Kun.jilal & Anr. v. The State of Madhya Pradesh

The shareholder by purchase of the share does not acquire any interest in the assets of the company wound up. The position of a shareholder of a company is al together different from that of a partner of a firm. A company is a juristic entity distinct from the shareholders but the firm is a collective name or an alias for all the partners. the company till after Decisions based on law of England are hardly safe guides for determining the true meaning of the term "agricultural Income-tax Act, 1922. income" under the Indian the peculiarities of Income-tax .. Chiranjit Lal ChowdhU1·i v. The Union of India 869) followed. [1950] S.C.R. Commissioners of Inland Revenue v. Forest (1924) 8 T.C. 704, Borland's Trustee v. Steel Bmthers & Co. Ltd. L.R. [1901] 1 Ch. 279, Commissioner of Income-tax, Bihar and Orissa v. Raja Bahadur [1948] 16 I.T.R. 325, Kamakshya Narayan Singh and Others Premier Construction Co. Ltd. v. Commissioner of Income-tax, .Bombay City [1948] 16 I.T.R. 380 and Maharajkumar Gopal Saran Narain Singh v. Commissioner of Income-tax, Bihar and Orissa [1935] 3 I. T.R. 237 referred to . CrvrL APPELLATE JuRrsorcnoN : Civil Appeal No. 104 of 1953. • Appeal from the Judgment and Order dated the 28th day of March, 1952, of the High Court of Judicature at Bombay in Income-tax Reference No. 39 of 1951 arising out of the Order dated the 23rd day of April, 1951, of the Income-tax Appellate Tribunal in Income tax Appeal No. 5228 of 1950-51. 878 SUPREME COURT REPORTS [1955] 1954 /amshedji Kanga, (R. /. Kolah, M. M. Jhaveri Bacha F. Guzdar v. Commissioner of lncome·tax, Bombay. and Rajinder Narain, with him) for the appellant. M. C. Setalvad, Attorney-General for India, ( G. N. Joshi, with him) for the respondent.

#1954. October 28. The Judgment of the Court was .. Ghulam Hasan j. delivered by GHULAM HASAN J.-This appeal raises an interest ing point of law under the Indian Income-tax Act. The question referred by the Tribunal to the High Court of Judicature at Bombay was stated thus : "Whether 60% of the dividend Rs. 2,750---received by the assessee from companies is agricultural income and as under section 4(3) (viii) of the Act." amounting two Tea such exempt Chagla C.J. and Tendolkar J., who heard the refer judgments dated March 28, ence, answered the question in the negative. by separate but concurring 1952. Indian the Indian shareholder tea. By rule 24 of The facts lie within a narrow compass. The appel lant, Mrs. Bacha F. Guzdar, was, in accounting year 1949-50, a two Tea compa111es, Patrakola Tea Company Ltd., and Bishnauth Tea Company Ltd., and received from the aforesaid com panies dividends aggregating to Rs. 2,750. The two -companies carried on business of growing and manu facturing Income-tax Rules, 1922, made in exercise of the powers conferred by section 59 of is provided that "income derived from the sale of tea .grown and manufactured by the seller in the taxable territories shall be income derived from business and 40% of such income shall be deemed to be income, profits and • gains, liable to tax." that 40%. of the income -0f the Tea companies was taxed as income from the manufacture and sale of tea and 60% of such income was exempt from tax as agricultural income. According to the appellant, the dividend income received by her in respect of the shares held by her in the said Tea <:ompanies is to the extent of 60% agricultural income in her hands and therefore pro tanto exempt from tax income is while the Revenue contends that dividend is common ground Income-tax Act, as if it were computed It • • S.C.R. SUPREME COURT REPORTS ~9 "'!" not agricultural income and therefore the whole of the income is liable to tax. The Income-tax Officer and, on appeal, the Appellate Assistant Commissioner both concurred in holding the whole of the said income to tax. The Income-tax Appellate Tribunal be liable to confirmed the view that the dividend income could not be treated as agricultural income in the hands of the shareholder and decided in favour of the Revenue, but agreed that its order gave rise to a question of law and formulated the same as set out above and referred it to the High Court. The High Court upheld the order to appeal to this Court. the Tribunal but granted i i 1954 Bacha F. Guzdar v. Commissioner of I ncomt-tax, Bombay. Ghulam Hasan :J. The question, we comprehend, is capable of an easy solution and can best be answered by reference to the material provisions Income-tax Act. Under section 2(1) 'agricultural income' means: "(a) any rent or revenue derived from land which is used for agricultural purposes, and is either assessed the taxable territories or subject to to land-revenue in a local rate assessed Government as such ; and collected by officers of (b) ....................... ' ' .......... . (i) ............... . \~9 . ' .. ' .......... . (111) ..........•..... sub-section ( 1) (c) .......................... " Sub-section ( 15) of section 2 defines "total income" referred as total amount of income, profits and gains, of section 4 computed in the to in manner laid down in this Act, Section 3 authorises income-tax to be charged upon a person in respect of the total income of the previous year. Section 4 lays that the total income of any previous year of any person to be charged must include all income, profits and gains, from whatever source derived and defines the scope of its application for purposes of tax. c;ertain Sub-section exemptions upon the chargeability of the income and clause (iii) includes agricultural income in the category the various heads of exemptions. Section 6 mentions chargeable to income-tax of income, profits and gains, the same section (3) of enacts 1954 Bacha F. Gut:dar v. CommissioTUr of lnromeMtax, Bombay. GhuJam Hasan ]. .. -li \ 880 SUPREME COURT REPORTS [1955] including in that category clause sources.' falls under this category. ( v) It is common ground 'income that dividend income that it its profits it will be to _distribute the part of the agricultural incumbent upon is revenue derived of agricultural it is true In order, however, that dividend may be held to be agricultural appellant to show that, within the terms of the defini tion, it is rem or revenue derived from land which is for the agricultural purposes. Mr. Kolah, appellant, contends land because 60% of the profits of the company out of which dividends are payable are referable to the pur operations company. process renders 60% of the profits exempt tax in the hands of is used for the company from land which agricultural purposes but can it be said that when such company decides the share holders and declares the dividends to be allocated to them, such dividends in the hands of the shareholders also partake of the character of revenue derived from land which is used for. agricultural purposes ? Such a position if accepted would extend vital words beyond 'revenue income as defined in the Act is obviously intended to refer to the revenue received by direct association with land which is and not by indirectly purposes extending it to cases where that revenue or part there cf changes hands either by way of distribution of dividends or otherwise. truth dividend investment made in the shares of is derived from the the foundation of it rests on the the company and contractual relations between shareholder. Dividend by a share derived relationship with the land. There holder by his direct can be no the initial source which has doubt that land used for agricultural pur produced the revenue is 'revenue derived from poses but to give to land' the unrestricted meaning, apart from direct land, would be quite association or relation with the unwarranted. For example, the a creditor advancing money on interest to an agriculturist the scope of land' limits. Agricultural for agricultural company and In fact and proposition the words legitimate derived S.C.R. SUPREME COURT REPORTS 881 and receiving interest out of the produce of the lands in the hands of the agriculturist can claim exemption of tax upon the ground that it is agricultural income within the meaning of section 4, sub-section (3) (viii), is hardly statable. The policy of the Act as gathered from the various sub-clauses of section 2(1) appears to be to exempt agricultural income from the purview of Income tax Act. The object appears to be not to subject to tax either the actual tiller of the soil or any other person getting land cultivated by others for deriving benefit therefrom, but to be should extend to conferred upon this class of persons that revenue falls, however those into whosoever hands remote the receiver of such revenue may be, is hardly warranted. to say that the benefit intended 1954 Bacha F. Guz:dar v. Commissioner of Income-tax, Bombay. Ghulam Hasan J. number that the first place a proportionate to the It was argued by Mr. Kolah on the is not possible shareholder acquires any strength of in Commis an observation made by Lord Anderson sioners of Inland Revenue v. Forrest (1), that an investor share of the assets of the buys in industrial concern shares he has purchased an<l also buys the right to participate in any profits which the company may m::ike in the future. That a shareholder acquires a right participate in the profits of the company may to accept readily conceded but it contention interest in the assets of the company. The use of the word 'assets' in the passage quoted above cannot be exploited to warrant the inference that a shareholder, on invest ing money in the purchase of shares, becomes entitled to the assets of the company and has any share in the property of the company. A shareholder has got no interest in the property of the company though he has undoubtedly a right to participate in the profits if and when the company decides to divide them. The interest of a shareholder vis-a-vis the company was explained in the case of Chiranjitlal Chowdhuri v. The Union of India and Others(2). That the position the appellant that a shareholder taken up on behalf of has got a the company. It is that the shareholders of the company have in the property of judgment negatives (r) [1924] 8 T. C. 704, 710. (2) [1950] S. C. R. 869, 904. 1954 Bacha F. Gui:.dar v. Commissioner of Income-tax~ BomOtg. Ghulam Hll.fanJ. 882 SUPREME COURT REPORTS [1955} forming It is the voice m administering statement does the sole determining affairs of the company and are entitled, as provided by the Articles of Association, to declare that dividends should be distributed out of the profits of the company to the shareholders but the interest of the shareholder either individually or collectively does not amount to more than a right to participate in the profits of company. The company is a juristic person and is. distinct company shareholders. which owns the property and not the shareholders. The dividend is a share of the profits declared by the company as liable to be distributed among the holders. Reliance is placed on behalf of the appellant on a passage in Buckley's Companies Act, 12th Ed., page 894, where the etymological meaning of, dividend is given as dividendum, the total divisible sum but its ordinary sense it means the sum paid and received as the share of the divisible sum the quotient payable to the recipient. This justify the contention that shareholders are owners of a divisible sum or that they are owners of the property of the company. The proper approach to the solution of the question is to concentrate on the plain words of the definition of agricultural income which connects in no uncertain language revenue with which it directly springs and a stray observation in a case which has no bearing upon the present question does not advance the solution of the question. There Indian law to warrant the assump is nothing in the shareholder who buys shares buys any that a interest in tlle property of the company which is a juristic person entirely distinct from the shareholders. is that on buying The true position of a shareholder shares an to participate in the profits of the company in which he holds the shares if and when the to the company declares, subject the profits or any portion Articles of Association, thereof should be distributed by way of dividends among the shareholders. He has undoubtedly a further right to participate in the assets of the company which rvould be left over after winding up but not in the assets as a whole as Lord Anderson puts it. investor becomes entitled I .. • S.C.R. SUPREME COURT REPORTS 883 The High Court expressed the view that until a dividend is declared there is no right in a shareholder to participate in the profits and according to them the declaration of dividend by the company is the effective source of the dividend which is subject to tax. This Indeed statement of the law we are unable to accept. that he was the learned Attorney-General not prepared to subscribe to that propos1t1on. The declaration of dividend is certainly not the source of to participation in the profits the profit. The right exists independently of any declaration by the com pany with the that the enjoyment of only difference profits is postponed until dividends are declared. conceded 1954 Bacha F. Guzdar v. Commissioner of lnconu-tax, Bomhqy. Ghulam Hasan J. •• It was argued that the position of shareholders in a company is analogous to that of partners inter se. This analogy is wholly inaccurate. Partnership is merely an association of persons for carrying on the business of partnership and in law the firm name is a compendious is, however, method of describing the partners. not the case of a company which stands as a separate In juristic entity distinct Halsbury's Laws of England, Volume 6 (3rd Ed.), page 234, the law regarding the attributes of shares is thus stated : shareholders. Such "A share is a right to a specified amount of carrying with it certain share capital of a company rights and liabilities while the company is a going concern and in its winding up. The shares or other are personal interest of any member in a company estate transferable in articles, and are not of the nature of real estate." the manner provided by that "a share in a company In Borland's Trustee v. Steel Brother/ & Co. Ltd. (1), Farwell J. held connot properly be likened to a sum of money settled upon in the and subject to executory limitations to future; it is rather to be regarded as the interest of shareholder in the company, measured, for the pur liability and dividend, by a sum of money poses of ......................... " dividend arises out of the profits accruing from and is impressed with the same character as the profits It was suggested (1) L. R. [1901] I Ch. 279. 1954 Bacha F. Guzdar v. Commissionn nf lncorru-tax, Bombqy. Chulam Hasan J. 884 SUPREME COURT REPORTS fl9551 it does income which - emphasizes not change its character merely because of the incident that it reaches the hands of the shareholder. This argument runs counter to the defini agricultural tion of a direct necessity of the recipient of income having remote and an immediate rather than an indirect and relation with land. To accept argument will recovering be tantamount to saying that the creditor agriculturist interest on money debt due from who pays out of the produce of the land is equally entitled to the exemption. In fairness to Mr. Kolah it must, however, be stated that the contention was not so broadly put but there is no reason why one should stop at a particular stage and not pursue the analogy to its logical limits. language of the English decisions resting upon the peculiarities of Income-tax law can hardly be a safe guide the English in determining Indian Income-tax Act the true meaning of the words 'agri cultural income.' A few cases of the Privy Council decided with reference to the provisions of the Indian Income-tax Act, howeyer, deserve notice_ The first -case, viz., Commissioner of Income-tax, Bihar and Orissfl v. Raja Bahadur Kamakshya Narayan Singh and Others( 1 ), dealt with the question whether interest on land used for .arrears of rent payable. in respect income . and agricultural purposes is agricultural It was held that it was fore exempt from income-tax. neither rent nor revenue derived from land within tl1e meaning of section 2(1) of the Income-tax Act. Lord Uthwatt who delivered judgment of the Privy Council used the following piquant language in coming to that conclusion : "The word 'derived' is not a term of art. Its use in the definition indeed demands an enquiry into genealogy of the product. But the enquiry should stop In the as soon as _genealogical tree of the interest land indeed appears effective the second degree, but the the accident of ~ource is rent, which has immediate and suffered the effective source is discovered. (1) [1948] 16 I. T. R. 325. •• • S.C.R. SUPREME COURT REPORTS 885 non-payment. And meaning of the definition." not land within 1951 Bacha F. Guzdar v. Commissioner of Income-tax, Bombay. Ghu/am Hasan]. .. , - The second case, viz., Premier Construction Co Ltd. v. Commissioner of Income-tax, Bombay City('), dealt with the nature of the commission of a managing agent of the company a part of whose income was agricultural income. The assessee claimed exemption from tax on the ground that his remuneration at 10 per cent. of the profits was calculated with reference the income of the company part of which was agricultural income. It was held agricultural income as defined by the Act but that he received a remuneration under .a contract service for personal ·calculated on the amount of profits earned by the employer, payable n.ot in specie out of any item of such profits, but out of any moneys of the employer avail able for the purpose, and that the remuneration income and was not exempt fore was not agricultural above case ·observed :, tax. Sir John Beaumont received no the assessee in the "In the principle their Lordships' view to be derived from a consideration of the terms of the Income tax Act and the authorities referred to is that where an .asses see receives income, not itself of a character to fall within the definition of agricultural income contained in the Act, such income does not assume the character of agricultural income by which it -calculated." is derived, or the method by which it reason of the source In the third case, viz., Maharajkumar Gopal Saran Narain Singh v. Commissioner of Income-tax, Bihar and Orissa(2), an annual payment for life to the assessee was income and therefore not not held to be agricultural ·exempt from tax where the arose out of a transfer made by the assessee of a portion of his estate for discharging his debts and for obtaining an adequate income for his life it being held that it was not rent or land but money paid under a revenue derived -contract imposing personal liability on the convenantor the discharge of which was secured by a charge on annuity (1) [1948] 16 I. T. R. 380 (2) [1935] 3 I. T. R. 237. 1954 .J!acha F. Gut:dar v. Commissioner of lnco~-tax, Bombqy. G!mlam H(JjarJ J. .. •. • - 886 SUPREME COURT REPORTS [1955T the ground income-tax en land. But reliance was placed upon another judgment of the Privy Council in the same volume at page 305 in Commissioner of Income-tax, Bihar and Orissa v. Sir Kameshwar Singh('). That was a case of a usufruc by whom were tuary mortgagee the profits received exempt that they were agricultural income in his hands. Lord Macmillan, the Act, observed after referring to certain sections of that "the result of those sections to exclude agricul the scope of the Act howsoever or by whomsoever it may be received." These observations must be held to be confined to the a case of facts of that particular usufructuary m()rtgagee who had profits directly from the land. The obvious implication of the that whosoever words used by Lord Macmillan was the land directly is entitled to the receives profit from exemption. income altogether from case which was received Reference was also made to some English decisions but they have no bearing upon the present case as they were founded on the English Income-tax law and provisions of the particular statute. 16, that dividend the provisions of section section compels the assessee learned Attorney-General also contended The is not agricultural income the conclusion also follows from section (2) and the proviso to the Act. According to to show in his him, this return the whole dividend including the portion which the ground of agricultural income. We is excluded on do not consider it necessary to express any opinion contention as our conclusion reached as a upon this result of the foregoing discussion is sufficient to dispose of the appeal. We accordingly dismiss the appeal with costs. Appeal dismissed. (t) [1935] 3 I. T. R. 305.