# PADMAVATI R. SARAIVA AND omERS v. COMMISSIONEJl OF INCOME-TAX BOMBAY Cl'f\'·1

- **Citation:** [1965] 1 S.C.R. 307
- **Court:** Supreme Court of India
- **Decided:** 1964-09-22
- **Case number:** Civil Appeals Nos. 704 to 715 of 1963
- **Bench:** K. SUBBA RAo, J. C. Shah, S. M. Sikri
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/padmavati-r-saraiva-and-omers-v-commissionejl-of-income-tax-bombay-cl-f-1-3310
- **Pages:** 9

## Headnote

Income-tax Act (11 of 1922), s.r. 16(2), 49AA and lndo-Paki't""
agreement dated 10th December, 1947-Scope of.
The assessee was a share-bolder in a company carrying on business
both in India and Pakistan. It declared dividend
out of the profits
accruing to it in both the countries. For the following year, having declared the dividend similarly, the company also passed a resolution that
half the amount of the dividend was payable on O'f after a certain date
and the balance was payable "within two months after -remittances from
Pakistan became free". On the two questions, namely : (i) whether the
assessee, having received the Pakistan
portion
of the diV'idend-income,
was entitled to any relief under the provisions of the
Inda-Pakistan
Agreement dated 10th December, 1947, entered
into between the two
countries to avoid double taxation
in Pursuance of s. 49AA of the
Income-tax Act, 1922, and (ii) whether the entire amount of dividend
including the moiety payable later could be included in the total income
of the assessee, the High Court answered the first, against, and the second,
in favour
of, the
assessee.
Both the
assessee and the
Commissioner
appealed to the Supreme Court.
HELD : The appeals should be dismissed.
(i) Articles IV and VI of the Agreement show that each Dominion
could make an assessment under tts own laws and
regardless of the
Agreement. The only restrictions imposed were on the liberty to retain
the tax and the obligation to allow certain abatements, if the conditions
mentioned in the Agreement were satisfied.
As no certificate of assessment in Pakistan had been
produced before the income-tax officer as
required by Art. VI (b), the assessee was not entitled to any relief.
[313D,G; 314A].
(ii) As the dividend due to the assessee was not credited to any separate account of the assessee so that he could, if he wished, draw it, it
must be held that the Pakistan portion
of the dividend had not been
credited or paid within the meaning of s. 16(2) of the Act and so, <:ould
not be induded in the total income of the assessee. [315B-C].
I. Dalmia v. Commissioner of Income-tax, Delhi,
53
l.T.R.
83,
followed.

## Text

..
A
B
c
D
E
F
G
307
PADMAVATI R. SARAIVA AND omERS
v.
COMMISSIONEJl OF INCOME-TAX BOMBAY Cl'f\'·1
September 22, 1964
{K. SUBBA RAo, J. C. SHAH AND S. M. SIKRI JJ.)
Income-tax Act (11 of 1922), s.r. 16(2), 49AA and lndo-Paki't""
agreement dated 10th December, 1947-Scope of.
The assessee was a share-bolder in a company carrying on business
both in India and Pakistan. It declared dividend
out of the profits
accruing to it in both the countries. For the following year, having declared the dividend similarly, the company also passed a resolution that
half the amount of the dividend was payable on O'f after a certain date
and the balance was payable "within two months after -remittances from
Pakistan became free". On the two questions, namely : (i) whether the
assessee, having received the Pakistan
portion
of the diV'idend-income,
was entitled to any relief under the provisions of the
Inda-Pakistan
Agreement dated 10th December, 1947, entered
into between the two
countries to avoid double taxation
in Pursuance of s. 49AA of the
Income-tax Act, 1922, and (ii) whether the entire amount of dividend
including the moiety payable later could be included in the total income
of the assessee, the High Court answered the first, against, and the second,
in favour
of, the
assessee.
Both the
assessee and the
Commissioner
appealed to the Supreme Court.
HELD : The appeals should be dismissed.
(i) Articles IV and VI of the Agreement show that each Dominion
could make an assessment under tts own laws and
regardless of the
Agreement. The only restrictions imposed were on the liberty to retain
the tax and the obligation to allow certain abatements, if the conditions
mentioned in the Agreement were satisfied.
As no certificate of assessment in Pakistan had been
produced before the income-tax officer as
required by Art. VI (b), the assessee was not entitled to any relief.
[313D,G; 314A].
(ii) As the dividend due to the assessee was not credited to any separate account of the assessee so that he could, if he wished, draw it, it
must be held that the Pakistan portion
of the dividend had not been
credited or paid within the meaning of s. 16(2) of the Act and so, <:ould
not be induded in the total income of the assessee. [315B-C].
I. Dalmia v. Commissioner of Income-tax, Delhi,
53
l.T.R.
83,
followed.
CIVIL APPELLATE JURISDICTION :
Civil Appeals Nos. 704
to 715 of 1963.
Appeals from the judgments and orders dated March
17.
1958, of the Bombay High Court in Income-tax Reference Nos.
41, 42, 43, 57, 58, 59, 69, and 71of1957.
H
A. V. Viswanatha Sastri, T. A. Ramachandra;;, J. B. Dadachan;i, 0. C. Mathur and Ravinder' Narain, for the appellants
(in C.A. Nos. 704, 706, 707, 709, 710, 711, 713 and 714 of
308
SUPREME
COtJRT
REPORTS
[1965] I S.C.R.
1963) and respondents (in C.As. Nos. 705, 708, 713 and 715 of
A
1963).
S. V. Gupte,
Additional Solicitor-Genera/,
R. Ganapathy
Iyer and R. N. Sachthey, for the appellants (in C.A. Nos. 705,
708, 712, and 715 of 1963) and respondents (in C.A. Nos. 704,
706, 707, 709, 710, 711, 713 and 714 of 1963).
The Judgment of the Court was delivered by
B
Sikri J. This iudgment will dispose of 12 anneals from the
judgments of the High Court of Bombay, dated March 17, 1958.
whereby the High Court answered the questions referred to it
partly in favour of the assessee and partly in favour of the
C
Department.
The four que>tiom: answered by the High Court
are:.
"1. Whether the initiation of action under seotion 34
for the purpo<e of bringing to tax the net dividend
i~come of Rs. 579 (suitably grossed) was valid?
2. Whether the said 'P. portion of the dividend
income' forms part of the assessee's total income as that
term is defined in section 2(15) of the Indian Income
Tax Act, 1922 ?
3. Whether having regard to the provisions of the
Indo-Pakistan Agreement, the assessee is entitled to any
'relief on the said 'P. portion of dividend income' 0
1. D. Whether the other moiety of the dividend of
Rs. 1,71,992 declared by the Company on 14-10-1952
is prooerly includible in the total income of the asscssce
cf the previous year S.Y. 2008 for the assessment year
1953-54 ?"
(The figures in these questions are in respect of Shri Purshottamdas Thak:urdass.)
In C.A. 709/63 and C.A. 713/63 questions I, 2 and 3 arise.
D
E
F
Only questions 2 and 3 arise in C.A. 710/63, C.A.
711/63, G
C.A. 704/63, C.A. 707/63, C.A. 714/63, and 706/63. Question 'D' arises in C.A. 712/63. C.A. 705/63, C.A. 708/63, C.A.
712.163 and CA. 715/63.
The appeals involving question 'D'
are •w t~e Commissioner of Income Tax and appeals involving
questions 1 to 3 are by assessees.
It will be convenient to give the facts in the case of the assessee. the late Shri Purshottamdas Thakurdass, hereinafter referred
to a, Assessee 'A'.
He was a shareholder in Narandas Rajaram,
H
PADMAVATI V. C.I.T. BOMBAY (Sikri J.)
309
A Ltd., which carries on business both in India and Pakistan. Profits accrued to it both in India and Pakistan.
The company
declared
dividend out of the above profits.
In the case of
Assessee 'A', the portion of the dividend attributable to the profits
that accrued in Pakistan amounted to Rs. 2, 722 for the assessment year 1949-50. On May 20, 1952, the I.T.O. included
B
this sum of Rs. 2,722 in the' total income but held that no
income tax or super-tax was payable in respect of this amount.
The Income Tax Officer reopened the assessment of 1949·50
because Assessee 'A' was a shareholder in Industrial Corporation
Ltd., and an order had been passed under s. 23A of the Indian
Income Tax Act, 1922 (hereinafter referred to as the Act) in
C · respect of this Corporation. As a result of this order, Rs. 579
was deemed to have accrued to him. But in his re-assessment
order, dated January 17, 1955, the Income Tax Officer brought
to chargii not only the said Rs. 579 but also the said sum
of Rs. 2,722, i.e., the Pakistan portion of the dividend received
D
from Narandas Rajaram Ltd.
The Appellate Assistant Commissioner upheld the assessment order both in respect of Rs. 579
and Rs. 2,722. The Appellate Tribunal also upheld the order.
The Appellate Tribunal then referred the first three questions to·
the High Court but refused to refer the following qlle.!tion:
E
F
"Whether on the facts ood circumstances of the case,
the relief allowed in the assessment under section 23(3)
on that portion of dividend income from Narandas
Rajaram & Co. Private Ltd., which is attributable to
the inoome of the Company arising in Pakistan can be
withdrawn while making re-assessment
under section
34(1 )(b)?"
Assessee 'A' took out a notice of motion for a reference of the
said question.
The High Court, by its judgment dated March 17,
1958,
answered the three questions against the Assessee.
The High
G Court also directed the Appellate Tribunal to refer the above
question, hereinafter to
be referred to as the "Supplementary
Question" which the Appellate Tribunal had declined to refer.
On the Appellate Tribunal referring the said question, the High
Comt by its judgment dated April" 14, 1960, answered the question in favour of the assessee.
H
On February 7, 1961, the High Court granted the necessary
certificate to Assessee 'A'. The Commissioner of Income Tax,
L2SupJ64-7
:110
SUPREME COURT REPORTS
( 1965] I S.C.R.
however, did not appeal against the judgment of the High Court
A
on the supplementary question.
For the assessment year 1952-53, the net dividend received by
Assessee 'A' from
Narandas Rajaram & Co., Ltd.
was
Rs. I, 12,867 out of which Rs. 23, 167 was attributable to
the profits of that company which accrued in Pakistan.
The
B
I .T.O. charged this sum to tax and the assessment was confirmed
hoth by the Appellate Assistant Commissioner and the Appellate
Tribunal. Two questions were referred to the High Court. The
second question is the same as question No. 3 reproduced in the
beginning of the judgment.
The first question was in substance
the same as question No. 2.
The High Court on July 10, 1959,
C
granted the certificate of fitness under s. 66A(2) of the Act.
The fourth question 'D' arose in the case of Assessee 'A' for
the assessment year 1953-54 under the following circumstances.
On October 14, 1952, the following resolution was adopted :it
the ordinary general meeting of Narandas Rajaram & Co. Ltd. :
0
"Dividends, as mentioned below, be and are hereby
declared out of the profits of the Company:
(a) A dividend of 4 per cent on 'A' Preference
Shares and 4 per cent on 'B' Preference Shares.
( b) A dividend of 32 per cent free of income-tax
on the Ordinary Shares and a consequential additional
dividend at the rate of 13 per cent free of income-tax on
'B' Preference Shares.
( c) A moiety of the amount of the dividend be paid
to the share-holders on and after 16th October, 1952
whose names appear on the Register of the Company as
on 6th October, 1952, and the other moiety be postponed
for payment within two months from the date on which
remittances from Pakistan become free and the moneys
are actually received."
The certificate issuod by the company under s. 20 of the Act also
stated that half of the amount of the dividend was payable on or
after October 16, 1952, and the balance was payable "within 2
months after remittances
from Pakistan become
free".
The
Income Tax Officer included the entire amount of Rs. 1,71,992
in the total income of Assessee 'A'. Both the Appellate Assistant
Commissioner and the Appellate Tribunal confirmed this.
On
3n application of Assessee 'A', the Tribunal referred three questions; the first question is Question 'D', the second question is
F
F
G
II
PADMAVATI V. C.I.T., BOMBAY (Sikri J.)
311
A similar to the question No. 2 and the third similar to question
No. 3, reproduced in the beginning of the judgment.
The High
Court answered question 'D' in the negative (i.e. against the
Commissioner of Income Tax) and the others, as in the others
references, against the assessee.
The High Court granted certificates under s. 66A (2) of the Act both to the Assessee 'A' and
B the Commissioner of Income Tax.
It is not necessary to give the ~acts in the cases of other assessees for, apart from the amount of dividend involved, the facts
are similar.
It is not necessary to discuss the first question, which raises
C the point of the validity of proceedings under s. 34 of the Act,
because it is common ground that it has become academic. This
common ground is based on the fact that the Commissioner of
Income Tax has not appealed against the judgment of the High
Court, dated April 14, 1960. By this judgment the High Court
D had answered the supplementary question in favour of the Assessee 'A'.
Regarding··the second question, Mr. Viswanatha Sastri rightly
concedes that the Pakistan portion of the dividend forms part of
the assessee's total income, as defined in s. 2 ( 15) of the Act.
The High Court had followed its earlier judgment in the ComE
missioner of Income-Tax, Bombay City v. Shanti K. Mahesh•
wari(').
We hold that the High Court was right in answering
this question against the Assessee 'A'.
The next question involves the interpretation of s. 49AA of
the Act, as it existed at the relevant time, and the Indo-Pakistan
F Agreement dated December 10, 1947.
Mr. Sastri contends that
on the true interpretation of the agreement each Dominion is
entitled to charge only on the proportion of income allotted to
it under the Agreement. The reply on behalf of the Revenue is
that each Dominion is entitled to assC6s an assessee on the total
income in the nonnal way but it has to allow an abatement subject
G to the conditions mentioned in the agreement being satisfied.
H
Section 49AA was in the following tenns :
"The Central Governm~nt may enter into an agreement with Pakistan or the United Kingdom for the
avoidance of double taxation of income, profits and gains
under this Act and under the corresponding law in force
in Pakistan or the United Kingdom
and
may,
by
(I} (1958) 33 I.T.R. 313.
312
SUPREME COURT REPORTS
(1965] I S.Clt.
notification in the official gazette, make such provision
as may be necessary for implementing the agreement."
In pursuance of this section, agreement for the avoidance of
double taxation of income was entered into between the Government of the Dominion of India and the Government
of
the
Dominion of Pakistan.
The following
portions of the agreement are relevant for disposing of the point ~rgued before w.
"Article IV. Each Dominion shall make assessment
in the ordinary way under its own laws; and, where
either Dominion under the operation of its laws charges
any income from the sources or categories of transactions specified in column I of the Schedule to this
Agreement (hereinafter referred to as the Schedule) in
excess of the amount calculated according to the percentage specified in columns 2 and 3 thereof, that Dominion shall allow an abatement equal to
the lower
amount of tax payable on such excess in either Domi·
nion as provided for in Article VI.
Article VI. (a) For the purposes of the abatement to
be allowed under Article IV or V, the tax payable in
each Dominion on the
excess or the doubly taxed
income, as the case may be, shall be such proponion of
the tax payable in each Dominion as the excess or the
doubly taxed income bears to the total income of the
assessee ~ each Dominion.
(b) Whtre at the time of assessment in one Dominion, the tax payable on the total income in the other
Dominion is not known, the first Dominion shall make a
demand without allowing the abatement, but shall hold
in abeyance for a period of one year (or such longer
period as may be allowed by the Income-tax Officer in
his discretion) the collection of a portion of the demand
equal to the estimated abatement. If the assessee produces a certificate of assessment in the other Dominion
within the period of one year or any !anger period
allowed by the Income-tax Officer, the uncollected portion of the demand will be adjusted against the abatement allowable under this Agreement; if no such certificate is produced, the abatement shall cease to be
operative and the outstanding demand shall be colle:ted
forthwith.
A
B
c
D
E
F
G
H
A
B
c
PADMAVATI V. C.I.T., BOMBAY (Sikri J.)
313
Source of Income or
nature of transaction
from which income is
THE SCHEDULE
(See Article IV)
Pecccntage of income which each
Dominion Is entitled to charge
under the Agreement
Remarks
derived
1~~~~~·~~~~~
1
8. Dividends
2
Iiy each Dominion
In proportion to
tho profits of the
company chargeable by each Dominion under this
Agreement.
3
4
50 per cent of· Relief In respect of any
the profits by
c x c e s s income-tax
the Dominion
deemed to bo paid by
i n
w h i c h
the share-holder shall
goods are sold.
bo allowed by each
Dominion In proportion to the profits of
the company charge
able by each under
this Agreement.
D
It seems to· us that the opening sentence of Art. IV of the
Agreement that each Dominion is entitled to make assessment in
the ordinary way under its own laws clearly shows that each
Dominion ·can make an assessment regardless of the Agreement.
But a restriction is imposed on each Dominion and the restriction
is not on the power of assessment but on the liberty to retain
E the tax assessed.
Article IV directs each Dominion to allow
abatement on the amount in excess of the amount mentioned in
the Schedule.
The scheme of the Schedule is to apportion
income from various sources among the two Dominions. In the
case of Dividends each Dominion is entitled to charge "in proportion to the profits of the company chargeable by each DomiF nion under this agreement." This refers us back to the other
items.
For instance, in respect of goods manufactured by the
assessee partly in one Dominion and partly in the other, each
Dominion is entitled to charge on 50% of the profits.
But the
Schedule does not limit the power of each Dominion to assess in
'the normal way all the income that is liable to taxation under
G its laws.
The Schedule has been inserted only for the purpose
of calculating the abatement to be allowed.
ff
Article VI also leads to the same conclusion.
For if no
assessment could be made on the amount on which abatement is
to be allowed, there could be no question of making a demand
without allowing the abatement and holding in abeyance for a
period the collection of a portion of the demand equal to the
estimated abatement.
314
SUPREME COURT REPORTS
[1965) I S.C.ll.
It is common ground that no certificate of assessment in the
A
other Dominion has
been produced before the Income Tax
Officer.
We agree with the High Court that the answer to this
question is in the negative.
The other question that remains is question 'D', set
out
above.
The High Court approached the question in the light of
B
the decision of the Bombay High Court in Commissioner of
Income Tax v. Laxmidas Mu/ra; Khatau(').
It came to the
conclusion that the resolution created only a contingent liability,
and, therefore, the dividend could not be said to have been paid
in the previous year of the assessment year 1953-54.
Mr. Gupte.
the learned Additional Solicitor-General, has urged that this view
C
is wrong but that in view of the recent decision of this Court in
J. Dalmia v. Commissioner of Income Tax, Delhi('), it is not
necessary to decide this point as this Court had dissented from
the decision in Commissioner of Income Tax v. Laxmidas Mu/raj
Khatau ( 1). He, however, urged
that the amount had
been
credited within the meaning of s. 16(2) of the Act.
He said
D
that the profit and loss Account of the Company was debited with
Rs. 5,85,000, that being the total amount of dividend declared.
The corresponding credits, he points out, were given as follows:
''To seventh Dividend Account
(being the amount payable to
shareholders)
E
Rs. 5,74,144-4-0
To Income-tax Reserve Account
(being the amount of income-tax
deducted on dividend warrants)
Non-resident shareholders' supertax Account (being the amount of
super-tax
deducted
from
the
dividend payable to non-resident
Rs.
10,500-0-0
shareholders)
Rs.
355-12-0"
F
Subsequently, after making payment, the seventh
dividend
account showed a credit balarice of Rs. 2, 92,500 representing a
G
moiety of the dividend that remained to be paid out of the total
dividend declared of Rs. 5,85,000.
We are unable to accept the contention.
Jn J. Dalmia v.
Commissioner of Income Tax, Delhi(2 ) Shah J., speaking for the
Court had observed :
(I) (t948) 161.T.R. 248.
(2) (1964) SJ l.T.R. 83.
H
PADMAVATI V. C.I.T., BOMBAY (Sikri J.)
115
A
"In general, dividend may be said to be paid within the
meaning of s. 16 ( 2) wben the Company discharges its
liability and makes the amount of dividend unconditionally available to the member entitled thereto".
This condition must also be fulfilled in case a dividend is credited.
B In other words, the credit must be in such form that the dividend
is unconditionally available to the member.
c
'It will be noticed that the dividend due to the assessee has
not been credited to any separate account of the assessee, so that
he could, if he wished, draw it.
Before the High Court it was
never suggested that the dividend was credited or distributed.
Accordingly we hold that the Pakistan portion of the dividend
has not been credited or paid within the meaning of s. 16(2) of
the Income Tax Act.
The answer to the question is, therefore,
in the negative.
0
In the result, all the appeals fail.
Ali the parties will bear
their own costs in this Court.
Appeals dismissed.