# R. S. Pandit v. Stale of Bihru Subba Rao, /

- **Citation:** [1963] Supp. 2 S.C.R. 668
- **Court:** Supreme Court of India
- **Decided:** 1963
- **Bench:** S. K. Das, J. L. .KA.PUlt, A. K. Sarkau, M. Hidayatullah, Raghubar Dayal
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/r-s-pandit-v-stale-of-bihru-subba-rao-2796
- **Pages:** 23

## Headnote

Income Tax-Advance payment of tax-Dividena income
deducted from total income-If allowable-" lJeductiM of incometax at the time of payment", Mcm1iny of-Company paying
t"" on <livirlend-Paymcnt of dividencl lo sliare-lwlder-IVhetlwr
fa,i.· 1lcduclctl at the ti1nc of z1ayntent-Indian, Income-tax ,,J.ct,
11122 (II of liJ2:!), •s. JU, IS, 11!-A, 19-B.
'l'hc asscsscc .subn1ittcd his e:;timate of inco1uc for advance
paymeut of tax under '· IG-A, in which he did not include his
dividend income. The Income-tax Ofliocr held that under
s. 18-A(2) the assessec was bound to indnde in his estimate,
and to pay advance super· tax, on his dividend income. Since
titat was not done a11d the advance tax paid was Jess than 00%,
of the lax determined on regular assessment, he levied penal
interest under s. 13-A(6) in respect of the supcr·-tax payable on
the dividend income. The assessee contended (i) that the
dividend income was income in respect of which provision \Vas
made under s. 18 for "deduction of income-tax at the time of
payment" and as such s. 18-A was not applicable to it, and (ii)
that since s. 18(5) was applicable to dividend income the penal
provisions of s .. 18-A(6) were not attracted.
llcld, (per Das, Kapur and Hidayatullah, .J.J., S.u'k'il' aud
!Jayal,JJ., ,[i.,-.1<H11g) that •· IC(5) read with ss.
16(~) and
49-B provid•d for the "deduction uf income-tax at the time of
payment" in respect of dividend income and therefore s. 1 a.A
did not app1y to such inco1ne.
A shareholder's right to the
dividend arises upon its declaration.
Under the legal fiction
2 S.C.R.
SUPREME COURT REPORTS
669
introduced by s. 49-ll, when dividend is paid to a shareholclr.r
by a conlpany which is a.ssesi;;ed to tax, the inr.01nf.·ta!'t (hue not
s11per·tax) i11 respect of such dividend i'i (lr.en1t"<r co h:l\'e heen
paid by the shn:-cholder hirnse)f antl credit is gh·cn tht"refor to
him under s. 113(5). If the shareholder "''H deemed to have paid
the tax himself at the time when the company paid the dividend, the payment was "deduction of income-tax at thr time of
payment" within the meaning of s. 18-A( l).
I'a Sarkar and Dayal,Jj.-The diddend income should
have been included in the estitnate of income and the penal
interest \vas properly levied on the assessee.
Dividend income
is not one on which tax was deducted at the time of payment
under s. !fl. Payn;ent of tax by the asscssce, fictional or otherwise, on income rec~iYed by him was not a deduction of tax
under s. lB by tht; person \Vho- paid the income to the assessee-.
]''or purpnses of s. I 11-1\ there had to Le a deducti1Jil under s. l H,:
cleducUon under other provisions \\'as not relevant.
Under
s. lfl(:j) credit for the tax paid by the company was to be gi\·en
to the shareholder not at tl1e tin1e of payment of the dh·klend
hut later at the time of assessn1ent.
Further, the provisions
of s. 13-A(<i) were applicable in respect of diddend income.
'fhe \Vords "income.to ,.,.·hich provjsions ofs. 18 do not apply"
in s. 18.\(6) refer to that type of income in respect of which s.
13 provides for deduction of tax at the source and they do not
include dh·idr-nd income.

## Text

_Characters 0–39,665 of 45,283. This is a partial read: ask again with offset=39665 for what follows._

1962
R. S. Pandit
v.
Stale of Bihru
Subba Rao, /.
1961
December, .f.
668 SUPREME COURT REPORTS [1963) SUPP.
objection is an afterthought and cannot be allowed
to be raised at this stage of the proceedings.
The appeal fails and is dismissed.
PURSHOTTAMDAS THAKURDAS
v.
COMMISSIONER OF INCOME-TAX, .l:IOMBAY
(S. K. DAS, J. L. .KA.PUlt, A. K.
SARKAU,
M. HIDAYATULLAH and RAGHUBAR DAYAL, JJ.)
Income Tax-Advance payment of tax-Dividena income
deducted from total income-If allowable-" lJeductiM of incometax at the time of payment", Mcm1iny of-Company paying
t"" on <livirlend-Paymcnt of dividencl lo sliare-lwlder-IVhetlwr
fa,i.· 1lcduclctl at the ti1nc of z1ayntent-Indian, Income-tax ,,J.ct,
11122 (II of liJ2:!), •s. JU, IS, 11!-A, 19-B.
'l'hc asscsscc .subn1ittcd his e:;timate of inco1uc for advance
paymeut of tax under '· IG-A, in which he did not include his
dividend income. The Income-tax Ofliocr held that under
s. 18-A(2) the assessec was bound to indnde in his estimate,
and to pay advance super· tax, on his dividend income. Since
titat was not done a11d the advance tax paid was Jess than 00%,
of the lax determined on regular assessment, he levied penal
interest under s. 13-A(6) in respect of the supcr·-tax payable on
the dividend income. The assessee contended (i) that the
dividend income was income in respect of which provision \Vas
made under s. 18 for "deduction of income-tax at the time of
payment" and as such s. 18-A was not applicable to it, and (ii)
that since s. 18(5) was applicable to dividend income the penal
provisions of s .. 18-A(6) were not attracted.
llcld, (per Das, Kapur and Hidayatullah, .J.J., S.u'k'il' aud
!Jayal,JJ., ,[i.,-.1<H11g) that •· IC(5) read with ss.
16(~) and
49-B provid•d for the "deduction uf income-tax at the time of
payment" in respect of dividend income and therefore s. 1 a.A
did not app1y to such inco1ne.
A shareholder's right to the
dividend arises upon its declaration.
Under the legal fiction
2 S.C.R.
SUPREME COURT REPORTS
669
introduced by s. 49-ll, when dividend is paid to a shareholclr.r
by a conlpany which is a.ssesi;;ed to tax, the inr.01nf.·ta!'t (hue not
s11per·tax) i11 respect of such dividend i'i (lr.en1t"<r co h:l\'e heen
paid by the shn:-cholder hirnse)f antl credit is gh·cn tht"refor to
him under s. 113(5). If the shareholder "''H deemed to have paid
the tax himself at the time when the company paid the dividend, the payment was "deduction of income-tax at thr time of
payment" within the meaning of s. 18-A( l).
I'a Sarkar and Dayal,Jj.-The diddend income should
have been included in the estitnate of income and the penal
interest \vas properly levied on the assessee.
Dividend income
is not one on which tax was deducted at the time of payment
under s. !fl. Payn;ent of tax by the asscssce, fictional or otherwise, on income rec~iYed by him was not a deduction of tax
under s. lB by tht; person \Vho- paid the income to the assessee-.
]''or purpnses of s. I 11-1\ there had to Le a deducti1Jil under s. l H,:
cleducUon under other provisions \\'as not relevant.
Under
s. lfl(:j) credit for the tax paid by the company was to be gi\·en
to the shareholder not at tl1e tin1e of payment of the dh·klend
hut later at the time of assessn1ent.
Further, the provisions
of s. 13-A(<i) were applicable in respect of diddend income.
'fhe \Vords "income.to ,.,.·hich provjsions ofs. 18 do not apply"
in s. 18.\(6) refer to that type of income in respect of which s.
13 provides for deduction of tax at the source and they do not
include dh·idr-nd income.
CIVIL APPELLATE JURISDICTION : Civil Appeal
No. 597 of 1Q6I.
Appeal from the judgment and order dated
.July 3, 1959, of the Bombay High Court in I. T.
Reference No. 45 of 1958.
A. 1'. Viswcmatha Nastri, N.
J. B. Dadachanji, 0. 0. JJfathur
Ncirain, for the appellant.
A. Palkhivala,
and Ravinder
K. N. Rajagopal Sastri and R. N. Saohthey,
for the respondent.
l!l62. December 4. The Judgment of Das,
Kapur and Hidayatullah, J.J., was delivered by
Das, J. The Judgment of Sarkar and Dayal, JJ., was
delivered by Sarkar, J.
1962
PtJrsh.:iJtamda~
'Jftal:urJ;n
v.
Commih'ionu of
lncome·Ta.t, Bombay
1962
Pttrslloltamdas
T111Jimrdas
v.
Commissioner of
f11r,ome·Ta\', Bombay
Das, J,
670 SUPREME COURT REPORTS [1963] SUPP.
S. K. DAR, J.·-This is an appeal on a certifi·
catc of fitness granted by the High Court of Bombay
under s. 66·A(2) of the Indian Income-tax Act, 1922.
The short facts giving rise to the appeal are
these.
The original assessee was Purshottamdas
Thakurdas, a well-known businessman of Bombay.
He died sometime after the proceedings in the High
Court had terminated and the appellants herein are
his legal representatives.
As nothing turns upon the
distinction between the assessee and his legal representatives in this case, we shall ignore it for the purpose of this judgment. By a notice issued under
s. 18·A(l} of the Act the Income·tax Officer concern·
ed required the assessee to make advance payment of
tax in respect of the assessment year 19i7-1948. On
September 15, 1946, the asscssee submitted an
estimate of his income under sub-s. (2) of s. 18-A.
In this estimate the assessee showed his total income
at Rs. 4,64,000/-.
He deducted
the sum of
Rs. 3,64,000/·, stated to be his dividend income, on
the ground that s. 18 of the Act applied to such
income.
After claiming credit for Rs. 10,000/· on
the ground of double taxation relief, the assessee
estimated the advance tax payable by him at
Rs. 2,67, 752/-. The Income-tax Officer took the
view that under s. 18·A(2} of the Act the assessee
was bound to include in his estimate, and to pay
advance super-tax on, his dividend income. Since
that was not done and the advance tax paid was less
than eighty per cent of the tax determined on the
basis of the regular assessment, he levied penal
interest on the assessee under sub-s. (6) of s. 18· A of
the Act in respect of the super·tax payable on the
dividend income.
There was an appeal to the
Appellate Assistant Commissioner who confirmed the
view of the Income-tax Officer. On a further appeal,
the
Appellate Tribunal held by its order dated
October 25, 1957, that sub-s. (6) of s. 18-A did not
apply to qividend income and the assessee w~ poi
-
2 S.C.R. SUPREME COURT REPORTS
671
liable to pay penal interest in respect of the divi·
<lend income.
The Commissioner of Income tax,
Bombay City, respondent before us, moved the
Appellate Tribunal to state a case to the Hi~h Court
of Bombay on the following question of law which
arose out of the Tribunal's ordel' :
"Whether on the facts and circumstances of the
case, the as<essee is liable to pay interest in
respect of dividend income as provided under
s. 18·A(6) of the Income-tax Act ?"
The Tribunal stated a case on the aforesaid
question and the reference made by the Tribunal was
dealt with by a Division Bench of the High Court
of Bombay by its judgment dated July 3, 1959. The
question framed by the Tribunal was slightly altered
by the High Court , but the alteration made is not
material for our purpose. Mr. Justice J.C. Shah
came to the conclusion that dividend income was not
income in respect of which s. 18 made any provision
"for deduction of income-tax at the time of payment"
within the meaning of sub-s. (l) of s. 18-A and
though the phraseology used in sub-s. (6) of s. l8A was
slightly different from the phraseology used in
subs. (l) ofs. 18-A, the two sub-sections substantially
had the same meaning.
Accordingly, he answered
the question in the affl'rmative and against the
assessee.
Mr. Justice S. T. Desai also gave the same
answer to the question, though he reached a somewhat different conclusion. He held that on a proper
construction of s•1b-s. (6) of s. 18-A an assessee was
liable to pay interest in respect of tax on dividend
income to the extent that sub-s. (5) of s. 18 did not
apply to the same.
He said
"An assessee who is called upon to make
advance payment of tax under s. 18-A (1)
may under sub-s. (2) of that section pay such
amo1mt as ac:;cords with his own estim<1tc, If he
1962
P11rslwttamdas
TIUJkurdas
v.
Commissioner of
lncome·TtU, Bombay
Das, J.
19f2
P111slrot1amdcu
Thnl:urdas
v.
Commissi()fler rf
/nctmt·Tax, Bombay
Das, J,
672 SUPREME COURT REPORTS [l!l63] SUPP.
excludes the amount of super· tax on dividend
income from his estimate he takes the risk of
the application of the ratio of eighty per cent
resulting in a shortfall and he would have to
pay interest "upon the amount by which the
tax so paid falls short of the said eighty per
cent." The eighty per cent would be of the
amount of tax determined on the basis of the
regular assessment so far as such tax relates to
income to which the provisions of s. 18 do not
apply. The provisions of s. 18(5) as I have
already pointed out do not apply to super-tax
and the amount of super-tax on the dividend
income must be included and taken into consideration in the computation necessary for the
purpose of fixing the quantum of tax to which
the ratio of eighty per cent is to be applied. I
would, therefore, answer the question as framed
by us in the affirmative."
The asscssee then moved the High Court for a
certificate of fitness and having obtained such certificate preferred this appeal to this court.
On behalf of the assessee, the contention is
that the amwer given by the High Court to the
question referred to it is not correct and this contention is based on two grounds.
The first ground is
that on a proper construction of sub-s. (2) of s. 16,
sub-s. (5) of s. 18 and s. 49-B of the Act, dividend
income is income in respect of which provision is
made under s. 18 for "deduction of income-tax at
the time of pay_ment" and therefore s. 18-A is not
attracted to it. The second ground which has been
taken in the alternative is that sub-s. (6) of s. 18-A
clearly states that where in any year an assessee has
paid tax under sub-s. (2) on the basis of his own
estimate and the tax so paid is less than righty
per cent of the tax determined on the basis of the
regular assessment, so far as such tax relates to income
-
-
2 s.c.R.
SUPREME COURT REPORTS
673
to which the provisions of s. 18 do not apply, simple
interest at the rate of six per cent per annum etc. shall
be payable by the assessee upon the amount by which
the tax so paid falls short of the said eighty per cent.
It is submitted that the phraseology used in subs. (6) of s. 18-A is "to which the provisions of s. 18
do not apply". The alternative argument is that
sub-s. (5) of s. 18 is undoubtedly a provision which
applies to dividend income and
therefore under
sub-s. (6) of s. 18-A the assessee was not liable to
pay penal interest by his failure to pay advance tax
on that head of income. Put
differently, the
alternative argument is that sub-s. (6) of s. 18-A
refers to a category of income wider than what is
referred to in sub-s. (1) of s. 18-A and if there is
some provision in s. 18 relating to a head of income,
namely, dividend income, (though that provision may
not amount to 'deduction of income-tax at the time
uf payment'), failure to pay advance tax on that
head of account will not attract the penal provisions
of sub-s. (6) of s. 18-A.
We
proceed now to consider these two arguments advanced on behalf of the appellants and
the replies thereto on behalf of the respondent.
First as to the argument that on a proper
construction of sub-s. (2) of s. 16, sub-s. ( 5) of s. 1 8
and s. 49-B of the Act, dividend income is income in
respect of which provision is made under s. 18 for
"deduction of income-tax at the time of payment."
To appreciate this argument it is necessary first to
refer to the scheme of ss. 18 and 18-A of the Act.
Under the Indian Income-tax Act 1922, tax. is
assessed and paid in the succeeding year upon the
results of the previous year of account. The legislature has by enacting s. 18-A, made a provision for
imposing a liability upon the tax-payen who had
been previously asseued and even upon those who had
not ;,been so assessed, to make advance payment of
hslll!ttamdas
Thakurdas
••
Commission1T of
ln<um1-T .. , B°"""J
Das, J.
19i2
Prn-slwttam'4s
Thakurdol
••
CommissioMr of
Jneome· Tax, BomN.1
Das, J,
674 SUPREME COURT REPORTS [1963) SUPP.
tax in respect of income exceeding a certain amount,
for which provision is not made under s. 18 for
deduction of tax at the time of payment. Sections 18
and 18-A between themselves exhaust all categories
of taxable income. The Act provides for two modes
of collecting taxes ...... direct levy and levy by
deduction at the source. The ordinary method of
collection is direct collection of the tax from the
assessee which is dealt with by ss. 19, 45 and 46.
Deduction of tax at the source is provided for only in
certain specified cases mentioned ins. 18. Sub-s. (2)
of s. 18 relates to salaries .and makes the person
responsible for paying any income chargeable under
the head "salaries" to make deduction of income-tax
and super-tax on the amount payable at a rate
representing the average of the rates applicable to the
estimated total income of the assessee under that
head. Sub-s. (3) relates to interest on securities and
makes the person responsible for paying any income
chargeable under the head "interest on securities",
unless otherwise prescribed in the case of any security
of the Central Government, to deduct at the time of
payment
income-tax but not super-tax on the
amount of interest payable at the maximum rate.
Sub-ss. (3-A) to (3-E) relate to certain other cases
which are not very material for our purpose. We
need not therefore refer to tho~e sub-sections. Subs. ( 4) of s. 18 says that all sums deducted in accordance with the provisions of this section shall, for
purposes of computing the income of an assessee, be
deemed to be income
received. Then there is
sub-s. · (5) which in so far as it is relevant for our
purpose is in these terms :
"Any deduction made and paid to the account
of the Central Government in accordance with
the provisions of this section and any sum by
which a dividend has been increased under
sub-section (2) of section 16 shall be treated as
a payment of income-tax or super-tax on behalf
-
2 S.C.R.
SUPREME COURT REPOR.TS
675
of the person from whose income the deduction
was made, or of the owner of the security or of
the shareholder, as the case may be, and
credit shall be given to him therefor on the
production of the certificate furnished under
sub-section (9) or section 30, as the case may
be, in the assessment, if any, made for the
following year under this Act :
Provided that, if such person or such owr er
obtains, in accordance with the provisions of
this Act, a refund of any portion of the tax so
deducted, no credit shall be given for the
amount of such refu!].d :
xx
xx
xx
xx
xx
xx
xx
xx''
Put briefly, the scheme of s. 18 is to provide
for deduction of income-tax at the source in respect
of certain categories of income. With regard to two
of the categories, namely, "salaries" and "interest
on securities", there is no difficult. The difficulty
arises with regard to the category of income, referred
to in sub-s. (5) of 1.18, namely, dividend income, and
to this difficulty we shall come later.
S. 18-A which was inserted in 1944 deals with
advance payment of tax. It was introduced as a war
measure probably to combat inflation, but, like many
other innovations in taxation legislation it has outlived the exigency
which necessitated it. The
section applies to those assessees whose total income
in the latest assessment, and also to those hitherto
unassessed whose total income of the previous ye-ar,
exceeded by a certain sum the maximum amount not
chargeable to tax. The section attempts to reconcile
the principle of advance payment of tax with 1he
scheme of the Act which is to tax the income of the
previous year. The basis of the section is the
1962
Purslwttamdol
Thakurdas
v.
Commissiorut of
lncome·Tax, Bomba,,
Du, J.
1962
Purs!wttanulal
Thakurdas
v.
Commissioner of
(ntofne~Ta:r, Balnhq,
Das, J.
676 SUPREME COURT REPORTS [1963) SUPP
principle of "pay as you earn", that is, paying tax
by instalments in respect of the income of the very
year in which the tax is paid. Sub-s. (1) provides
for the payment of tax in respect of the income of
"the latest previous year" while under sub-s. (11)
the tax so paid is treated as having been paid in
respect of the income of the year of payment and
credit therefor
is given to the assessee in the regular
assessment made in the next financial year. The
advance payment of tax is only provisional, and if
after the regular assessment is made the tax paid in
advance is found to be in excess of the tax payable,
the assessee would be entitled to a refund of such
excess. Further, it is WQrthy of note that the
provision for advance payment of tax under s. 18-A
is only in respect of income from which the tax is not
deductible at the source, under s. 18. Where the ta.t is
deductible at the source, that in itself amounts
to advance payment of tax and therefore such income
is left out of the purview of the section. Sub-s. (2)
of s. 18-A enables an assessee to make his own
estimate if in his opinion, the income of the year is
likely to be less than that on which he has been asked
to make advance payment of tax in accordance with
the provisions contained in sub-s. (1). Sub-s. (6) of
s. 18-A so far as it is material for our purpose is in
these terms :
"Where in any year an assessee has paid
tax under sub-section (2) or sub-section (3) on
the basis of his own estimate, and the tax so
paid is less than eighty per cent of the tax determined on the basis of the regular assessment, so
far as such tax relates to income to which the
provisions of section 18 do not apply and so far
as it is not due to variations in the rates of tax
made by the Finance Act enacted for the year
for which the regular assessment is made, simple
interest at the rate of six per cent per annum
from the 1st day of January in the financial
-
2 S.C.R.
SUPREME COURT REPORTS
677
year in which the tax was paid up to the date
of the said regular assessment shall be payable
by the assessee upon the amount by which the
tax so paid falls short of the said eighty per
cent:
xx
xx
xx
xx
xx
xx
xx
xx
xx."
It provides for cases where the assesee's estimate
turns out to be too low and it lays down inter alia
that where an assessee has paid advance tax under
sub-s. (2) and the amount so paid is less than eighty
per cent of the final assessment of his income for the
particular year, he is liable to pay interest at six per
cent. There is however the necessary qualification
that this is in the context of "income to which the
provisions of s. 18 do not apply."
Having regard to the scheme of ss. 18 and ISA
explained above, the first question before us is this :
can it be said that sub·s. (5) of s. 18 in its true scope
and effect treats dividend income as income from
which a deduction of income-tax has been made at
the time of payment of the dividend ? The contention on behalf of the assessee is that sub-s. (5) of s. 18
read with sub-s. (2) of s. 16 and s. 49-B has that
effect. The argument on behalf of the respondent is
that it has not that effect. In our· opinion the contention urged on behalf of the assessee is correct.
Sub-s. (2) of s. 16 declares in the first part thereof
that any dividend shall be deemed to be income of
the year in which it is paid etc. regardless of the
question as to when the profits out of which the
dividend is paid were earned. A shareholder's right
to dividend arises upon its declaration. Under the
second part of the sub-section, the net dividend paid
to the shareholder is to be "grossed up" before inclusion in the shareholder's total income, by adding
1962
Purslrottamdos
Tt.ckutdr,s
••
Cemmissioner of
. ~""-7ox, B091boy
Das J.
1962
Purshottamtlas
Thak•rdas
y,
Commission" of
Income· T -u, Bombtg
Das, J.
678 SUPREME COURT REPORTS (1963] SUPP.
thereto the amount of income-tax paid by the
company. In general law the company is chargeable to tax on its profits as a distinct taxable entity
and it pays the tax in discharge of its own liability and
not on behalf of or as agent for its shareholder: This
aspect of the matter has been rightly emphasised by
learned counsel for the respondent in his reply. While
it is true that the company pays its own tax, a legal
fiction is introduced bys. 49-B of the Act. Under
that section when a dividend is paid to a shareholder
by a company which is assessed to tax, the incometax (but not super-tax) in respect of such dividend is
deemed to have been paid by the shareholder himself.
Since the income-tax .in respect of the dividend is
deemed under s. 49-B to have been paid by the shareholder himself on his own income, though in reality
it was tax paid by the company in discharge of its
own liability, credit is given therefor to the shareholder in the assessment, under sub-s. (5) of s. 18.
He is not liable to pay income-tax again in respect
of the dividend and may claim a refund under s. 48,
if the maximum rate of income-tax, which is applicable to companies, is not applicable to him: The
combined effect of sub-s. (2) of s. 16, s. 49B and
sub-s. (5) of s. 18 is that the tax-free dividend is not
really a dividend of the amount received, but a dividend of a larger sum less the tax thereon, and as in
the case of tax-free salaries and tax-free securities,
it is the gross amount which is included in the
shareholder's total income, because the
incometax paid by the company remains part of the
income derived from the shareholding. If this be the
true effect of the section referred to above, thens. 18
in sub-s. (5) does provide "for deduction of incometax at the time of payment" within the meaning of
that clause in sub-s. (1) of s. 18-A.
Learned counsel for the respondent has, however, drawn our attention to that part of subs. (5) of
s. 18 which refers to "any deduction made and paid to
-
2 S.C.R.
SUPREME COURT REPORTS
619
the account of the Central Government in accordance
with the provisions of this section" and "any sum by
which a dividend has been increased under sub-s. (2)
ofs. 16." His argument is that the sub-section talks
of two different matters : one is deduction of tax
referred to in the earlier sub-sections and the other is
addition of a sum to the dividend. These two, according to learned counsel, stand on a different footing;
one is in reality "deduction of income-tax at the time
of payment" and the other, namely, the sum added
to dividend income under sub-s. (2) of s. 16, is not
really "deduction · of income-tax at the time of
payment" but is included in the sub-section merely
for the purpose of giving credit to the shareholder for
the amount which has been added to his dividend.
We are of opinion that this line of argument does not
give full effect to the legal fiction created by s. 49-B
under which the tax paid by the company is deemed
to have been paid by the shareholder himself in
respect of his dividend income ~rossed up under
sub-s. (2) of s. 16: If the shareholder is deemed to
have paid the tax himself at the time when the
company paid the dividend, we do not see why this
payment is not "deduction of income-tax at the time
of payment" whithin the meaning of that clause in
sub-s. (1) ofs. ISA. Deduction at the source is only
a mode of collecting tax from the person· from whose
income the deduction is made; The tax paid by the
company at the time of payment of the dividend is
treated as part of the income of the shareholder and
the gross amount has to be included in his total
income; on the same principle, the tax deducted at
the source and paid to the Government is treated as
having been paid by the shareholder himself. In
this view of the matter, sub-s. ( 5) merely works out
the principle of sub-s. (4) of s. 18, namely, that all
sums deducted in accordance with the provisions of
the section shall, for the purpose of computing the
income of an assessee, be deemed to be income
received.
1962
Purslloi tamdas
Thrrlcurdas
v.
Commissioner of
lncom1-Tax, B.:mibaJ
Das, J.
1962
Purshottamtlas
Thakurdas
v.
Commissioner of
lncome·Tax, BomlHg
Das, J.
680
SUPREME COURT REPORTS [1963] SUPP.
There was some argument before us as to the
omission of the word "shareholder" in the first provim
to sub-s. (5) of s. 18. The· Amending Act of 1939
which added the reference to the "shareholder" in
the substantive part of the sub·section did not make
similar addition to the first two provisos; whether
this was an over-sight, as one commentator has said,
or not is not a matter which need be decided in this
case. We have rested our conclusion on the substantive part ofsub-s. (5).
In the view which we have taken on the main
argument urged on behalf of the appellant, s. 18-A
is not attracted to the dividend income of the
assessee in this case. The assessee was not therefore
liable to penal interest under sub-s. (6) of s; 18-A.
It becomes unnecessary, therefore, to decide this case
on the alternative argument presented on behalf of
the appellant ·which is based on the phraseology of
sub-s. (6). We need only point out that sub-s. (6)
uses the phraseology "income to w!ich the provisions
ofs. 18 do not apply." It is difficult to see how it
cari be said that sub-s. (5) of s. 18 does not "apply"
to dividend income. It refers to dividend income in
express terms.
The argument on behalf of the
respondent is that sub·s. (6) of s. ISA will be unworkable in the matter of dividend income, unless it
has the same meaning as ln subs. (1).
Learned
counsel has relied on two decisions of this court :
Commissianer of Income-tax v. Teja Singh(') and
Gursakai Saigal v. 'l'ke Commissioner of Income-tax,
Punjab ('). The first decision lays down that in
construing the scope of a legal fiction it would be
proper and even necessary to assume all those facts
on which the fiction can operate ...... a decision which
is really against the respondent on the main argument. The second decision related to sub-s. (8) of
s. 18-A and proceeded on the rule that it is proper to
give a machinery provision an interpretation which
makes it workable. We do not think that sub-s. (&)
ti) (1959] Supp. I S.C.R. 394.
12) [1963J 48 l.T.R. I.
I
2 S.C.R.
SUPREME COURT REPORTS
681
of s. 18·A will be unworkable, even if it refers to an
income wider in category than that referred to in
sub-s. (1).
It is unnecessary, however, to go into this point
more elaborately. Our conclusion is that sub-s. (5)
of s. 18 read with sub;s. (2) of s, 16 and s. 49-B
provides for "deduction of income-tax at the time of
payment" in respect of dividend income; therefore,
S; 18-A does not apply to such income.
We would accordingly allow this appeal, set
aside the judgment of the High Court, and answer
the question referred to the High Court in the
negative
and in
favour of the assessee: The
appellants will be entitled to their costs of this court
and in the High Court;
SARKAR, J.-Under the Income-tax Act, 1922,
the usual rule is to charge tax for a year on the
income of the previous year. Section 18A of the
Act ma~es a departure from this usual rule and pro·
vides for advance payment of tax, that is, payment
of tax on income during the year in which the
income is earned. The question in this appeal is as
to the interpretation of certain provisions in s. 18A
and of a few other sections of the Act. The conten·
tion advanced in this case can be appreciated only
after these provisions have been referred to.
Sub-section (1) ofs.18A states, "In the case of
income in respect of which provision is not made
under section 18 for deduction of income-tax at the
time of payment, the Income-tax Officer may ........ .
require an assessee to pay quarterly .................... .
an amount equal to one quarter' of the income·
tax and super-tax payable on so much of such income
as is included in his total income of the latest previous year in respect of which he has been assessed."
This liability to pay arises only however if the total
income of the latest previous year exceeds a certain
1962
PursAottamdas
Thakurdas
y,
Commissiotur of
l"come·Tax, Bombay
Das. J.
Sarkar, I.
1962
PurJhotlamdas
Thakurdas
v.
Commisssioner of
Income· Tax, Bombay
Sarkar, J.
682 SUPREME COURT REPORTS [1963] SUPP.
amount mentioned in the sub-section. Under this
sub-section, therefore, the amount demanded as
payment of taK in advance is calculated on income
found in a previous assessment.
Now it may so
happen that the assessee thinks that his income for
the period for which the demand had been made
would be less than his income in that previous assessment. Sub-section (2) provides that in such a case
the assessee may "send to the Income-tax Officer an
estimate of the tax payable by him ............... and
shall pay such amount as accords with his estimate
in equal instalments ............... " So under sub-s:(2)
the assessee is given the liberty to make his own
estimate of the tax payable in advance instead of
paying according to a previous regular assessment by
the revenue authorities.
As in the case of sub-s. (1),
in making the estimate of the tax under sub-s. (2),
the assessee is only to take into account income in
respect of which provision is not made under s. 18
for deduction of income· tax at the time of payment.
Sub-section (3) provides for the case of an assessee
who has never been assessed before but whose total
income is likely to exceed the amount upon which
tax is payable in advance under sub-s. (1). It
requires such an assessee to "send to the Income-tax
Officer an estimate of the tax payable by him on
that part of his income to which the provisions of
s. 18 do not apply", and ·to pay that amount on
certain specified dates·.
Here also the assessee makes
his own assessment.
Payment of tax in. advance
under sub-ss. (1), (2) or (3) is only provisional and
the assessee would be entitled to a refund if on regular
assessment after the year it is found that he had paid
more than he is liable to pay; or he may be called
upon to pay more if he had paid less than what is
due from him.
As the responsibility for making the assessments
under sub·ss. (2) and (3) is on the assessee, sub-s. (6)
is intended to provide a machinery whereby the
\
•
I
2 S.C.R.
SUPREME COURT REPORTS
683
assessee is put under a certain disadvantage if it is
found th!lt his estimate is erroneous beyond a certain
limit. This appeal turns largely on this sub-section
and, so far as relevant, it is in these terms :
"Where in any year an assessee has paid
tax under sub-section (2) or sub-section (3) on
the basis of his own estimate, and the tax so
paid is less than eighty per cent of the tax
determined on the basis of the regular assessment, so far as such tax relates to income to
which the provisions of _section IS do not
apply .................... ., simple interest at the
rate of six per cent per annum ............... shall
be payable by the assessee upon the amount by
which the tax so paid falls short of the said
eighty per cent."
This sub-section also prescribes the period for which
the interest payable under it is to be calculated but
it is not necessary to trouble ourselves with such
period in this appeal.
Now, Purshottamdas Thakurdas, the assessee
in this case, sent an estimate under sub-s. (2) of'
s. l SA of the tax payable by him in advance in the
year 19!7-4S. In that estimate he did not iqclude ·
.the dividends received on shares held by him. Upon
regular assessment it was found that the tax estimated by him was less than eighty per cent of the regular assessment and on this shortfall he was held
liable to pay interest under sub-s. (6) of s. ISA.
The shortfall would not have arisen if the assessee
had taken the dividends into account in making the
estimate of the tax payable by him. Against this
decision the assessee appealed. to the Appellate
Assistant Commissioner but his appeal failed. He
then appealed to the Income-tax Appellate Tribunal and was successful there. Thereafter, at the.
instance of the respondent Commissioner of Incometax, the Tribunal referred under s. 66 (I) of the Act
1962
Purshottamdas
Thakurdas
v.
Commissioner of
lncome~T ax, Bambay
Sarkar, J,
1962
Pursholttundos
Thalwrdu
Y.
Commis.sion1r Df
l'llcom1-T"x, Bamba}
SdrkQr1 J.
684 SUPREME COURT REPORTS [1963] SUPP.
the following questions for the decision of the High
Court.
"Whether on the facts and circumstances
of the case the assessee is liable to pay interest
in respect of dividend income as provided under
Section 1SA(6) of the Income· tax Act ?"
The High Court answered the question in the
affirmative though the reasons upon which the learn·
eel Judges constituting the bench deciding the case
based themselves were somewhat · different. The
assessce has now come to this Court in further
appeal. Pending
the appeal here, the assessee
died
and his
legal representatives have been
substituted in hii place and are the appellants now.
The real question in this appeal is whether
in making an estimate under s. ISA (2) of the
tax payable by him, the assessee should have taken
into account the dividends received by him. Now,
it is not in dispute that in making this estimate only
that income "in respect of which provision is not
made under s. IS for deduction of income-tax at the
time of payment" is to be taken into account.
Learned counsel for the appellants contends that
dividend is income in respect of which provision is
made under s. IS for deduction of income-tax at the
time of payment. If this contention is sound, then
of course no interest is payable under s. ISA (6).
Now, the appellants' contention was based on
sub-s. (2) of s. 16, sub·s. (5) of s. IS ands. 49B of
the Act. The first of these, that is, sub-s. (2) of
s. 16, says that for the purpose of inclusion in the
total income of an assessee, a dividend shall be
deemed to be income of the previous year in which
it is paid and shall be increased in a certain manner,
and without going into the question of the increase
in great detail, which· would be unnecessary for the
2 s.c.R.
SUPREME COURT REPORTS
685
purposes of this case, it would perhaps be right to
say that the increase is to be substantially by such
amount as would be payable by the company as
income-tax on the amount of the dividend at the
rate applicable to it in the financial year in which
the dividend is paid. Sub-section (5) of s. 18
provides.
"Any deduction made and paid to the
account or the Central Government in accordance with the provisiom of this section and
any sum by which a dividend has been increased under; sub-section (2) of section 16
shall be treated as a payment of income-tax
or super-tax on behalf of the person from whose
income the . deduction was made, or of the
owner of the security or of the shareholder,
as the case may be, and credit shall be given
to him therefor on the production of the
certificate furnished under sub-section (9) or
section 20, as the case may be, in the assessment, if any, made for the following year
under this Act;"
Lastly, s. 49B states that "Where any dividend
has been paid .......•• or deemed to have been paid ..... .
to any of the persons specified in Section 3 who is a
shareholder ............ such person shall, if the dividend
is included in his total income, be deemed in respect
of such dividend himself to have paid the incometax (exclusive of super-tax) of an amount equal to
the sum by which the dividend .had been increased
under sub-section (2) of section 16."
Now, the contention. of the learned counsel for
the appellants is that as a result of the two provisions
last referred to, there is a fictional deduction of tax
on dividends which fiction must be given effect to
and, therefore, in making an estimate of income
under s. ISA (2) dividends have to be excluded and
1961
PurshottamW
Tlwkurdas
v.
Commissioner of
Iricome-T•x, Bombay
1962
Purslwttamdas
Tlwhlrdas •
••
Commissioner of
Income-Tax, Bombqy
Sarkar, J.
686 SUPREME COURT REPORTS (1963] SUPP.
they have to be treated in view of the fiction, as
income in respect of which tax has been deducted
at thr. time of payment .
We are wholly unable to accept this argument.
All that the provisions on which the learned counsel
for the appellants relies, show is that a shareholder
who received dividends on his shares is entitled in
his assessment to have a certain sum, :paid or payable
as tax by the company, treated as paid as tax on his
behalf and to require that sum to be deemed to have
been paid as tax by himself. We are not concerned with
payment of tax by or on behalf of the assessee. We
are concerned with income, income-tax on which has
been deducted at the time offayment by the payer
of it under s. 18. Payment o tax by the assessee or
on his behalf is not deduction of tax on the income
by the payer of that income. We are wholly unable
to agree that payment of tax by the assessee, fictional
or otherwise, on income received by him is in any
sense a deduction of tax under s. 18 by the person
who pays the income to the assessee. Clearly there
is no deduction as contemplated bys. 18. We do
not see that ss. 16 · (2)., 18(5), and 49B require
any fiction of a deduction under s. 18 to be raised.
Indeed s. 18( 5) by mentioning expressly and separately "Any deduct10n made .............. .in accordance
. h
th"
t"
"
d "
b
wit . .. . . . . . . . . . . .. . . . . . . 1s sec 10n
an
any sum
y
which a dividend has been increased under subsection (2) of section 16" shows that these two are
different,· or, in other words, that the increased
amount is not a deduction under s. 18. It is impor·
tant also to remember that for s. 18A(l), (2) and (3)
there has to be a deduction under s. 18 to exclude a
part of the income; deduction under other provisions
will not do.
Then again, under s. 18(5) an assessee is entitled to credit for the amount to be added to the dividend under s. 16(2) as tax paid on his behalf
2S.C.R.
SUPREME COURT REPORTS
6S7
but this only at the time of the assessment, if any,
for the following year. Obviously, there is no question of giving any credit till a~essment later, that is
to say, later than the time of payment of the
dividend to the assessee. This again shows that
dividends are not income in respect of which tax
is deducted under s. IS at the time of payment. We
would also point out that if there is no assessment of
the assessee, then no tax can be treated as having
been paid by him. The position under s. 49B is the
same. If tax is deducted at the source under s. IS,
it would be deducted in all cases and the deduction
would not depend on any assessment. This is a
further reason for saying that dividends are not
income on which tax is deducted at the time of payment under s. IS.
The appellants then contend that even if dividends are not income from which tax is deducted at
the time of payment, still no interest is chargeable
in this case under s. ISA(6) for another reason. It
was said that in finding out the shortfall under sub-·
s. (6) of s. ISA you have to compare the amount of
tax paid by an assessee on his own estimate with the
amount of tax ascertained on the regular assessment
taking into account only that part of the income "to
which the provMons of section IS do not apply."
Hence it is contended that in ascertaining for the
purpose of this sub·section the tax payable on regular
assessment that part of the assessee's income should
be kept out of con~ideration to which the provisioμs
of s. IS apply. Then it is pointed out that sub-s. (5)
of that section applies to income received in the
shape of .dividends. Therefore, in finding out the
amount of tax payable on regular assessment under
sub s. (6) of s. ISA, dividends have to be kept out
of account and if that is done, then the shortfall
would disappear.