# The Oom1ni3siotier of Income-tax. Bombay City II v. Shakunm/a and two others etc

- **Citation:** [1962] 2 S.C.R. 871
- **Court:** Supreme Court of India
- **Decided:** 1962
- **Bench:** S. K. Das, M. HrnAYA'.l'ULLAH, J. C. Shah
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/the-oom1ni3siotier-of-income-tax-bombay-city-ii-v-shakunm-a-and-two-others-etc-2304
- **Pages:** 10

## Headnote

Jncome-~f.1ax-8hares 1egistered in names of members of
Hindu undivided family-Undistributed incorne deemed to be
distributed dividrnd- Whether assessable in hands of farnilylndian Income-tax Act, 1922 (11of1922), s. 23A.
A Hindu undivided family was the beneficiary of 1842
shares in a company; but the !:hares
~'ere held in the nan1es
of different members of the family. For the assessment year
1949-50 the Income. tax Officer applied ,the provisions of
s. 23A of the Income-tax Act, 1922 (as it stood at that time)
and ordered that the undisuibuted portion of the assessable
income of the company in the previous year shall be deemed
to have been distributed as dividend among the shareholders.
The proportionate amount of dividend in respect of the I 842
shares after being grossed up was added to the income of the
joint family. The assessee-family contended that the dividend deemed to have been distributed under s.23A should
be assessed in the hands of the shareholders and not in the
hands of the family
Held, that the dividend deemed to have been distributed nnder s. 23A of the Act could not be assessed in the
hands of the Hindu undivided family but could be assessed
only in the hands of the members of the family who were
registered shareholders of the company.
Under the express
words of the section the artificial or notional income had
to be included in the total income of the shareholder. The
expression
"shareholder" in s.23A meant the person who
was shown as a shareholder in the register of the company.
The section did not talk of the beneficial owner of the share.
The Hindu undivided family was not a shareholder of the
Company. The fiction enacted by the rrgislature must be
restricted to the plain terms ofthestatute.
8. C. Cambatta v •. Cornmissioner of Income-tax, Bombay,
(1946) 14 I. T. R. 748 and Skree Shakti Mills Ltd., v. Commissioner
of Income-tax,
Bombay, (I948) 16 I. T. R. 187,
approved.
Howrah Trading Co. ltd., v. Commissioner of Income-tax,
Central Calcutta, (1959) 36 I.T.R. 215 .and Charandas Haridas
v, Commissioner of Income-tax, Bombay, (1960) 39 I. T. R.
202, applied.
1961
. Jitly,18.
1961
The
Oom1ni3siotier
of Income-tax.
Bombay City II
v.
Shakunm/a and
two others etc. .
S.K. Das J.
872
SUPREME COURT REPORTS
2 [1962]

## Text

•
;
'.
2 S.C.R.
SUPREME COURT REPORTS
s7i
COMMISSIONER OF INCOME-TAX, BOMBAY
CITY II
v .
SHAKUNTALA AND TWO OTHERS ETC.
(S. K. DAS, M. HrnAYA'.l'ULLAH and J. C. SHAH, JJ.)
Jncome-~f.1ax-8hares 1egistered in names of members of
Hindu undivided family-Undistributed incorne deemed to be
distributed dividrnd- Whether assessable in hands of farnilylndian Income-tax Act, 1922 (11of1922), s. 23A.
A Hindu undivided family was the beneficiary of 1842
shares in a company; but the !:hares
~'ere held in the nan1es
of different members of the family. For the assessment year
1949-50 the Income. tax Officer applied ,the provisions of
s. 23A of the Income-tax Act, 1922 (as it stood at that time)
and ordered that the undisuibuted portion of the assessable
income of the company in the previous year shall be deemed
to have been distributed as dividend among the shareholders.
The proportionate amount of dividend in respect of the I 842
shares after being grossed up was added to the income of the
joint family. The assessee-family contended that the dividend deemed to have been distributed under s.23A should
be assessed in the hands of the shareholders and not in the
hands of the family
Held, that the dividend deemed to have been distributed nnder s. 23A of the Act could not be assessed in the
hands of the Hindu undivided family but could be assessed
only in the hands of the members of the family who were
registered shareholders of the company.
Under the express
words of the section the artificial or notional income had
to be included in the total income of the shareholder. The
expression
"shareholder" in s.23A meant the person who
was shown as a shareholder in the register of the company.
The section did not talk of the beneficial owner of the share.
The Hindu undivided family was not a shareholder of the
Company. The fiction enacted by the rrgislature must be
restricted to the plain terms ofthestatute.
8. C. Cambatta v •. Cornmissioner of Income-tax, Bombay,
(1946) 14 I. T. R. 748 and Skree Shakti Mills Ltd., v. Commissioner
of Income-tax,
Bombay, (I948) 16 I. T. R. 187,
approved.
Howrah Trading Co. ltd., v. Commissioner of Income-tax,
Central Calcutta, (1959) 36 I.T.R. 215 .and Charandas Haridas
v, Commissioner of Income-tax, Bombay, (1960) 39 I. T. R.
202, applied.
1961
. Jitly,18.
1961
The
Oom1ni3siotier
of Income-tax.
Bombay City II
v.
Shakunm/a and
two others etc. .
S.K. Das J.
872
SUPREME COURT REPORTS
2 [1962]
CIVIL APPELLATE JURISDICTION: Civil Appeals
NoH. 125, 231 and 447 of 1960.
AppPals from the judgment and order dated
September 25, 1957, of the Bombay High Court of
Ineome-tax References Nos. 30, 29 & 37/57, respectively.
K. N. Rajagopal Sastri and D. Gupta, for the
appellant.
A. V. Viswanatha Sastri and J. B. Dadachanji,
for the respondents.
1961. July, 18. The Judgment of the Court
was delivered by
S. K. DAS, J. These three appeals, with
special leave of this Court, have been heard
together. They arise out of three Income-tax
References made to the High Court of Bombay,
namely, Income-tax Reference No. 29 of 1957,
Income-tax Reference No. 30 of 1957 and Incometax Reference No. 37 of 1957.
The facts are
similar in the three cases and the question of law
which the High Court had to answer was the same
in each of the cases. The High Court gave its
answer in its leading judgment in Income-tax
Reference No. 29 crl' 1957, and the other two
References were disposed of in accordance with
that answer. For the purposes of these appeals,
it would be enough if we state the facts of Reference
No. 29 and then indicate the question which arose
for decision and the answer which the High Court
gave to it.
One Nanalal Haridas
was the karta of a
Hindu undivided family which admittedly was the
benefkiary of 1842 shares in a company called the
Cotton Export ancl Import Limited (hereinafter
referred to a8 the Company). The shares were held
in the nameB of different members of the family as
given below.
•
2 8.C.R.
SUPREME COURT REPORTS
873
No. of shares
877
815
150
Name or names in which
they stand
Tribhuvandas Haridas
Nanalal Haridas
Naualal Haridas and
Tribhuvandas Haridas
The Company was one in which the public were not
substantially interested. For the assessment year
194,9.50 the Income-tax Officer concerned applied
the provi~ions of s. 23A of the Indian Income-tax
Act, 1922 (as it stood previous to the amendment
of Hl55) and ordered that the undistributed portion
of the assessable income of the Company of the
relevant previous year, as computed for income-tax
purposes and reduced by the amount of income-tax
and super-tax payable by it in respect thereof, shall
be deemed to have been distributed as dividend
among the shareholders as at the date of the relevant General Meeting of the Company. The proportionate amount of dividend of the 18!2 shares, after
being grossed up, came to Rs. 5!,307 /-. This amount
the Income-tax Officer added to the income of the
joint family.
The assessee-family claimed that the
dividend deemed to have been distributed under
a. 23A should be assessed in the hands of the shareholders, that is, the persons in whose names the
shares stood registered in the books of the
Company, and not in the hands of the Hindu undivided family though admittedly it was the
beneficiary of the shares. The Income-tax Officer
and the Appellate Assistant Commissioner rejected
this contention. The matter then went in appeal
to the Income-tax Appellate Tribunal.
The
Department contended before the Tribunal that
having regard to the scheme of s.23 A and the
ordinary dictionary meaning of the word "shareholder,'' there was no reason why the joint family
should not be held to be the shareholder within
the meaning of s ~3 A. The Tribunal by its order
daW February 15, 1957, expressed the view that
1961
The
Oommis.Wner of
Incume•taz,
Bombay Oitg II
v_
Slaaknnfa/,a !Htdtwo others ect;
S.K. Da..J.
1961
2'he
Commissioner of
I neome-tax,
Bombry City Ii
v.
Sluiku'llla/,a and
two others etc.
S.K. DasJ.
874
SUPREME COURT REPORT~
Ll962J
the interpretation of s. 23A for which the assessee
0ontended
would
defeat
the very purpose
of that section, but held that it was bound by the
decision of the Bombay High Court in S. G. Gambatt.a
v.
Commiss·ioner
of Income-tax,
Bombay (').
Accordingly, the Tribunal allowed the appeal
ancl directed the Income-tax Officer concerned to
delete the deemed dividend income from the income
of the Hindu undivided family. The Com.missioner
of Income-tax, Bombay, then moved the Tribunal
to refer the following question of law to the High
Court of Bomb:iy:
"Whether
the
dividend
income
of
Rs. 54,307 /- is to be assessed in the h<mds
of the assessee, the Hindu undivided
family?"
The Tribunal was of' the view that the question
did arise out of its order and made a reference to
the High Court accordingly.
The High Court by its order dated September
25, 1957, answered the question in favour of the
assessee. It held that in respect of an income
which was deemed to be distributed under the
provisions of s. 23A, the section in terms provided
that the proportionate share of the shareholders in
,;uch distribution should be included in their income ; and as the Hindu undivided family was
not and could not be a registered shareholder of
the Company, the amount in question could not
be treated as the income of the Hindu undivided
family under the provisions of that section. The
High Court re-affirmed the view it had expressed
in its earlier decision in S. C. Gambatta v. Commissioner of Income-tax, Bombay (1).
The High Court having refused leave to
appeal to this Court from its decision in question,
the Commissioner of Income-tax, Bombay, applied
to this Court for special le1we and having obtained
(I)
(1946) 14 LT.R. 748.
'
I
~ S.C.R.
SUPREME COURT REPORTS
875
such leave has brought these appeals to this Court.
It is necessary now to read the relevant portion of s. 23A as it stood prior to its amendment
by the Finance Act, 1955.
"23A: Power to assess individual members
of certain companies.
(I) where the
Income-tax Officer is
satisfied that in respect of any previous year
the profits and gains distributed as dividends
by any company up to the end of the si:x:th
month after its accounts for that previous
ye;ir are laid before the company in general
meeting are less than sixty per cent of the
assessable income of the company of that
previous year, as reduced by the amount of
income-tax and super-tax payable by the
company in respect thereof he shall, unless
he is satisfied that having regard to losses
incurred by the company in earlier years or
to the smallness of the profits made, the
payment of a dividend or a larger dividend
than that declared would be unreasonable,
make with the
previous approval of the
Inspecting Assistant Commissioner an order
in writing that the undistributed portion of
the assessable income of the company of that
previous year as computed for income-tax
porposes
and reduced by
the amount of
income-tax and super-tax payable by the
company in respect thereof shall be deemed
to have been distributed as dividend amongst
the shareholders as at the date of the general
meeting aforesaid, and thereupon the proportionate share thereof of each shareholder
shall be included in the total income of such
shareholder for the purpose of assessing his
total income :
x
x
x
1961
The
Commissioner of
I ncome-ta:e,
Bombay City II
v.
Shakuntala and
two others etc.
f!.K. Daa J.
1961
The
Oommi•sioner Jj
I ncome·tax,
Bombay Oity II
v.
Shaku,.taltl amt
lwo olhet"s, etc.
S.K. Dall.
876
SUPREME OOURT REPORTS
(1962]
Provided further that this sub-section
shall not apply to any company in which the
public are substantially interested or to a sub·
sidiary company of such a company if the
whole of the share capital of such subsidiary
company is held by the parent company or by
the nominEes thereof."
The section in effect creates a fictional or notional
dividend-income which is not in fact received by
the shareholder. The notional dividend is deemed
to have been distributed as on tlie date on which
the accounts of the previous year were laid before
the company in a general meeting. It is clear from
the section that an order made under it is not
in itHelf an ordPr of assessment; it has to be
followed bv an assessment on the shareholder either
under s. 23 or under s.34-.
Under the express
terms of the seetion, the artificial or notional
income has to be included in the total income of the
shareholder for the purpose of assessing his total
income. The High Court has r~ferred to its earlier
decision in S.C. Carnbatta v. 'l'he Cornrnissioner of
Incorne-tax, Bornbay(1). That decision laid down
th(lt whern (I shitre stood registered in two or more
names, the registered holders treated as an association of persons must be regarded as the 'shareholder' under s.23A and they must be assessed
accordingly. It further laid down that s. 23A did
not say anything about equities or beneficial ownership; it was a procedural sec:tion and not a charging
section. It created a notional income which was
wholly artificial and did not in fact exist in
the
pocket of any
shareholder. In a later
decision in Shree Shakti Mills Ltd. v. Cornrnissioner
of
I ncorne-t(J,x,
Bornb(J,y City('\ the same High
Court
held
that
the expression 'shareholder'
mentioned in s. 18 (5) of the Act meant the person
who was shown as a shareholder in the register
of the company and it was only the shareholder
of a company who was entitled to the procedure
(1) (1946) 14 J.T.R 748.
(2)
(1948) 16 I.'f.R. 1!!7 .
•
2 S.C.lt.
SUPREME COURT REPORTS
877
of processing permissible under ss. 16 (2) and 18(5)
of the Act. This view was accepted by this Court
in Howrah Trading Co., Ltd. v. Commissioner of
Income-tax, Central Calcutta (1) where it said that
no valid reason existed as to why the expression
'shareholder' as used in s. 18(5) should mean a
person other than the one denoted by the same
expression in the Indian Companies Act, 1913.
A reference was made to the
decision- of the
Bombay High Court in Skree Shakti Jl!Ji'.ll8 Ltd. v.
Commissioner of Income-tax, Bombay City(') and
other decisions bearing on the subject.
Similarly,
we see no reason why the expression 'shareholder'
in s. ~3A should not have the same meaning,
namely, a shareholder registered in the books of
the company.
It would be
anomalous if the
expression 'shareholder' has one meaning in s. 18(5)
and a different meaning in s. 23A of the Act ; for
that would mean that a Hindu undivided family
treated as a shareholder for the purpose of s. 23A
would not be entitled to the benefit of s. 18(5) of
the Act.
The learned counsel for the appellant has
urged two points in support of his contention that
the expression 'shareholder' in s. 23A means the
person who owns the share, irrespective of the
circumstance whether that person is registered in
the books of the company as a shareholder or not.
His first point is that the very object of the section
is to prevent avoidance of super-tax by the shareholders of a company, and if the lwneficial owner
of the shares is a Hindu undivided family, that
family will not come within the purview of s. 23A,
because a Hindu undivided family as such cannot
be a shareholder in a company. The argument is
that the narrow interpretation
put on s.23 A
will defeat the very purpose of the section. The
second point urged is that the principle that a
(I) (1959) 36 I.T.R. 215.
(2) (1948) 16 I.T.R. 187.
1961
The
Commissioner of
1 ncome-ta:x,
Bombay.City 11
v.
Shakuntala and
two others, etc.
S.K. Daa J.
878
SUPREME COURT REPORTS
[1962]
1961
legal fiction must be carried to its logical conclusion cannot be overlooked in construing s. 23A.
0
'!'~e
The legal fiction enjoined by the section is that
ommiss1cmer of
fi.
·
Income-tax
the pro ts must be "det,med to have IJeen distriBombay City 'II buted as dividend a1!10ngst the shareholders as at
v.
the date of the gennml meeting". This legal fiction
Shakunta/a and must i>e earried to its logical conclusion by holding
two others, etc. that the dividend had been actually distributed
and r<'ceived by the Hindu undivided family. It
S. K. Daa J.
is pomted out thH.t if the saiμe dividend were
actually distributnd by the
company, it would
cNtainly bP inc"me in the hands of the Hindu
undivided family whieh would he liable to pay
all taxes on itH income, whether actual or artificial.
We do not thir~k that either of the two points
urged by the appellant is re111ly decisive of the
question.
The queHtion is really one of interpretation of s. 23A, and we must interpret s. 23A with
reference to its own terms. The section in express
terms says that "the i:iropurtionate share of each
shareholder shall be included in the total income
of the 8hareholder for the purpose of assessing his
total income". The sPction does not t ilk of the beneficial owner of the share. It talks of the shareholder only. Section 18(5) of the Act deals with
f!rossing up of dividend and two expressions occur
therein : "owner of the security" and the "shareholder". So far as the expression "owner of the
security" is concerned it may perhaps include a.
beneficial owner ; but it has been decided by this
Court that the
expression
"shareholder" in
s.18 (5) means the shareholder registered in the
books of the company. As we have earlier said,
no good reason exists as to why the expression
"shareholder" in s. 23A shall not have the same
meaning. Sub-sections (3) and (4) of s. 23A also
make the position clear : they talk of members
of the company and a Hindu undivided family as
such is not a member of the company.
2 S.C.R. SUPREME COURT REPORTS
87!!
The position of a Hindu undivid<:'d family
vis-a-vis a partnership was considered by this Court
in Chara.ndas Ha.ridas v. Commissioner of lncome-tru
Bombay (1) and Cmnmissioner of lnwme-tax,
80111bay v. N1indlul Claudalal ('). It i8 not diHJ>llll'<l
that the Hindu undivided family as sueh was not
a shareholder of the company in the present case.
Therefore, so far as the notional income i:; 1·011cerned, we must go by the terms of s.23A and
if there is any lacuna in the "·ordi11g of the scdion,
we cannot cure it in the guise of intl'rprctatiuu.
The question here is not one of r leciding the
matter from the point of view of J!artuershiii law
or Hindu law, as was tht> question in Commi88ioner
of Income-tax,
Bornbaq
v. Nrmdlal Gandalal (')
which led to a
difference of opinion.
The
question here is one of interpretation only and
that interpretation must be based on the terms
of the section. The fiution enacted by the Legislature must be restricted by the plain terms of
the statute. Nor do Wf' see how it can be said that
the interpretation put on s.23A that it is confined to a shareholder regiAtered in the book~ of
the company defeats the very purpose of the se('tion.
The section will still apply to 'hareholdt>r,; of
the company and to their income will be added
the notional income determined under s. 23A. We
are unable to accept the argument that the principle that a legal fiction must be cal'ried to its
logical conclusion requires us to traye] beyond the
terms of the section or give the expression "shareholder" a meaning "hich it docs not obviously
bear.
For these
reasons
we are of the view
that the High Court conectly an&wered the question which was referred to it. In view of that
answer the High Court rightly held that th"
second question referred to it did not. fall for
(I) (1960) 39 I. T. R. 202.
(2) (1960) 40 I. T R. !.
1961
The
Comniissionet of
I nc(nne.~ta.r,
Bombay City II
v.
Shakuntala and
tuY> other8, fie.
8.K. Das J.
'
880
8UPREME COURT REPORTS
[I962j
1961
The
a ommission~r of
I nC<Jme--tax,
Bombay City I1
v.
consideration.
The result, therefore, is that all
these three appeab fail and must
be dismissed
with costs ; one heari1!¥ foe.
Appeal8 dismissed.
Shalr:untala and
two others, etc.
S •. K. Das J.
1901
July, 24.
SETH DJKHRAJ JAI~URIA
v.
UNION OF INDIA
(J. L. KAPUR, 1{. SUBBA RAO, M. HIDAYA'.l'ULLAH,
J. ·c. SnAH ;ind ~AGHUBAR DAYAL, ,JJ.)
'
Contract-Divisional. Supprintendent of Railway placing
orders-Cont,ract not 1 e:tpressed to be in name of Goverrior-
'
General and not executed on behalf of Governor-General-Whethei·
binding on G6uern1nent- (/overnmi:nt of India Act, 1935 (26 Geo.
IJ Ch. 2) s. f715 (3).
'
In the year 1913 the Divisional Superintendent, East
lti<liciu Raihvay piacecj certain purcha~e oi<lers with the appellant for the supply "of foodgrains for the employees of the
East ~ndian Railway. , The orders \\:'ere not ('Xpressed to be
made .in the name Of the Governor-General and were not
executed on ~ehal( of the !J.overnor-General as required by
s. 175 (3) of the Government oflnclia Act, 1935. They were
signed Dy the Divisional Superintendent eithef..inwhis oWn hand
or in the ·haiid of h'is PCrsonal Assistant.
Some deliveries of
foodgrains \.Vere made under theSe orders aild were aCcepted
and paid for by the Railway Administration.
But lhe Railway
i\dn1inistration declined to accept further deliveries of foodgrains. The-appellant sold the balance of foodgrains under the
purchase orders and fi.JetJ a suit to recover the difference bet-
\Vcen thC price realised Ly
~-ale and the contract price. The
respondent resisted the suit infe.r alia on the ground t.hat the
contracts were not Binding on it.
Held, that the contracts were not binding on the respondent and it was not liable for damages for breach of the
contracts.
Under
s.17.'(3) of-the Government of India Act,
J 935, as it stood at the relevant time, the contracts had:
(a) to be expressed to be made by the Governor-General, (b) to
be executer! 0n hehalf of the Governor-General and (c) to be
·executed by officers duly appointed in that behalf and in such
manner as the Governor-General directed or authorised. The