any further taxation at the standard rate, i.e. the rate at
which deduction has been made. The assumption underlying this position is that
the dividend represents the residue of the total incon1e wJUch has already been
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C.I.T. CALCUTTA V. CLIVE INSURANCE CO.
845
taxed in the hands of the company, the fiction being that if tax was not paid
by the company there would have been a higher dividend and therefore the
dividend income is already taxed. The company is t

## Text

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844
COMMISSIONER OF INCOME TAX WEST BENGAL I,
CALCUTTA
v.
CLIVE INSURANCE CO. LTD., CALCUTTA
May 2, 1978
[Y. V. CHANDRACHUD, C.J., D. A. DESAI AND R. S. PATHAK JJ,]
Inco1ne-tax Act, 1922, S. 49D-Reliej in respect of incomes accruing or arising
outside the taxable territories-Warran! of payn1ent of interini dii·idend shows
net dividend after deducting at source U.K. income-tax and certified to be so
-Whether relief under s. 49D of the Act pernzissible to the assessee.
The claim f_or relief under s. 49D of the Income Tax Act 1922 made by the
respondent-assessee Company in its return for the assessment year 1'60-61, the
relevant previous year being the calendar year 1959, in respect of the net
dividend income of Rs. 15_.2661- after deduction of
British
income-tax of
Rs. 9,881/- was rejected by the Income-tax Officer without making the reasons
for his decision 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 s. 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 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.
Dismissing the appeal by certificate, the Court
HEW : I. All the requirements of s. 49D of the Income-tax 1922 read
with Explanation have been satisfactorily established by the assessee and therefore the High _Court rightly answered the question in the affi.rmath'e in favour
of the assessee.
[854 F]
2. To be eligible for relief under s. 49D read with its Explanation, the assessee
must establish ~xcluding the non-disputed requirement that (i) the assessee has
income which has accrued or arisen without taxable territory; and (ii) the
assessee has p_aid in any country income-tax by deduction or otherwise under
the Jaw in force in that country; (iii) in that event the assessee would be entitled
to the deduction from Indian income tax payable by him; (iv) a sum calculated
on such doubly taxed income at the Indian rate of tax or the rate of tax of the
said country,
whichever is
lower.
The expression
'rate of tax of the said
country'· must be given the meaning as set out in para (iii) of the explanation
and in doing so the importance of the
words 'income
assessed in the said
country' has to be borne in mind.
[847 F-H]
3. Under U.K. 1aw, the con1pany 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 chargul to tax, it is optional with the company either to deduct or not t9
deduct income tax paid by it from the dividend paid to members and if 1t
chooses to exercise the option it can do so at standard rate. There is no specific
provision under U.K. Income-taJt Act \Vhich would show that dividend income
in U.K. in the hands of the assessee is exempt from payment of income tax. The
company is liable to pay income-tax on its profits and gains and s. 184 enables
the company to deduct from the dividend paid out of profits, tax at the standard
rate for the year in which the amount payable becomes due.
Dividends which
represent the distribution of a taxed Fund are, therefore styled as franked income
so far as concerns any further taxation at the standard rate, i.e. the rate at
which deduction has been made. The assumption underlying this position is that
the dividend represents the residue of the total incon1e wJUch has already been
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C.I.T. CALCUTTA V. CLIVE INSURANCE CO.
845
taxed in the hands of the company, the fiction being that if tax was not paid
by the company there would have been a higher dividend and therefore the
dividend income is already taxed. The company is treated as a I~rge partne~ship
and though this system is high1y artificial but it is a domestic expedient limited
Jn rts oreration to U.K.
[849 F-G, 850 B-D, 85! E]
According to the statute law of U.K. and the interpretation put on it by
the highest court in that country,· the dividends which have borne tax in the
hands of the paying company were treated as franl..ed income in the hands of
the assessee.
Tn other words it would mean that the income is the income in
the form of dividends has been subjected to tax.
It is immaterial whether they·
are taxed in the hands of the assessee or not but they are deemed to have been
taxed in the hands of the assessee in U.K. Dividends which are style<l as
franked income have borne tax at the source. [852 C-0, F]
If the dividends styled as franked income have been charged to incon1e-tax
at the source, it \vould mean that it is the income in respect of which incon1e tax
has been paid by deduction or otherwise in accordance with the law in force in
the country in _\vhich the income accn1ed.
If it is now charged to tax under
the Indian Jncome-tax Act it obviously becomes a doubly taxed income and
one of the requirements of s. 49D would be satisfied.
[852 F-G]
Bradbury v. English Sewing Cotton Co. Ltd., 8 Tax Cases 481 (House of
Lords), Con1n1issioners of Inland Revenue v. Cull, 22 Tax Cases 603 at 636
Canadian Eagle Oil Co. Ltd. V. The King, 27 Tax Cases 205; Cenlon Fin.111ce
Co. Ltd. ''· Ellwood, 40 Tax Cases 176 at 205; F. S. Securities Ltd. v.
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1nissioners of Inland Revenue, 41 Tax Cases 666 discussed.
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4. Undoubtedly to be entitled to relief under s. 49D the requirements for
eli_gibility 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 incon1e-tax by deduction or otherwise
under the 1a\V in force· in the country in which the income accrued. [853 i\]
While examining the question
whether the
mssessee has fulfilled this
requirement, it will have to be ascertained what is the law bearing on income-tax
I:
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 are therefore styled as franked
income.
The payment of tax by the company and deduction made at standard
rate from dividend distributed to shareholder operates in relief of the shareholders. Such dividend income, according to the law of the country where it
has arisen is deemed to have been subjected to tax.
Viewed from this angle
the dividend income in the hands of sha-reholder is not charged to income-tax.
F
[853 B-Cl
Inland Revenue Con1missioner v. Blott, [1921] A.C. 171 @
201;
quoted
with approval.
5. Once it is accepted that the dividend represents franked income distributed
out of profits and gains and not liable to further income-tax in the hands of
member, it clearly transpires that for relief against double taxation it is the
income which has been subjected to tax in the foreign country in which it has
arisen and irrespective of the fact that there is no provision comparable to s.
18(5) of our Act in the Income-tax Act of U.K. yet the payment of tax by the
company operates in relief of the shareholder and on that account alone the
dividend income is not chargeable to tax in U.K.
Therefore, it can be said
v:.ith reasonable certaintv that in resoect of the dividend income of the assessee
income-tax has been paid by deduction or otherwise under the law in force in
the country in which income has arisen.
The principle of agency in payment
by the company is worked out on the basis of company being treated as a large
partnership so tQat the payment of tax by the company would operate
to
discharge the quasi-partners. [854 D-E]
Com1nissioner of Income-tax v. Tata Sons P. Ltd. [1974] 97 ITR 128; Com111issioner of Incon1e Tax v. Cotton Fabrics Lid. [1976] 104 ITR 233 over-n1led,
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846
SUPREME COURT REPORTS
[1978) 3 S.C.R.
6. The expression 'income assessed in the foreign country would clearly, in
the context in which it is used, mean subjected to tax in the foreign country.
Jn order to ascertain whether the rate under the Indian Income-tax Act or the
rate of tax in the foreign country is lower, apart from any other consideration,
the rate of tax in U.K. in the context of dividend income is easily ascertainable
inasmuch as company can deduct income-tax at standard rate only. Undoubtedly,
where the assessee was also liable to pay surtax in U.K. on the dividend income
no complication would arise in working out the rate because surtax is payable
on dividend income.
But in the present case that difficulty does not arise as
the assessee being a company, it was neither liable to any surtax nor entitled to
any relief in U.K., ~nd, therefo~e? the rate of .~~x can be worked. out wlth
certainty consistent with the prov1.s1~ns of. para (u1) of ~e Explanation.
The
assessee thus, in respect of the d1v1dend 1n~ome has paid tax at the standard
rate and that is the rate of tax of the foreign country for the purpose of para
(iii) of the Explanation. [853 F-H, 854 A]
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1590 (T) of
1973.
From the Judgment and Order dated the 11th May 1971. of the
Calcutta High Court in Income Tax Ref. No. 138 of 1967.
S. I. Desai, K. C. Dua and A. Subhashini for the, Appellant.
K. Ray, J. Ramamurthy and D. N. Gupta for the Respondent.
The Judgment of the Court was delivered by
DESAI, J. The Revenue in this appeal by certificate questions the
correctness of the judgment of the Calcutta High Court in Income Tax
Reference No. 138 of 1967 in which the Income Tax Appellate Tribunal, Calcutta Bench 'A', referred the following question to the High
Court for its opinion :
"Whether on the facts and in the circumstances of the
case, the assessee could be said to have paid income-tax in
U. K. by deduction or otherwise in respect of the net dividends of Rs. 15,266 so as to be eligible for the relief coatel]!plated by section 49D of the Indian Income Tax Act,
1922 ?"
.
The Respondent assessee is a resident Company carrying on business of general insurance. The Compi!lly held shares of U.K. based
joint stock companies. The net dividend income in respect of the
shares held by it amounted to Rs. 15,266/- after deduction of British
Income-tax of Rs. 98811-, 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 s. 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,
s. 49D is not attracted. In further appeal by the assessee, the Tribunal
accepted the contention of the assessee and at the instance of the
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C.I.T. CALCUTTA v. CLIVE INSURANCE co. (Desai,!.)
847
Revenue, referred the question hereinabove set out, to the High Court.
The High Court, after an exhaustive examination of .t~e relevai;t provisions of the Income-tax Act of U.K. and the dec1S1ons bearing on
the question, confirmed the decision of the Tribunal.
The Assessee claims relief in resp~ct of the income arising outside
the taxable territory under s. 49D of the Act.
The relevant portion
of s. 49D reads as under :
"49.D. Relief in respect of incomes accruing or arising
outside the taxable territories :-(1) If any person who is
resident in the taxable territories in any year proves that, in
respect of his income which accrues or arises
during that
yea1· without the taxable territories (and which is not deemed
to accrue or arise· in the taxable territories), he has paid in
any country, with which there is uo reciprocal arrangement
for relief or avoidance of double taxation, income-tax, by
deduction or otherwise, under the law in force in that country,
he shall be entitled to the deduction from the Indian incometax payable by him of a sum calculated on such doubly taxed
income at the Indian ratei of tax or the rate of tax of the said
country, whichever is the lower.
(2)
x
x
x
x
(3)
x
x
x
x
Explanation-In this section,-
(i)
x
x·
x
x
(ii)
x
x
x
x
(iii) the expression "rate of tax of the said country"
means income-tax and super-tax actually paid iii the
said country in· accordance with the corresponding
laws of the said country after deduction of all reliefs
due, but before deduction of any relief due in the said
country in respect of double taxation, divided by the
whole amount of the income assessed in the said
country".
To be eligible for relief under. s. 49D read with its explanation, the
assessee must establish excluding the non-disputed requirement that :
(i) the assessee has income which has accrued or arisen witliout taxable territory; and (ii) the assessee has paid in any country income-tax
by deduction or otherwise under the law in force in that country; and
(iii) in that event the assessee would be entitled to the deduction, from
Indian income-tax payable by him; (iv) a sum calculated ou such
<loubly taxed incom~ at-the Indian rate of tax or the rate, of tax of the
said country, whichever is lower.
The expression 'rate of tax of the
said country' must be given the meaning as set out in para (iii) of the
.explanation and in doing so the importance of the words 'income
.assessed in the said country' has to be borne iu mind.
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848
SUPREME COURT REPORTS
[I 978] 3 S.C.R.
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There is no controversy that the assessee is a resident company and
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has dividend income from the U.K. based joint-stock companies, i.e.
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income accruing withont taxable territory.
Admittedly, there. is no
reciprocal arrangement for relief or avoidance of double taxation betw~en India and U.K.
·
The assessee has received dividend income. A specimen dividend
warrant issued in favour of 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.
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Annexed is a warrant in payment of Interim Dividend on your
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Stock on account of the year ending 31st March 1960.
Gross Dividend of ls od Per 1 unit on-
£ .... Ordinary stock.
£1932 'A' Ordinary stock
Less-Income-tax at 7/9d in the £ ..
Net Dividend
THE CLIVE INSURANCE CO. LTD.,
CLIVE BUILDINGS,
8, NETAJI SUBHAS ROAD, CALCUTTA.
£96 12 0
£37 8 8
£ 59 3 4
I hereby certify that income-tax on the profits of the Company, of
which profits this dividend forms a portion, has been qr 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
Isl December, 1959.
Cadby Hall, London, W.14".
The real controversy centres round the question whether deduction
of income-tax from dividend as shown in the dividend voucher constitutes payment of income-tax by the assessee by deduction or otherwise
in U.K. on his dividend income.
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The first submission is that the income in respect of which relief
can be claimed under s. 49D must be income actually chargeable to
income-tax under the law of the foreign country, the income must be
subject to tax, and must hence actually be taxed in the foreign country.
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Section 49D does postulate that in order to be entitled to relief against
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double taxation the income which has arisen without the taxable territory must have been charged to income-tax by deduction or otherwise
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C.LT. CALCUTTA v. CLIVE INSURANCE co. (Desai, J.)
8 49
under the law in force in the country in which the income has accrued.
It cannot be gainsaid that relief against double taxation c.an be had !il
respect of the income which has been taxed once according to law Ill
force in the country in which it has arisen and it is the income of the
person who is resident in taxable territory and is liable to be charged
to income-tax according to Indian Income-tax Act. In other words, it
must: be doubly taxed income.
The question which was vigorously debated is whether the dividend
income which accrued in U.K. was charged to
tax by deduction or
otherwise 'according to the law of Income-tax in force at the relevant
time in lJ .K.
In U .K. there is a slight a'nomalous position with regard to dividend
income. Broadly it is slated that dividend paid out of the profits of
the company to shareholders of the company is not chargeable to
income-tax in the hands of the assessee.
The company pays tax on
its profits. If dividend is distributed after tax i's paid by the company
it is optional with the company not to deduct any income-tax from
the dividend paid to shareholders or the company may reimburse itself
in respect of the tax paid by it by deducting income-tax at standard
rate from the dividends paid to the shareholders, vide s. 184, lJ.K.
Income·tax Act, 1952. The dividend income thus received by the
sharcholc;ers is not chargeable to income-tax but is certainly chargeable
to surtax in the hands of the assessee. In view of this legal position,
it was strenuously contended that there was n_o statutory provision for
taxing dividend income under the law of U.K. 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 incom~-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 so1ne rate of income-tax in U.K. and then comparison can
be made with Indian rate of income-tax to grant relief.
Initially the difference that stares in our face in respect of deduc~
tion of income-tax from dividends paid by compani<:s under lJ.K. income-tax law and our Act must be no~iced. Under U.K. law the company has to pay tax on its profits or gains as its liability and no.t 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 indome-tax paid by it from the dividend paid to membern and if it chooses to exercise the option, it can do so at standard
rateUnder s. 18 cf our Act, the company has to deduct incometax and supertax at prescribed rate from the dividend paid to member as agent of the member and all sums so deducted shall for the
purpose of computing the income of an assessee, be deemed to be
income received vide sub s. ( 4) of s. 18.
The dividend income
including deduction, that is grossed up income, will be assessed as
income of the shareholder and he will be given credit for the amount
so deducted by. the company and paid over to the authority. It was,
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SUPREME COURT REPORTS
[1978] 3 S.C.R.
accordingly pointed out that in U.K. company pays tax under s. 184
on its own liability and reimburses itself to some extent by the tax
deducted at standard rate from the dividend paid to shareholder and
the deduction so made would not be paid to treasury for and
on
behalf of the shareholder.
Therefore, Mr. Desai submitted that even
if income-tax at standard rate is deducted from the dividend paid by
the company to the asseseee, the dividend income in the hands of
assessee is not assessed and charged to tax, and it could not be said
that it is a doubly taxed income J!S envisaged by s. 49D.
No specific provision was pointed out to us which would show
that dividend income in U.K. in the hands of the assessee is exempt
from payment of Income-tax.
The company is liable to pay incometax on its profits and gains and s. 184 enables the company to deduct
from the dividend paid out of profits, tax at the standard rate for
the year in which the amount payable becomes due.
Dividends
which represent the
distribution of a taxed fund arc,
therefore,
styled as franked income so far as concerns any further taxation at
the standard rate, i.e. the rate at which deduction has been made.
The assumption
underlying this position is that the dividend represents the residue of the total income which has already been taxed
in the hands of the ·company, the fiction being that if tax was not
paid by the company there would have been a higher dividend and,
therefore, the dividend income is already taxed.
But this fiction Jed
to a number of complications because the company is an independent
juristic person and the s_cheme of the Income-tax Act in U.K. does
not imply that the Company pays tax on behalf of the member. To
reconcile this position, way back, Lord Phillimore in Bradbury
v.
English Sewing Cotton Co. Ltd.,(') 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 wonld 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; a~d the statute carries the analogy of a partnership
further, for it contemplates a company declaring a d~v~d
end on the gross gains, and then on the face of the d1v1dend 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 ~et the income tax which has been deducted on the dividend warrant returned to him".
It would appear that company for tax purpose being treated .as
a large partnership was not merely a fiction resorted to, to reconcile
the position of the dividend in~ome in the hands of the shareholder
(!) 8 Te.x C?.'es 481 (House of Lords)
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C.I.T. CALCUTTA v. CLIVE INSURANCE co. (Desai, 1.)
851
and the juristic personality of the joint stock company, but it was
traceable in the words of Lord Phillimore, to the
statute itself.
Mr. Desai,
however, contended that this theory of company being
treated as a large partnership has been discarded and long since exploded in U.K. itself, and in this connection reliance was placed on
Commissioners of Inland Revenue v. Cull,(') where Lord
Atkin
observed as under :
"My Lords, it is now clearly established that in
the
case of a limited company the company itself is chargeable to tax on its profits, and that it pays tax in discharge
of its own liability and not as agent for its shareholders.
The latter are not chargeable with Income-tax on dividends, and they are not assessed in respect of them.
The
reason presumably is that the amount which is available to.
be distributed as dividend has already
been
diminished
by tax on the company, and that it is thought inequitable
to charge it again.
At one time it was thought that the
company, in paying tax, paid cm behalf of the. shareholder :
hut this theory is now exploded by decisions in this House,
and the position of the shareholders as to tax is a:s I have
stated it."
However, in Canadian Eagle Oil Co. Ltd. v. The King,(') wherein
Lord Macmillan, after observing that this topic has been darkened
rather than illumined by a false analogy which it has been sought
to draw with the case of the taxation of the income of United Kingdom companies and their shareholders,
affirmed the
observations
of Lord Phillimore in Bradhury' s case (supra) and further observed
that this system of treating the company as a large partnership
is
highly artificial; but it is a domestic expedient limited in its operation
to U.K.
In Cenlon Finance Co. Ltd. v. Ellwood, (3) Lord Reid in
his speech, after referring to Bradbury's case (supra) and two other
cases, observed that at one time it was thought that a company pays
tax on behalf of or as agent for its shareholders, and, if that were
so, the explanation would be obvious, but that idea has long been
discarded.
But as late as 4th June 1964, the House of Lords in
F. S. Securities Ltd. v. Commissioners of Inland Revenue,(-') 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 (supra), 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
(I) 22 Tax Cases 603 at 636
(2) 27 Tax Cases 205,
(3) 40 Tax Cases 176 at 205.
(4) 41 Tax Cases 666.
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852
SUPREME COURT REPORTS
[1978] 3 S.C.R.
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 necessar;Jy equate their respec.tive 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 for the purpose of assessing it to tax on a separate taxable subject, that is the
trading profit. It was in ternis said that to do so would be to recognise
double taxation in its most obvious form.
There was some dispute
whether this view is the majority view but having seen the opinion of
all Law Lords, we have no doubt about this and it is on this basis. that
the appeal of the appellant was allowed.
It, therefore, appears well established according to the statute law
of U.K. and the interpretation put on it by the highest court in that
conntry that the dividends which have borne tax in the hands of the
paying company were treated as franked income in the hands of the
assessee.
In o!Qer words, it would mean that the income in the form
of dividends has been subjected to tax.
It is immaterial whether they
were taxed in the hands of the assessee or not but they are deell!ed to
have been taxed in the hands of the assessee in U.K It would be
advantageous to refer Simon's Income Tax, 2nd Edn., Vol. I, p. 307,
where it is stated that it is a general principle of the Income Tax Acts
in U.K. that as far as possible tax is charged at the point where the
income first emerges from the source and this is so even if the person
primarily in receipt of the income does not ultimately enjoy it but
pays it over or accounts for it to another who is the person beneficially
entitled to it.
In such cases the person assessed has the right
to
recoup himself, when making a payment of income to the person entitled
thereto, by deducting the tax appropriate to that income, or by crediting himself with the amount when accounting.
The author includes
dividend income as one such income.
F
It thus dearly emerges that dividends which are styled as franked
income have borne tax at the source and that is why they are not
assessable for income-tax in the hands of the shareholder.
Now, if thus the dividends styled as franked income have been
charged to income-tax at the source, it would mean that it is the income
in respect of which income-tax has been paid by deduction or otherG
wise in accordance with the law in force in the country in which the
income accmed. If it is now charged to tax under the Indian Incometax Act, it obviously becomes a doubly taxed income and one of the
requirements of s. 49D would be satisfied.
H
It was contended on behalf of the Revenue that s. 49D shonld be
interpreted having regard to the scheme of our Act and in hannony
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
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C.I.T. CALCUTTA v. CLIVE INSURANCE co. (Desai, J.)
85 3
described as anomelous.
Undoubtedly, to be entitled to relief under
s. 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 donble 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 accmed.
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 are, therefore, styled as franked income.
The payment
of tax _!>y the company and deduction made at standard rate from divi ·
dend distributed to shareholders, operates in relief of the shareholders
(vide Ii!land Revenue Commissioners v. Blott.(')
Such dividend income according to the law of the country .where it has arisen is deemed
to have been subjected to tax.
Viewed from this angle the dividend
income in the hands of shareholder is not charged to income-tax.
It was, however, said that no relief could bei granted to the assessee
because in order to work out the mechanics of the relief it would be
necessary to ascertain the rate at which the Indian income-tax will be
payable on the income in question and the rate of income-tax at which
income-tax by deduction or otherwise is paid in the foreign country
and then to ascertain which of the two is the lower one which can be
allowed as a deduction from the tax payable under the Indian Incometax Act in respect of such doubly taxed income.
The contention is
that in England it being optional with the company to deduct or not
to deduct income-tax from the dividend paid by it from its profits after
tax is paid by the company, it would be impossible to ascertain the
rate at which the tax is paid in the foreign country in respect of such
income. Now, the position in U.K. with regard to deduction of incometax from the dividend distributed from the profits of the company is
clear iRasmuch as the tax can be deducted only at the standard rate.
The expression 'income assessed in the foreign country' would clearly,
in the eontext in which it is used, mean subj(!Cted to tax in the foreign
country. In order to ascertain wheth~r the rate nuder the Indian
Income-tax Act or the rate of tax in the foreign country. is lower
apart
from any other consideration, the rate of tax in U.K. in the context of
dividend income is easily ascertainable inasmuch as company can deduct
income-tax at standard rate only. Undoubtedly, where the assessee
was also liabl.e to pay surtax in U.K. on the dividend income no complication would arise in working out the rate because surtax is payable
on dividend income.
Bnt in the present case that difficulty does not
arise as the assessee being a company, it was neither liable to any
surtax nor entitled to any relief in U.K., and, therefore, the rate of tax
can be worked out with certainty consistent with the provisions of para
(iii) of the Explanation. __ The assessee thus on the interj,retation put
by us in respect of the dividend income has paid tax at the standard
(l) [1921] A.C. 171 at 201.
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854
SUPREME COURT REPORTS
(1978] 3 S.C.R.
rate and that is the rate of tax of the foreign country for the purpose·
of para (iii) of the Explanation.
Mr: i;>esai s,ubmjtted that the expressions 'paid', 'by deduction or
otherwise and rate of tax of the said country' and the Explanation
to S· 49D clearly postulate that relief can be granted nnder 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 ot)ler
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
conntry on behalf of the shareholder.
Some of the facets of this submission have already been exa)llined and dealt with by us.
The only
question is whether the expression 'assessed' in para (iii,) of the Explanation could mean assessed fa the hands of the shareholder as his
income.
Once it is accepted that the dividend represents franked income distributed out of profits and gains and not liable to further
income-tax in the hands of member, it clearly transpires! that for relief
against double taxation it is the income which has been subjected to
tax in the foreign country in which it has arisen and irrespective of the
fact that there is no provision comparable to s. 18 ( 5) of our Act in the
Income-tax Act of U.K. yet the payment of tax by the company operates in relief of the shareholder and on that account alone the dividend
income is not chargeable to tax in U.K. Therefore, it can be said with
reasonable certainty that in respect of the dividend income of
the
assessee income-tax has been paid by deduction or otherwise under the
law in force in the country in which income bas arisen.
The principle
of agency in payment by the company is worked out on the basis of
company being treated as a large partnership so that its payment of
tax is on behalf of quasi·partners.
Thus, it clearly transpires that all the requirements of s. 49D read
with the Explanation have been sat.isfactorily established by ~e a~sessee
and, therefore, the High Court rightly answered the question m the
affirmative in favour of the assessee.
Before we conclude. it may be pointed out that the Bombay High
Court in Commissioner of Income-tax v. Tata Sons Pvt. Ltd.,(') and
the Gujarat High Court in Commissioner of Income-tax v.
Cotton
Fabrics Ltd.,(2) have in terms followed the decision of the Calcutta
High Court under appeal.
This appeal accordingly fails and is dismissed with costs.
S.R.
(1) [1974] 97 ITR 128.
(2) [1976] 104 ITR 233.
Appeal dismissed.
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