Case: Commissioner Of Income Tax West Bengal I, Calcutta Vs. Clive Insurance Co. Ltd., Calcutta

2. The respondent assessee is a resident Company carrying on business of general insurance. The Company held shares of U. K. based joint stock companies. The net dividend income in respect of the shares held by it amounted to Rs. 15, 266/- after deduction of British Income-tax of Rs. 9, 881/-, the amount being stated in rupee equivalent of the pound sterling. For the assessment year 1960-61 relevant previous year being the calendar year 1959, the assessee applied for relief under S. 49-D of the Indian Income-tax Act, 1922 (for short the Act). The I. T. O. declined to grant the relief but the reasons for the decision were not made explicit. In appeal by the assessee, the Appellate Assistant Commissioner confirmed the decision of the Income-tax Officer observing that even if it be held that the net dividend income suffered U. K. tax by deduction, there is nothing to show that the tax deducted was paid to U. K. Revenue and, therefore, S. 49-D is not attracted. In further appeal by the assessee, the Tribunal accepted the contention of the assessee and at the instance of the Revenue, referred the question hereinabove set out, to the High Court. The High Court after an exhaustive examination of the relevant provisions of Income-tax Act of U. K. and the decisions bearing on the question, confirmed the decision of the Tribunal.

Reasoning:
10. In U. K. there is a slight anomalous position with regard to dividend income. Broadly it is stated that dividend paid out of the profits of the company to shareholders of the company is not chargeable to income-tax in the hands of the assessee. The company pays tax on its profits. If dividend is distributed after tax is paid by the company, it is optional with the company not to deduct any income-tax from the dividend paid to shareholders or the company may reimburse itself in respect of the tax paid by it by deducting income-tax at standard rate from the dividends paid to the shareholders, vide S. 184, U. K. Income-tax Act, 1952. The dividend income thus received by the shareholders is not chargeable to income-tax but is certainly chargeable to surtax in the Lands of the assessee. In view of this legal position, it was strenuously contended that there was no. statutory provision for taxing dividend income under the law of U. K. nor was there any machinery prescribed for assessing to income-tax the dividend income accrued to a shareholder. The Company having been charged to tax on its income, the dividend income in the hands of shareholders was not chargeable to income-tax in the hands of shareholders. It was further said that to work out the mechanics of relief to be granted it must be shown that the dividend income in the hands of the assessee must be assessed at some rate of income-tax in U. K. and then comparison can be made with Indian rate of income-tax to grant relief.11. Initially the difference that stares in our face in respect of deduction of income-tax from dividends paid by companies under U. K. Income-tax Law and our Act must be noticed. under U. K. law the company has to pay tax on its profits or gains as its liability and not as agent of members to whom dividend is distributed out of profits. Therefore, if dividend is distributed after profit or gain of the company is charged to tax it is optional with the company either to deduct or not to deduct the income-tax paid by it from the dividend paid to members and if it chooses to exercise the option, it can do so at standard rate. Under Section 18 of our Act, the company has to deduct income-tax and super-tax at prescribed rate from the dividend paid to member as agent of the member and all sums so deducted shall for the purpose of computing the income of an assessee, be deemed to be income received vide sub-sec. (4) of S. 18. The dividend income including deduction, that is grossed up income, will be assessed as income of the shareholder and he will be given credit for the amount so deducted by the company and paid over to the authority. It was accordingly pointed out that in U. K. company pays tax under S. 184 on its own liability and reimburses itself to some extent by the tax deducted at standard rate from the dividend paid to shareholder and the deduction so made would not be paid to treasury for and no. behalf of the shareholder. Therefore, Mr. Desai submitted that even if income-tax at standard rate is deducted from the dividend paid by the company to the assessee, the dividend income in the hands of assessee is not assessed and charged to tax, and it could not be said that it is a doubly taxed income as envisaged by S. 49-D.12. No. specific provision was pointed out to us which would show that dividend income in U. K. in the hands of the assessee is exempt from payment of Income-tax. The company is liable to pay income-tax . on its profits and gains and Sec. 184 enables the company to deduct from the dividend paid out of profits, tax at the standard rate for the year in which the amount payable becomes due. Dividends which represent the distribution of a taxed fund are, therefore, styled as franked income so far as concerns any further taxation at the standard rate, i.e. the rate at which deduction has been made. The assumption underlying this position is that the dividend represents the residue of the total income which has already been taxed in the hands of the company, the fiction being that if tax was not paid by the company there would have been a higher dividend and, therefore the dividend income is already taxed. But this fiction led to a number of complications because the company is an independent juristic person and the scheme of the Income-tax Act in U. K. does not imply that the Company pays tax on behalf of the member.It, therefore, appears well established according to the statute law of U. K. and the interpretation put on it by the highest court in that country that the dividends which have borne tax in the hands of the paying company were treated as franked income in the hands of the assessee. In other words, it would mean that the income in the from of dividends has been subjected to tax. It is immaterial whether they were taxed in the hands of the assessee or not but they are deemed to have been taxed in the hands of the assessee in U. K. It would be advantageous to refer Simons Income-tax, 2nd Edn., Vol I, p. 307, where it is stated that it is a general principle of the Income-tax Acts in U. K. that as far as possible tax is charged at the point where the income first emerges from the source and this is so even if the person primarily in receipt of the income does not ultimately enjoy it but pays it over or accounts for it to another who is the person beneficially entitled to it. In such cases the person assessed has the right to recoup himself, when making a payment of income to the person entitled thereto, by deducting the tax appropriate to that income, or by crediting himself with the amount when accounting. The author include dividend income as one such income.16. It thus clearly emerges that dividends which are styled as franked income have borne tax at the source and that is why they are not assessable for income-tax in the hands of the share-holder.17. Now, if thus the dividends styled as franked income have been charged to income-tax at the source, it would mean that it is the income in respect of which income-tax has been paid by deduction or otherwise in accordance with the law in force in the country in which the income accrued. If it is now charged to tax under the Indian Income-tax Act, it obviously becomes a doubly taxed income and one of the requirements of S. 49-D would be satisfied.It was, however, said that no. relief could be granted to the assessee because in order to work out the mechanics of the relief it would be necessary to ascertain the rate at which the Indian income-tax will be payable on the income in question and the rate of income-tax at which income-tax by deduction or otherwise is paid in the foreign country and then to ascertain which of the two is the lower one which can be allowed as a deduction from the tax payable under the Indian Income-tax Act in respect of such doubly taxed income. The contention is that in England it being optional with the company to deduct or not to deduct income-tax from the dividend paid by it from its profits after tax is paid by the company, it would be impossible to ascertain the rate at which the tax is paid in the foregin country in respect of such income. Now, the position in U. K. with regard to deduction of income-tax from the dividend distributed from the profits of the company is clear inasmuch as the tax can be deducted only at the standard rate. The expression income assessed in the foreign country would clearly, in the context in which it is used, mean subjected to tax in the foreign country. In order to ascertain whether the rate under the Indian Income-tax Act or the rate of tax in the foreign country is lower, apart from any other consideration, the rate of tax in U. K. in the context of dividend income is easily ascertainable inasmuch as company can deduct income-tax at standard rate only. Undoubtedly, where the assessee was also liable to pay surtax in U. K. on the dividend income no. complication would arise in working out the rate because surtax is payable on dividend income. But in the present case that difficulty does not arise as the assessee being a company, it was neither liable to any surtax nor entitled to any relief in U. # K., and, therefore, the rate of tax can be worked out with certainty consistent with the provisions of para (iii) of the Explanation. The assessee thus on the interpretation put by us in respect of the dividend income has paid tax at the standard rate and that is the rate of tax of the foreign country for the purpose of para (iii) of the Explanation.To be eligible for relief under Sectionread with its explanation, the assessee must establish excluding therequirement that : (i) the assessee has income which has accrued or arisen without taxable territory; and (ii) the assessee has paid in any countryby deduction or otherwise under the law in force in that country; and (iii) in that event the assessee would be entitled to the deduction from Indianpayable by him; (iv) a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country, whichever is lower. The expression rate of tax of the said country must be given the meaning as set out in para. (iii) of the explanation and in doing so the importance of the words income assessed in the said country has to be borne in mind.5. There is no. controversy that the assessee is a resident company and has dividend income from the U. K. based joint stock companies, i.e. income accruing without taxable territory. Admittedly there is no. reciprocess arrangement for, relief or avoidance of double taxation between India and U. K.