Case: Commissioner of Income Tax, Bombay City II Vs. Shakuntala &amp; Others

2. One Nana Lal Haridas was the karta of a Hindu undivided family which admittedly was the beneficiary of 1842 shares in a company called the Cotton Export and Import Limited (hereinafter referred to as the Company). The shares were held in the names of different members of the family as given below:No. of shares Name or names in which they stand.877 Tribhuvandas Haridas815 Nanalal Haridas150 Nanalal Haridas and Tribhuvandas HaridasThe Company was one in which the public were not substantially interested. For the assessment year 1949-50 the Income-tax Officer concerned applied the provisions of S. 23-A of the Indian Income-tax Act. 1922 (as it stood previous to the amendment of 1955) 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 1842 shares, after being grossed up, came to Rs. 54,307. 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 S. 23-A 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 Section 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. 23-A. The Tribunal by its order, dated February 15, 1957, expressed the view that the interpretation of S. 23-A for which the assessee contended would defeat the very purpose of that section, but held that it was bound by the decision of the Bombay High Court in S. C. Cambatta v. Commissioner of Income-tax, Bombay, 1946-14 ITR 748 : (AIR 1947 Bom 264 ). Accordingly, the Tribunal allowed the appeal and directed the Income-tax Officer concerned to delete the deemed dividend income from the income of the Hindu undivided family. The Commissioner of Income-tax, Bombay, then moved the Tribunal to refer the following question of law to the High Court ofthe dividend income of Rs. 54,307 is to be assessed in the hands of the assessee, the Hindu undividedTribunal was of the view that the question did arise out of its order and made a reference of the High Court accordingly.3. 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 such 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 reaffirmed the view it had expressed in its earlier decision in 1964-14 ITR 748 : (AIR 1947 Bom 264 ) (supra).4. 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 leave and having obtained such leave has brought these appeals to this Court.

Reasoning: It is clear from the section that an order made under it is not in itself an order of assessment, it has to be followed by an assessment on the shareholder either under S. 23 or under S. 34. Under the express terms of the section, the artificial or notional income has to be included in the total income of the shareholder for the purpose of assessing his total income.We do not think that either of the two points urged by the appellant is really decisive of the question. The question is really one of interpretation of S. 23A, and we must interpret S. 23A with reference to its ownAs we have earlier said, no good reason exists as to why the expression "shareholder" in S. 23-A shall not have the same meaning. Sub-section (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.It is not disputed that the Hindu undivided family as such was not a shareholder of the company in the present case. Therefore, so far as the notional income is concerned, we must go by the terms of S. 23A and if there is any lacuna in the wording of the section, we cannot cure it in the guise of interpretation. The question here is not one of deciding the matter from the point of view of partnership law or Hindu law, as was the question in 1960-40 ITR 1  : (AIR 1960 SC 1147 ) (supra) 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 fiction enacted by the Legislature must be restricted by the plain terms of the statute. Nor do we see how it can be said that the interpretation put on S. 23-A that it is confined to a shareholder registered in the books of the company defeats the very purpose of the section. The section will still apply to shareholders 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 carried to its logical conclusion requires us to travel beyond the terms of the section or give the expression "shareholder" a meaning which it does not obviously bear.9. For these reasons we are of the view that the High Court correctly answered the question which was referred to it. In view of that answer the High Court rightly held that the second question referred to it did not fall for consideration.