Case: Kishanchand Lunidasingh Bajaj Vs. Commissioner Of Income-Tax, Mysore

1. Kishanchand Bajaj and his seven sons formed a Hindu undivided family which owned shares exceeding Rs. 91,000 in value, in public limited companies. The family commenced business in money-lending and as commission agents on May 16, 1956 in the name of Messrs. Mangoomal Kishanchand and in the books of account of the firm the shares which stood registered in the name of Kishanchand with the companies were credited as capital of the business. On August 22, 1956 Shyam Sundar and Girdharlal, two of the sons of Kishanchand, separated from the family, each receiving rupees two lakhs in lieu of his share. On August 23, 1956 a partnership was formed between Kishanchand representing the Hindu undivided family of himself and his five sons and Shyam Sundar and Girdhalal, for carrying on the business of Messrs. Mangoomal Kishanchand. Under the deed of partnership Shyam Sundar and Girdharlal were each entitled to a seventh shares and the remaining five-sevenths share was to belong to Kishanchand as karta of the Hindu undivided family. Dividends received in respect of the shares were credited to the profit and loss account of the firm.2. In proceedings for assessment of the firm for the year 1959-60 it was claimed that the shares which stood registered in the name of Kishanchand belonged not to the Hindu undivided family but to the firm of Messrs. Mangoomal Kishanchand. The Income-tax Officer rejected that contention. He held that the Hindu undivided family was "the real and legal owner of the shares" and that the shares were at no time the property of the firm. The order of the Income-tax Officer was confirmed in appeal by the Appellate Assistant Commissioner. In second appeal to the Income-tax Appellate Tribunal, it was contended on behalf of the Hindu undivided family that the dividend from the shares could be assessed only in the hands of the person who held ownership "legal as well as equitable" in the shares, and as the family had ceased to be the "equitable owner" of the shares, the Hindu undivided family could not be assessed under the Income-tax Act, 1922 on the dividend. The Tribunal rejected the contention. The Tribunal then referred under S. 66 (1) of the Income-tax Act, 1922, the following question to the High Court of Mysore foron the facts and circumstances of the case, the dividend income from shares standing in the name of Kishanchand Lunidasing Bajaj and acquired with the funds of the Hindu undivided family of which the said person was the karta was assessable in the hands of the assesseeHigh Court answered the question in the affirmative, and with special leave the Hindu undivided family has appealed to this Court.

Reasoning: 4. In our judgment the contention is wholly without substance. Under S. 3, total income of the previous year of every individual, Hindu undivided family, company and local authority, and of every firm and other association of persons or the partners of the firm or the members of the association individually is charged to tax. By S. 4 the total income of any previous year of any person includes, subject to the previous of the Act, all income, profits and gains from whatever source derived, which are received or deemed to be received in the taxable territories in such year by or on behalf of such person, or if such person is resident in the taxable territories during such year the income which accrue or arise or is deemed to accrue or arise to him in the taxable territories during such year, or accrue or arise without the taxable territory during such year, or having accrued or arisen to him without the taxable territories or brought in the taxable territories during such year, or if such person is not residing in the taxable territories during such year, accrue or arise, or are deemed to accrue or arise to him. By sub-s. (3) of S. 4 any income, profits or gains falling within the Cls. (i) to (xxii) are not liable to be included in the total income of the person receiving them. Tax being charged by S. 3 upon dividend income and not being excluded under S. 4 (3), such income would be chargeable to income-tax under the Act in the hands of the person to whom it accrues or by whom it is received. A company for its purposes does not recognize any trust or equitable ownership in shares; it merely recognizes the registered shareholder as the owner and pays the dividend to that shareholder. But the shares may, because of the trust or other fiduciary relationship, belong to a person other than the registered shareholder, and the dividend distributed by the company would for the purpose of tax be deemed to accrue or arise to the real owner of the shares.It was said by counsel for the appellants that by the use of the expression "benefit can only go to the person who, both in law and in equity, is to be regarded as the owner of the shares", it was laid down that dividend may be taxed only in the hands of a person who is "in law as well as in equity" the shareholder. But these observations are not susceptible of any such meaning. Hidayatullah, J., in that case was seeking to explain that dividend income cannot be "grossed up" in the hands of the real owner of shares if the shares are registered in the name of another person. He did not say that the real owner of shares cannot be taxed in respect of dividend received by him, if the shares are registered in the name of another person.We are unable to accept the argument of counsel for the appellants that because the dividend income in respect of the shares cannot be "grossed up", and credit for tax paid cannot be obtained by the appellants, the appellants are not liable to be taxed in respect of dividend received by them. There is no provision in the Act which supports this plea, and the scheme of the Act lends no countenance to an expedient which may lead to gross evasion of tax.