Tambe, J.
1. The question framed by the Bombay Income-tax Appellate Tribunal and referred to us under section 66(1) of the Indian Income-tax Act, 1922 (hereinafter referred to as the Act), is :
'Whether the net dividend income of Rs. 47,120 accrued to the assessee in the former Baroda State, or whether it is income accrued or deemed to have accrued to the assessee in British India ?'
2. Mrs. Kusumben D. Mahadevia, hereinafter referred to as the assessee, was at the material time a resident of Bombay. In the assessment year 1950-51, the previous year being the calendar year 1949, the assessee was assessed to a total income of Rs. 1,50,765, which included a grossed-up dividend income of Rs. 1,47,026. Included in this dividend income was a net dividend income of Rs. 47,120, being the total amount of three dividends received by the assessee on 760 shares of Mafatlal Gagalbhai & Co. Ltd. is a private limited company incorporated under the Indian Companies Act. Its registered office is in Bombay. The shares of this company are mostly held by the members of the late Shri Mafatlal Gagalbhai. The meetings of the board of directors and the shareholders are usually held in Bombay. Its income was derived mainly from the dividend received by it from the joint stock companies of which it held shares and from property in Bombay. One of the several joint stock companies, of which Mafatlal Gagalbhai & Co. Ltd., held shares, was incorporated in the former Baroda State and operated in that State. The dividends received by Mafatlal Gagalbhai & Co. Ltd. on the shares held by it in the Baroda company were not brought into British India by Mafatlal Gagalbhai & Co. Ltd. but they were kept in the Baroda State. In the year 1949, Mafatlal Gagalbhai & Co. Ltd. declared dividends out of these accumulated profits held by it in the Baroda State, by three resolutions, which are in the following terms :
(1) Resolution passed at the extraordinary general meeting of the shareholders of Mafatlal Gagalbhai & Co. Ltd. held on March 25, 1949, at the office of M. G. Investment Corporation Ltd., Navsari (in the former Baroda State) :
'That a further dividend of Rs. 17 per ordinary share free of income-tax for the year 1947, be and is hereby declared absorbing Rs. 4,29,250 and the same be payable in Navsari out of the profits of the year 1947 lying at Navsari.' (2) Resolution passed at the extraordinary general meeting of the shareholders of Mafatlal Gagalbhai & Co. Ltd., held on April 29, 1949, at the office of M. G. Investment Corporation Ltd., Navsari :
'That a further dividend of Rs. 24 per ordinary share free of income-tax for the year 1948, be and is hereby declared absorbing Rs. 6,06,000 and the same be payable in Navsari out of the profits of the year 1948 lying at Navsari with Messrs. M. G. Investment Corporation Ltd. on and after 30th April, 1949.' (3) Resolution passed at the board of directors of Mafatlal Gagalbhai & Co. Ltd. at a meeting held on April 29, 1949, at the office of M. G. Investment Corporation Ltd., Navsari : 'Resolved that an ad interim dividend of Rs. 21 per ordinary share free of income-tax absorbing Rs. 5,30,250 be and is hereby declared for the year 1949 out of the income of the company for the year 1949, remaining unwrought with Messrs. M. G. Investment Corporation Ltd., Navsari, and that the same be payable in Navsari on and after 30th April, 1949.'
3. By virtue of the three resolutions, the assessee received at Navsari in the calendar year 1949, Rs. 47,120 by way of dividend on her 760 shares of Mafatlal Gagalbhai & Co. Ltd. This amount she did not bring into British India, but on the other hand, she kept it in the former Baroda State.
4. It was contended on behalf of the assessee before the Tribunal that inasmuch as the dividends in question were declared out of the accumulated dividends which had accrued in the Baroda State and which were not brought into British India, the dividend income of Rs. 47,120, which the assessee received from Mafatlal Gagalbhai & Co. Ltd. accrued to her in the former Baroda State. The assessee also further contended that if this contention of the assessee was accepted, the assessee would be entitled to certain concessions granted by the Merged States (Taxation Concessions) Order, 1949. The Tribunal held that Mafatlal Gagalbhai & Co. Ltd. received certain income, a part of it accrued in British India, and a part of it accrued in the Indian State. It is out of the composite profits that a shareholder is entitled to receive dividends. The dividend income of the assessee, therefore, did not accrued to her in the former Baroda State. The Tribunal further pointed out that the assessee has paid for and acquired shares of the company in British India and was thus holding an asset in British India and that the income was from that asset. In view of its finding that the dividend did not accrued to her in the Baroda State, the Tribunal did not go into the second contention of the assessee that she was entitled to certain concessions granted by the Merged States (Taxation Concessions) Order, 1949. On an application made by the assessee under section 66(1) of the Act, the Tribunal held that, in its opinion, a question of law reproduced above, did arise. It, therefore, drew up a statement of the case agreed to by the parties and referred it to this court. The reference came up for hearing before this court on 28th September, 1955. This court took the view that it was necessary first to consider the applicability of the Merged States (Taxation Concessions) Order, 1949, to the case of the assessee before proceeding to answer the question referred to it. It therefore re-framed the question covering both the aspects of the case. The matter was further heard on 28th February, 1956, and this court held that the aforesaid order had no application to the case of the assessee, and accordingly, answered the re-framed question in the negative. The matter was taken up in appeal to the Supreme Court, and the Supreme Court held that the question of accrual of income has to be decided under the Income-tax Act, and has but little to do with the Concessions Order. In this view of the matter, the Supreme Court has remitted the case to decide the question originally framed by the Tribunal which we have reproduced above. We are here thus not concerned as to whether the said amount of Rs. 47,120 is chargeable to tax under the Indian Income-tax Act, or States (Taxation Concessions) Order, 1949. The only question with assessee in the former Baroda State, or whether it is income accrued or deemed to have accrued to the assessee in the then British India. The question thus framed is in two parts, firstly, whether the said income accrued to the assessee in British India or in the former Baroda State, and secondly, even if it has, in fact, accrued to her in the former Baroda State, whether it can be deemed to have accrued to the assessee in British India under the provisions of the Income-tax Act.
5. On the first aspect of the question it is the contention of Mr. Palkhivala that in view of the facts that the dividend was declared in Baroda State out of the profits earned and retained in Baroda State, paid in Baroda State and kept by the assessee in Baroda State, the said income accrued to the assessee in Baroda State. It is his argument that the source of the dividend income is not the shares but the declaration of the dividend made by Mafatlal Gagalbhai & Co. Ltd. In the alternative, his argument is that even if the source of the dividend income is the share, the situs of the share has no relevance as the tax is not on the corpus. The income may accrued at a place different from the place of location of the source. He referred us to certain observations in Governor-General in Council v. Raleigh Investment Co. Ltd., Commissioner of Income-tax v. Chunilal B. Mehta and Commissioner of Income-tax v. Major K. C. Goldie. On the other hand, the contention of Mr. Joshi is : Mafatlal Gagalbhai & Co. Ltd. is a company registered under the Indian Income-tax Act. Its registered head-office is in Bombay. The assessee is a resident of Bombay. She had purchased the shares in Bombay. The dividends are normally declared in the meetings held in Bombay and also are usually paid in Bombay. The sites of the shares held by the assessee is Bombay. Thus the source of the assessee's income is in Bombay, i.e., British India. The income, therefore, has accrued to the assessee in Bombay, i.e., in British India. The facts that the three meetings were held in Baroda State, or that the funds were kept in Baroda State, or that the dividends were made payable in Baroda State, has no relevance in determining the place of accrual of the dividend income.
6. Now, the word 'source' used in relation to a dividend income an have more than one meaning. Section 4, the charging section of the Act, provides that subject to the provisions of the Income-tax Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived. Section 6 enumerates the heads of income chargeable to income-tax and provides that 'save as otherwise provided by this Act, the following heads of income, profits and gains shall be chargeable to income-tax in the manner hereinafter appearing'. It then details six heads. It thus appears that in the Act, the expression 'source' and the expression 'heads of income' are used in one and the same sense and it means property, movable or immovable, belonging to an assessee or the activity of an assessee that yields or brings income to him, within the meaning of the Act. Therefore, the source of the said dividend income of Rs. 47,120 of the assessee is the packet of the said 760 shares held by her in Mafatlal Gagalbhai & Co. Ltd., which brings the said income to her. In the other sense, speaking generally, the source of dividend income may mean the fund out of which the dividend is paid to an assessee. In this sense, the source of the said dividend income of the assessee is the accumulated profits held by Mafatlal Gagalbhai & Co. Ltd. It is true that a shareholder is not entitled to receive dividend till it has been declared, but that, in our opinion, cannot, in any way, mean that a declaration of the dividend is the source of dividend income. In Bacha F. Guzdar v. Commissioner of Income-tax the Supreme Court observed :
'The declaration of dividend is certainly not the source of the profits. The right to participation in the profits exists independently of any declaration by the company with the only difference that the enjoyment of profits is postponed until dividends are declared'
7. and at page 4 of the report, it has been observed :
'In fact and truth dividend is derived from the investment made in the shares of the company and the foundation of it rests on the contractual relations between the company and the shareholder.'
8. In Bradbury v. English Sewing Cotton Company Ltd., their Lordships of the Privy Council observed :
'A share or a parcel of stock is an incorporeal thing, carrying the right to a share in the profits of a company; and where the company is, there the share is also, and there is the source of any dividend paid upon it.'
9. We are here concerned with ascertaining the source of the assessee's income within the meaning of the Act, and that, as already stated, is the packet of 760 shares held by the assessee. The declarations of dividend cannot, in any sense, be the source of that income.
10. It is not in dispute that the situs of the shares held by the assessee is Bombay, where the share register of Mafatlal Gagalbhai & Co. Ltd. is kept and maintained. But, it is not possible to hold that income from or profits of a source would necessarily accrued or arise at the place where the source is located. The question has been elaborately considered by their Lordships of the Privy Council in Commissioner of Income-tax v. Chunilal B. Mehta. The facts of that case were that the assessee was residing and carrying on business in Bombay. As regards the speculation business, the assessee did it on his own account as well as on the account of his constituents. He carried on his business not only with the parties in British India, but also with the parties outside British India, i.e., Liverpool, London and New York, and profit and loss from such business, as was done on his own account, was his. Profits were earned by him by his operations on the New York Cotton Exchange. The assessee did not bring them to India, but retained them in America. The question arose as to his liabilities to pay tax on these profits earned by him as a result of his operations on the New York Cotton Exchange. It may be stated that the position then was that an assessee was liable to pay tax only if income was received in India or brought to India or arose or accrued to him in British India. Admittedly, the said profits were neither received by the assessee in British India nor brought by him to British India. It was, however, contended by the revenue that the said profits earned by the assessee in the foreign transaction were part of the profits of his Bombay business, which was located in British India, and, therefore, the said profits had accrued in British India. After examining the relevant sections of the Income-tax Act, their Lordships held that the provisions of the Indian Income-tax Act do not mean that the situation of the source of the profits should determine the place where the profits arose or accrued. At page 530 of the report, it has been observed :
'To answer the question, 'Do these profits accrued or arise in British India ?' by asking another, 'What in the sense of section 6 is the source of these profit and is it situate in British India ?' is to divert attention from that to which the statute points and to devote attention to what it discards. Nothing could be easier than to say 'from whatever source derived if situate in British India' had this been intended.'
11. Mr. Joshi, however, tried to take the instant case out of the aforesaid observations and the decision of their Lordships by saying that they had relevance only in a case where business is the source of the income and has no application to the cases where the source of the income is other than business. We are unable to accept this contention of Mr. Joshi. Their Lordships, after examining the various relevant provision of the Act, have generally considered the question whether the test of chargeability is that profits arise or accrued at a place where the source is situate. In our opinion, therefore, the fact that the situs of the shares held by the assessee is in Bombay would not by itself lead to the conclusion that the dividend income of those shares accrued to the assessee in Bombay. At page 527 of the aforesaid report, it has been observed :
'Profits.... accruing or arising in British India' are words which in their ordinary meaning seem to require a place to be assigned as that at which the result of trading operation comes, whether gradually or suddenly, into existence.'
12. We have here to ascertain the place at which the result of the investment activity of the assessee, i.e., the dividend income amounting to Rs. 47,120, came into existence and it will be that place where the income can be said to have accrued to the assessee. We have already reproduced the observations of their Lordships of the Supreme Court that the right of a shareholder to participate in the profits by getting dividend is derived from the investment made by him in the shares and the foundation of it rests on the contractual relationship between the company and the shareholder. But the enjoyment of that right and getting profits in hand is postponed till the dividends are declared. A declaration of a dividend thus brings into existence the results of the investments made by an shareholder. It is not in dispute that, once the dividend is declared by a company, it becomes a debt payable by the company to its shareholders. We have not been shown nor are we aware of any legal bar against a company from holding meetings of its directors or shareholders at a place other than at the head-office. Unless dividend is declared no shareholder is entitled to enforce payment of dividend. There is also no bar against a company making its dividend payable at a place other than its head-office. Therefore, even after dividend is declared, there would be no legal right in a shareholder to enforce its payment at a place other than the place at which the company had made its dividend payable. The place where a dividend is declared and the terms of the declaration, including the place at which the dividend is made payable to the shareholder, would therefore necessarily be relevant factors in determining the date and the place of accrual of dividend income. The legislative history of bringing on the statute book the third explanation to sub-section (1) of section 4 of the Act and the language in which it is couched, lends support to our view that the place where the dividend is made payable has relevance in determining the place of accrual of dividend income. One Major Goldie, a resident of the United Kingdom, held shares in a company registered in the United Kingdom, but doing business in British India. The company had its shares registered in London. On its business in India, the company declared dividends in London and paid them at its head office in London. The question arose whether the said dividend income of Major Goldie, under the Act, was chargeable to tax and the answer turned on the question whether the dividend income accrued to him in British India or outside British India. If the answer was that the income accrued in British India, the dividend income was taxable. If the answer was that the income accrued outside British India, the income was not taxable. The matter came up before this court in Commissioner of Income-tax v. Major K. C. Goldie and it was held that the said dividend income of Major Goldie was not income which accrued or arose in British India and therefore was not taxable. The third explanation to sub-section (1) of section 4 was introduced in the statute book in 1939 to get over the effects of this decision. Its constitutionality has been upheld by the Federal Court in Governor-General in Council v. The Raleigh Investment Co. Ltd. The explanation as it then stood was in the following terms :
'A dividend paid without British India shall be deemed to be income accruing and arising in British India to the extent to which it has been paid out of profits subjected to income-tax in British India.'
13. This explanation has been further amended, but those amendments are not relevant for the purpose of the decision of this issue. It is clear that a dividend paid outside British India could not, in fact, be said to have accrued to the shareholders in British India, and to get over that difficulty, by this explanation a legal fiction was created and the same was treated as if to have accrued in British India, provided certain conditions stated in the explanations were fulfilled. Navsari was in Baroda State on the dates the three dividends were declared. They were made payable at Navsari. The dividend income of the assessee, therefore, in our opinion, accrued to her at Navsari, a place in the former Baroda State. Thereafter, by virtue of the State Merger (Governors Provinces) Order, 1949, promulgated and published on 27th July, 1949, the former Baroda State merged in the Province of Bombay and became part and parcel of the said province from 1st August, 1949.
14. It is, however, contended by Mr. Joshi that, even assuming that the dividend income had, in fact, accrued to the assessee in the former Baroda State, in law, it accrued to her in British India and, in this connection, he referred to certain provision of the Act and certain amendments introduced in the Income-tax Act. Clause (3A) of the section 2 of the Income-tax Act modified up to 1st July, 1948, defined 'British India' as follows : 'British India means, as respects any period before the 15th day of August, 1947, the territories then referred to as British India but including Bear, and as respect any period after 14th day of August, 1947, the territories for the time being comprised in the Provinces of India.' The Taxation Laws (Extension to Merged States) Ordinance, XXI of 1949, was promulgated and published in the Gazette of India, Extraordinary, dated 26th August, 1949. By sub-section (1) of section 3 of the Ordinance, the Indian Income-tax Act, 1922, and all rules and orders made thereunder, which were in force immediately before the commencement of this Ordinance, were extended and brought into force in all the merged States. Sub-section (2) of section 3 of the Ordinance provided that the Indian Income-tax Act, 1922, and the Indian Finance Act, 1949, and all rules and orders made thereunder, shall operate as if they had been extended to and brought into force in all the merged States on the first day of April, 1949. Section 5 provided that the amendments specified in the First Schedule shall be made in the Indian Income-tax Act, 1922, and shall be deemed to have been made therein with effect from the 1st day of April, 1949. The amendment to the Income-tax Act, mentioned in the Schedule, introduced a proviso to clause (3A) of section 2 of the Income-tax Act, i.e., the definition of 'British India'. The proviso was in the following terms :
'Provided that, as respects any period included in the previous year for the purpose of making any assessment for the year ending on the 31st day of March, 1950, or for by subsequent year, and as respects any period after the 31st day of March, 1949, for the purposes of this Act, the merged States shall be deemed to be territories comprised in the Provinces of India.'
15. On the basis of these provisions, Mr. Joshi argued that from 1st April, 1949, the former Baroda State was treated as a part of the Bombay State for the purposes of the Income-tax Act and that the dividends declared thereafter in the meeting held on 29th April, 1949, therefore, accrued to the assessee, in law, British India. We find it difficult to accept this contention of Mr. Joshi also. As ready stated, the territories of Baroda State did not, in fact, merge in the Province of Bombay till the 1st day of August, 1949. The three dividends were declared before the 1st August, 1949. The dividend income, therefore, cannot be said to have, in fact, accrued to the assessee in British India. It is true that by virtue of the above-referred provisions of the Taxation Laws (Extension to Merged States) Ordinance, 1949, as promulgated and published on 26th August, 1949, the Indian Income-tax Act has been extended and brought into force in all the merged States including the Baroda State and further a legal fiction has been created that the Indian Income-tax Act shall operate in the merged States as if it had been extended and brought into force in the merged States on the 1st April, 1949. These provisions of law, in our opinion, only create a legal fiction and, by that legal fiction, the territories of the merged States including the territories of the marked State of Baroda might be treated as a part of the Bombay Statue for the purpose of assessment. But, that cannot affect the factual position that, on the dates these dividends accrued to the assessee in the former Baroda State, it was not part of then British India. At the most, all that can be said for the revenue is that the dividend income, which accrued to the assessee by virtue of the two resolutions of 29th April, 1949, be deemed to have accrued to the assessee in British India, but that is not relevant to the consideration of the first part of the question. In our opinion, therefore, so far as the first aspect of the question is concerned, it cannot be said that the said dividend income or any part thereof had accrued to the assessee in British India. On the other hand, for reasons stated above, in our opinion, the said dividend income in its entirety accrued to the assessee in the former Baroda State.
16. And this brings us to the second aspect of the question, i.e., whether the said income be deemed to have accrued to the assessee in British India. In view of our finding that the source of the dividend income are the shares held by the assessee in Mafatlal Gagalbhai & Co. Ltd. and in view of the admitted position that the sites of those shares was in Bombay, there can be no manner of doubt that the said dividend income is an income deemed to have accrued to the assessee in British India by virtue of the provisions of sub-section (1) of section 42 of the Act. Mr. Palkhivala, during the course of this arguments, frankly conceded that in the event we hold that the source of the said dividend income are the shares held by the assessee, then, on the terms of sub-section (1) of section 42, the said income can be deemed to have accrued to her in British India. It is, however, his argument that sub-section (1) of section 42 has no application to dividend income of an assessee. Sub-section (1) of section 42 is a general provision. The third explanation to sub-section 4 is a special provision relating to dividend income of an assessee paid without the taxable territories. On a well established principle of construction the special provision will have to be taken as an exception to the general provision and that takes out the case of such a dividend income of an assessee out of the scope and ambit of sub-section (1) of section 42. It is his argument that to hold otherwise would result in stultifying the clear mandate given by the third explanation to sub-section (1) of section 4. The third explanation, as it stood, at the material time, and even now stands reads as follows :
'Explanation 3. - A dividend paid by an Indian company without the taxable territories shall be deemed to be income accruing and arising in the taxable territories to the extent to which it has been paid out of profits subjected to income-tax in the taxable territories.'
17. The Adaptation of Laws Order, 1950, promulgated on 26th January, 1950, introduced certain changes in the Income-tax Act. The expression 'taxable territories' was substituted for the expression 'British India'. Clause (3A) defining 'British India' was omitted. After clause (14), clause (14A) was inserted into defamed 'taxable territories'. We are here concerned with a period after 14th August, 1947, and before 26 January, 1950. The definition of 'taxable territories' so far as it relates to this period is in the following terms :
'14A. 'Taxable territories' means - (i)..... (ii) as respects any period after the 14th day of August, 1947, an before the 26th day of January, 1950, the territories for the time being comprised in the Provinces of India....'
18. The dividends have been declared on 25th March, 1949, and 29th April, 1949. As already stated, on these dates, the former Baroda State was not a part of the then Bombay Province. The dividend declared and paid us this State would, therefore, be dividend paid without the taxable territories. The dividend is paid by Mafatlal Gagalbhai & Co. Ltd., which admittedly is an Indian company. It is the argument of Mr. Palkhivala that this explanation applies to shareholders who are residents as well as those who are non-residents within the meaning of the Act. The cases of the assessee, therefore, falls fully within the ambit of this explanation and therefore will have to be decided only in accordance with the terms of this explanation. Every dividend paid by an Indian company without the taxable territories cannot be deemed to be accruing or arising in the taxable territories. It is only such dividend or that part of the dividend which has been paid out of the profits subjected to income-tax in the taxable territories. The statement of the case shows that the profits of Mafatlal Gagalbhai & Co. Ltd., out of which the dividend income had been paid to the assessee, was not subjected to income-tax in the taxable territories. In these circumstances, the assessee's dividend income cannot be deemed to be income accruing or arising in the taxable territories. On the other hand, it is the contention of Mr. Joshi that the third explanation has application only to such cases where the dividend is paid by an Indian company without the taxable territories to a shareholder who is a non-resident within the meaning of the Income-tax Act. In our opinion, the contention raised by Mr. Joshi is well founded. It is true that the third explanation is sufficiently widely worded to include payment of dividends to shareholders who are residents as well as shareholders who are non-resident within the meaning of the Act. But then, in our opinion, to understand the true scope and ambit of this explanation, it will have to be read in the context of the other provisions of sub-section (1) of section 4, to which it is an explanation and, when so read, it becomes clear that this explanation has application only to cases where dividend is paid to non-resident shareholders by an Indian company without the taxable territories. Section 4 is the charging section. The income of both residents as will as non-residents is charged to tax, when certain conditions are fulfilled. Under clause (a) of sub-section (1) of section 4, the income of both residents as well as non-residents is subjected to tax when received or deemed to be received in the taxable territories by him or on his behalf. Clause (b) of sub-section (1) deals with the cases of resident assessee. Sub-clause (2) of clause (b) renders chargeable to tax the income of the resident-assessed even if it has accrued to him without the taxable territories. Having regard to all the three sub-clauses of clause (b), the world income of a resident-assessed whether accrued to him within the taxable territories or without it is chargeable to tax. Clause (c) relates to the case of a non-resident assessee and it enacts that the income of a non-resident, which is not received by him or deemed to have been revived by him in the taxable territories, can be taxed only if it accrued to him or deemed to accrued or arises or him in the taxable territories during such year. It would thus be seen that, under sub-section (1) of section 4, the question as to whether a particular income deemed to have accrued to an assessee in a taxable territory or not would arise only in the case of a non-resident assessee. The third explanation, which is an explanation to sub-section (1) of section 4, relates to this subject-matter. That being the position, in our opinion, the third explanation would have application only to the cases where the dividend is paid to non-resident shareholder by an Indian company without the taxable territories. The assessee admittedly is a resident within the meaning of the Act. The case of the assessee, therefore, does not fall within the purview of the third explanation. The provisions of sub-section (1) of section 42 are applicable to her case. The aforesaid income of Rs. 47,120 is, therefore, an income deemed to have accrued to the assessee in British India.
19. In the result, our answer to the question is that the net dividend income of Rs. 47,120 though, in fact, accrued to the assessee in the former Baroda State, is an income deemed to have accrued to her in British India.
20. The assessee shall pay the costs of the department.
21. Questions answered accordingly.