Mehrotra, C.J.
1. The following questions of law have been referred to us under Section 66(1) of the Indian Income-tax Act, 1922 (hereinafter called ' the Act '), for opinion :
' (1) Whether, on the facts and in the circumstances of the case, and upon a true interpretation of the provisions of the second proviso to Section 34(3), the assessment for the year 1955-56 on the applicant Hindu undivided family made on February 6, 1961, pursuant to an order under Section 27 cancelling the assessment of Sri S. M. Saharia, as an individual, was barred by limitation ?
(2) Whether, on the facts and in the circumstances of the case, and on a true interpretation of the terms of Section 2(6A)(e) of the Income-tax Act, 1922, the Tribunal was right in holding that the amounts of Rs. 2,21,702 (gross) and Rs. 3,43,505 (net) were taxable as dividends in the hands of the applicant Hindu undivided family for the assessment years 1955-56 and 1956-57, respectively, when the shares were registered in the name of Sri S. M. Saharia, the karta of the family ?
(3) Whether, on the facts and in the circumstances of the case, there was any material before the Tribunal to justify the conclusion that Sri S. M. Saharia was holding shares in Messrs. Shyam Sundar Tea Co. (Private) Ltd. in his capacity as karta of the applicant family consisting of himself and his minor son ?
(4) Whether, on the facts and in the circumstances of the case, there was any material before the Tribunal for the finding that the applicant family was the beneficiary uptill August 16, 1955, in respect of 50 shares registered in the name of Sri S. M. Saharia on May 16, 1953, before the disruption in the joint status of the family of Hanutram Ramprotap ?
(5) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the Hindu undivided family of Hanutram Ramprotap was not a shareholder in Messrs. Shyam Sundar Tea Company (P.) Ltd. uptill August 16, 1955 ?
(6) Whether, on the facts and in the circumstances of the case, in computing the accumulated profits of Messrs. Shyam Sundar Tea Company (P.) Ltd. within the meaning of Section 2(6A)(e), the Tribunal acted rightly in refusing to allow:
(a) deduction in respect of loans advanced by the said company to the erstwhile family of Messrs. Hanutram Ramprotap which amounted to Rs. 3,60,989 as at December 31, 1954, and increased to Rs. 3,80,567 as at August 16, 1955, and written off at the end of the year 1955 ;
(b) deduction in respect of Rs. 51,049 and Rs. 66,206 for the assessment years 1955-56 and 1956-57, respectively, being the difference between
the written down value of depreciable assets of the said company as per income-tax records and their book value ?'
2. The material facts disclosed in the statement of the case are that the assessee, Messrs. Rameshwarlal Sanwarmal, is a Hindu undivided family represented by its karta, Sri Sanwarmal Saharia. The reference relates to two assessments for the years 1955-56 and 1956-57. Point No. 1 arises only in connection with the assessment for the year 1955-56. The corresponding accounting year for 1955-56 is the Ramnavami year 2011 (ending on March 31, 1955) and the corresponding accounting year 1956-57 is the Ramnavami year 2012 (ending on April 18, 1956). The necessary facts for answering the question No. 1 are that on the 27th December, 1955, the Income-tax Officer, Special Survey Circle, Shillong, issued a notice under Section 22(2) of the Act to Sri Sanwarmal Saharia. By this notice the addressee was called upon to furnish a statement of his income during the previous year. Sri Sanwarmal Saharia filed no return in response to the aforesaid notice. A further notice under Section 22(4) of the Act for production of books was also not responded to and the Income-tax Officer made an ex parte assessment under Section 23(4) on 29th February, 1960. This assessment was made in the status of an 'individual'. The assessee was described in the assessment order as ' Sri Sanwarmal Saharia ' and the total income was estimated to be Rs. 3,17,548, On the 9th March, 1960, Sri Sanwarmal Saharia applied for cancellation of his ex parte assessment under Section 27 of the Act on the ground that there was no service of notice under sections 22(2), 22(4) and 23(2) and thus he has sufficient cause for non-appearance. He also pointed out that on the 29th October, 1959, a return had been filed on behalf of the Hindu undivided family. By an order dated the 16th December, 1960, the Income-tax Officer cancelled the ex parte assessment for the assessment year 1955-56. The Income-tax Officer held that as the ex parte assessment was made under Section 23(4) without issuing a notice under Section 23(2), it was void ab initio and was illegal. A fresh assessment was directed to be made after issuing notice under Section 23(2) of the Act. On the 6th February, 1961, the Income-tax Officer made a fresh assessment after issuing a notice under Section 23(2) for the assessment year 1955-56 and the Hindu undivided family of which Sri Sanwarmal Saharia was the karta was assessed to income-tax. The assessee was described as ' Sri Sanwarmal Saharia, karta of Messrs. Saharia & Company alias Rameshwarlal Sanwarmal(Hindu undivided family consisting of karta and a minor child)'. The total income was estimated at Rs. 2,70,333. The contention raised by the assessee was that the assessment made on the 6th February, 1961, was barred by limitation under the second proviso to Sub-section (3) of Section 34.
3. It cannot be denied that ordinarily the assessment for the year 1955-56 should have been completed on the 31st March, 1960, and as it was completed on the 6th February, 1961, it was beyond time. The assessee went up in appeal against the order of the Income-tax Officer making a fresh assessment on the 6th February, 1961, to the Assistant Commissioner. The Appellate Assistant Commissioner repelled the contention of the asses-see and held that the assessment was within time. As against that, an appeal was filed to the Income-tax Appellate Tribunal, 'A' Bench, Calcutta, which dismissed the appeal.
4. The material provisions of Section 34(3) are as follows :
'34. (3) No order of assessment or reassessment, other than an order of assessment under Section 23 to which Clause (c) of Sub-section (1) of Section 28 applies or an order of assessment or reassessment in cases falling within Clause (a) of Sub-section (1) or Sub-section (1A) of this section shall be made after the expiry of four years from the end of the year in which the income, profits or gains were first assessable: . . .
Provided further that nothing contained in this section limiting the time within which any action may be taken or any order, assessment or reassessment may be made, shall apply to a reassessment made under Section 27 or to an assessment or reassessment made on the assessee or any person in consequence of or to give effect to any finding or direction contained in an order under Section 31, Section 33, Section 33A, Section 336, Section 66 or Section 66A.'
5. Under Sub-section (3) of Section 34, therefore, all assessments or reassessments are to be made before the expiry of four years from the date of the relevant assessment year. If the sub-section stands by itself, admittedly the assessment made on the 6th February, 1961, would be barred by time. The department's contention is that the second proviso to Section 34(3) is attracted in the present case. The argument is that as the ex parte assessment was cancelled by the Income-tax Officer under Section 27 of the Act, the fresh assessment which was made, though of the Hindu undivided family, was an assessment made under Section 27. The return was filed by Sri Sanwarmal Saharia on the 29th October, 1959, as the, karta of the joint Hindu undivided family, Rameshwarlal Sanwarmal. The present assessment has been made on Sri Sanwarmal Saharia as karta of the Hindu undivided family and unless the present assessment on the 6th February, 1961, can be deemed in law to have been made under Section 27 of the Act, it will be barred by limitation. As disclosed in the statement of the case, on the 27th December, 1955, notice under Section 22(2) was issued to Sri Sanwarmal Saharia individually. The return was filed by him on the 29th October, 1959, as the karta of the Hindu undivided family. On the 29th February, 1960, ex parte assessment under Section 23(4) was made on
Sri Sanwarmal Saharia in the status of an individual. On the 22nd March, 1960, petition under Section 27 of the Act was filed by Sri Sanwarmal Saharia to cancel his ex parte assessment. Obviously this petition was filed by him in his individual capacity.
6. Section 27 of the Act reads as follows:
' 27. Where an assessee within one month from the service of a notice of demand issued as hereinafter provided, satisfies the Income-tax Officer that he was prevented by sufficient cause from making the return required by Section 22, or that he did not receive the notice issued under Sub-section (4) of Section 22, or Sub-section (2) of Section 23, or that he had not a reasonable opportunity to comply, or was prevented by sufficient cause from complying, with the terms of the last-mentioned notice, the Income-tax Officer shall cancel the assessment and proceed to make a fresh assessment in accordance with the provisions of Section 23. '
7. Under the scheme of the Income-tax Act an undivided family is a distinct entity for assessment from the individual members constituting the undivided family. Section 27 gives a right to an assessee who has been assessed to income-tax, to apply for the cancellation of the said assessment on certain grounds mentioned therein and it further gives a right to the Income-tax Officer in the event of his cancelling the assessment to direct a fresh assessment. The plain reading of Section 27 leads to the inference that the assessee who has been assessed to tax by an ex parte order, can apply under Section 27. In the present case the application was made by Sanwarmal Saharia for cancellation of the assessment order under Section 27 as an assessee who has been assessed to Inncome-tax by an order under Section 23(4). The application was thus not by the undivided Hindu family of which Sri Sanwarmal Saharia was the karta as till then the undivided Hindu family had not been assessed, but by Sri Sanwarmal Saharia as an individual and if that is so, the Income-tax Officer could only cancel the ex parte assessment against Sri Sanwarmal Saharia as an individual and direct a fresh assessment of Sri Sanwarmal Saharia as an individual. Any assessment made on the undivided Hindu family on the basis of the return filed by it on 29th October, 1959, cannot be said to be a fresh assessment under Section 27.
8. The Tribunal has mainly based its decision relying upon two decisions of the Allahabad High Court in the cases of Lakshman Prakash v. Commissioner of Income-tax, [1963] 48 I.T.R. 705 and Mukand Lal v. Income-tax Officer, 'A' Ward Varanasi, [1963] 49 I.T.R. 354. The facts of the case of Lakshman Prakash, were that for the year 1944-45 although a member of a Hindu undivided family had furnished a return as an individual, the Income-tax Officer assessed the income as that of a Hindu undivided family without making any inquiry as to whether it belonged to the family or to the member who had been assessed as an individual. The Hindu undivided family appealed and contended that the assessment was invalid as the income did not belong to the Hindu undivided family but belonged to the member as an individual. The Appellate Assistant Commissioner directed an inquiry to be made as to whether the income belonged to the family or to the member as an individual. The Income-tax Officer made an inquiry and found that the income did not belong to the family and assessed on the 24th January, 1952, the individual on the said income. The assessee went up in appeal against the order of assessment on the 24th January, 1952, on two grounds, firstly that the Appellate Assistant Commissioner could direct a fresh inquiry and fresh assessment under Clause (b) of Section 31(3) only in respect of the person who had appealed, namely, the Hindu undivided family in that case and not of any other person and thus the fresh assessment made was barred by limitation. The contention of the assessee was repelled. It was held by the Allahabad High Court that as the appellant was the Hindu undivided family and the Hindu undivided family is a compendious name given to all its members, the individual member of the family was also a party to that appeal and if that was so, the Appellate Assistant Commissioner had power under Section 31(3)(b) to direct fresh assessment of the member of the family. When the Appellate Assistant Commissioner directed an inquiry as to whether the income was that of the undivided family or of the individual the direction meant that the Income-tax Officer if he found that the income was that of the individual, could assess the individual. This case thus rests on the principle that an appeal filed by the undivided Hindu family in effect means an appeal by all its members. The Tribunal in the present case has also remarked that the case is a converse case. But the converse proposition of law enunciated by the Allahabad High Court appears to be equally applicable to the present case. We do not think that the same principle will apply to the present case. Even if it is assumed that when an appeal is filed by a joint family, each one of the members of the undivided family is an appellant, the same may not be true when the case is a converse one. If an appeal is filed by an individual against his assessment as an individual, by no principle of law it can be assumed that all the other members of the undivided family are appellants. Secondly, it is also significant to note that under Section 34(3) proviso, the substantive Section 34(3) is not attracted to a case where the fresh assessment is made on the assessee or any person in consequence of an order passed under Section 31. The words 'any person' are not applicable to the case where the fresh assessment is made under Section 27 The Allahabad High Court in the case referred to above had emphasised the words 'or any person' occurring in Section 34(3) proviso. If any person
has been assessed to income-tax in pursuance of an order under Section 31, the proviso to Section 34(3) will be attracted in his case. But the same may not be the case if any person other than the assessee on whose application the ex parte assessment has been cancelled, has been assessed to income-tax. It was for that reason that the argument in the Allahabad High Court was advanced that the member was no party to the appeal in his individual capacity and thus no order could be passed against him and any order passed against him under Section 31 was a nullity and thus the assessment against him was not in pursuance of an order under Section 31. The other argument advanced in the Allahabad case that the appellate authority was not competent to direct inquiry was also repelled. It should also be pointed out at this stage that their Lordships of the Supreme Court in the case of S.C. Prashar v. Vasantsen Dwarkadas, [1963] 49 I.T.R. (S.C.) 1 have held that the words ' any person' in the proviso to Section 34(3) are ultra vires.
9. Mr. Pathak's contention on behalf of the department further is that from the order passed by the Income-tax Officer under Section 27 of the Income-tax Act it will be clear that the Income-tax Officer has treated the return filed by Sanwarmal Saharia on the 29th October, 1959, on behalf of the undivided family as a return filed by him in his individual capacity and as when the ex parte order was passed the fact of the return being filed on the 29th October, 1959, was ignored, the ex parte assessment was held to be void and fresh assessment was directed to be made. Even if that be so, the result which follows from this contention is that it was Sri Sanwarmal Saharia as an individual who was to be assessed afresh and not the undivided Hindu family. It was not open to the Income-tax Officer to treat the return filed on the 29th October, 1959, to be one filed by Sri Sanwarmal Saharia as an individual and then on that basis assess the Hindu undivided family beyond four years. It being a return filed by the undivided family on the 29th October, 1959, the undivided Hindu family could only be assessed within four years. It was held by their Lordships of the Supreme Court in the case of Commissioner of Income-tax v. S. Raman Chettiar, [1956] 55 I.T.R. 630 (S.C.) that even though a notice under Section 34 was invalid, the return which was submitted in pursuance of that notice was a return within Section 22(3), and such a return could not be ignored and the notice under Section 34, issued on the assumption that there has been an omission or failure on the part of the assessee to make the return of his income under Section 22. The return thus filed by the undivided Hindu family could not be ignored and fresh assessment made on the basis of an order passed under Section 27 beyond four years of March 1956. In our opinion question No. 1 should be answered in the affirmative.
10. The second question arises in both the assessments for the years 1955-56 and 1956-57. This is directed against the inclusion of the sums of Rs. 2,21,702 (gross) and Rs. 3,43,505 (net) as the taxable income of the assessee as dividends under Section 2(6A)(e) of the Income-tax Act. The facts necessary to appreciate the point are that Sri Sanwarmal Saharia is the karta of the Hindu undivided family of Messrs. Rameshwarlal Sanwarmal, a joint family born of a bigger undivided family styled as Messrs. Hanutram Ramprotap on partition. On the 19th April, 1954, the members of the bigger undivided family referred the question of partition to arbitration and the actual partition was effected on the 16th August, 1965, when the award was given. During the existence of the bigger undivided family Sri Sanwarmal Saharia had received by transfer 50 shares of Messrs. Shyam Sundar Tea Company Ltd., on the 16th May, 1953. In the registers of the company the name of Sri Sanwarmal Saharia was entered as the shareholder. During the relevant accounting year, however, the bigger joint family had been disrupted and the smaller undivided family consisting of Sri Sanwarmal Saharia and his minor son came into existence. This family was the sole proprietor of three business concerns (1) Nilmoni Shop, (2) Saharia & Co, and (3) Saharia Industrial Corporation Co. Messrs. Shyam Sundar Tea Co. Ltd. had advanced certain amounts to these three business concerns which were owned and run by the undivided family of Shri Sanwarmal Saharia and his minor son. These sums of Rs. 2,21,702 and Rs. 4,84,045 after grossing up, were included in the total income of the undivided family for the assessment years 1955-56 and 1956-57 respectively. The contention of the assessee is that as the undivided family which owned these three business concerns was not entered as shareholder in the register of the company of Messrs. Shyam Sunder Tea Co. Ltd. (hereinafter called 'the company'), any advance made to the business which belonged to the undivided family cannot be deemed to be a dividend as defined by Section 2(6A)(e) of the Income-tax Act. Nor can it be taxed as a dividend income in the hands of the undivided family. It could only be taxed as a dividend income in the hands of Sri Sanwarmal Saharia as an individual as his name was entered as a shareholder in the share registers of the company.
11. The Appellate Assistant Commissioner confirmed the order of the Income-tax Officer directing inclusion of these amounts in the income of the undivided family, but reduced the quantum of the net dividend for the year 1956-57 to Rs. 3,43,505. The assessee went up in appeal to the Income-tax Appellate Tribunal and urged that the dividend in the hands of the shareholders registered as such in the books of the company could be assessed under Section 2(6A)(e) and as the undivided family was not a registered shareholder of the said company, the loan could not be added to
the income of the undivided family. It further urged that even assuming that Sri Sanwarmal Saharia represented the undivided family, when he owned 50 shares, he did so as a coparcener of the now defunct Hindu undivided family, Messrs. Hanutram Ramprotap, and the present Hindu family could not be held to be the owner of the 50 shares. It was also urged that the accumulated profits of the said company as at March 31, 1955, and March 31, 1956, were nil and, therefore, in any event, the Income-tax Officer was not justified in including any amount whatever in the total income of the assessee under Section 2(6A)(e).
12. The second and the third points raised by the assessee form the subject-matter of the other questions referred to us for opinion. The Tribunal held that during the accounting period Sri Sanwarmal Saharia was not holding the shares in the company as the nominee of the defunct bigger undivided family nor he was holding the shares in his individual capacity. In the circumstances the only possible conclusion according to the Tribunal was that Mr. Sanwarmal Sabaria was holding the shares in the capacity of the karta of the family consisting of himself and his minor son. Having, thus found, the Tribunal came to the conclusion that the advances made to Sri Sanwarmal Saharia which is included in the dividend under Section 2(6A)(e) of the Act is to be taxed in the hands of the real beneficiary, that is, the undivided Hindu family of which Sri Sanwarmal Saharia was the karta.
13. Section 2(6A)(e) of the Act provides that the ' dividend ' includes any payment by a company, not being a company in which the public are substantially interested within the meaning of Section 23A, of any sum (whether as representing a part of the assets of the company or otherwise) by way of advance or loan to a shareholder or any payment by any such company on behalf or for the individual benefit of a shareholder, to the extent to which the company in either case possesses accumulated profits. It is not disputed that the said company is not a company in which the public are substantially interested within the meaning of Section 23A. Section 2(6C)(i) of the Act provides that 'income' includes dividend. Section 12(1A) of the Act lays down that income from other sources shall include dividends, and any dividend declared by a company or distributed or paid by it within the meaning of Sub-clause (a) or Sub-clause (b) or Sub-clause (c) or Sub-clause (d) or Sub-clause (e) of Clause (6A) of Section 2, shall be deemed to be the income of the previous year in which it is so declared, distributed or paid, as the case may be. Reading these three sections together it will appear that any dividend declared or distributed or paid will be deemed to be the income by other sources and such a dividend whether it is actual or notional will be included in the income of the assessee. Section 2(6A)(e) regards the payment made to a shareholder as dividend.
14. The contention of the assessee is that the word ' shareholder' in Section 2(6A)(e) means a shareholder whose name is entered in the books of the company. An undivided family as such cannot be a shareholder in the company and it is not disputed that in the present case the name of Sanwarmal Saharia was entered in the registers of the company as a shareholder. It also cannot be disputed that the advance made to the 3 business concerns was made to the undivided family of which Sri Sanwarmal Saharia was the karta and not to him as an individual as these business concerns were owned by the undivided family. That being so, if the contention of the assessee is accepted that the word ' shareholder ' in Section 2(6A)(e) means the shareholder whose name is recorded in the books of the company, the advance in the present case made to the undivided family business cannot be regarded as a dividend and cannot be taxed in the hands of the undivided family, the beneficial owner of the shares, as a dividend income. The Tribunal's reasoning is that even though the payment made only to the registered shareholder can be regarded as a dividend, there is no bar to taxing the said advance made to the registered shareholder as the income of the beneficial owner when the amount is paid to the beneficial owner.
15. In my opinion this interpretation of Section 2(6A)(e) cannot be accepted. Before any payment can be regarded as a dividend income it must be an advance made to the registered shareholder. If the advance itself is made to a third party by the company, it cannot be deemed to be a dividend within the meaning of Section 2(6A)(e). Further even if it be assumed that the advance in this case made to the joint family also constituted an advance made to the member constituting the said undivided family, it will only be regarded as dividend income of the registered shareholder who will be deemed to have received the advance as one of the members of the undivided family.
16. Their Lordships of the Supreme Court have interpreted the word 'shareholder ' occurring in Section 18(5) as meaning a person who is recorded as a shareholder in the books of the company and have also held that the word 'shareholder' in section Z3A also bears the same meaning, namely, that it refers to a shareholder recorded in the books of the company.
17. We do not find any reason why a different meaning should be given to the word ' shareholder ' in Section 2(6A)(e). It should be pointed out that Section 23A has since been amended. Section 18(5) provides that any deduction made and paid to the account of the Central Government in accordance with the provisions of this section shall be treated as a payment of income-tax or super-tax on behalf of the person from whose income the deduction was made, or of the owner of the security or of the shareholder, as the case may be, and credit shall be given to him therefor on the production of the certificate furnished under Sub-section (9) the assessment, if any made for the following year under this Act. It is only the registered shareholder who can get the benefit of Section 18(5) and not a beneficial owner of the shares even though that may be the undivided Hindu family. It is inconceivable that the Hindu undivided family should have to pay income-tax on the advance made to it as dividend income and should not be entitled to the benefits of Section 18(5) which can be claimed only by the recorded shareholder. If under Section 18(5) it is only the recorded shareholder who can get the benefit, then it necessarily follows that the advance made to him can only be regarded as his income. The accumulated profit of the company out of which the dividend is paid, distributed or any advance is paid which is regarded as a dividend under Section 2(6A)(e) is taxed as the profit in the hands of the company itself and when it is distributed, the shareholder to whom it is given as a dividend, is entitled to get certain benefit under Section 18(5). If the advance made to the recorded shareholder comes to the beneficial owner or if the share is really owned by a third party as beneficial owner, he is not entitled to get benefit of Section 18(5), or, in other words, the payment made to a beneficial owner of the shares does not retain the character of dividend income in his hands. It is an advance to him which he is liable to pay back and may not necessarily be the distribution of the accumulated profit of the company.
18. Section 16(2) of the Act provides :
' For the purposes of inclusion in the total income of an assessee any dividend shall be 'deemed to be income of the previous year in which it is paid, credited or distributed or deemed to have been paid, credited or distributed to him, and shall be increased to such amount as would, if income-tax (but not super-tax) at the rate applicable to the total income of the company without talking into account any rebate allowed or additional income-tax charged for the financial year in which the dividend is paid, credited or distributed or deemed to have been paid, credited or distributed, were deducted therefrom, be equal to the amount of the dividend :
Provided that when any portion of the profits and gains of the company out of which such dividend has been paid, credited or distributed or deemed to have been paid, credited or distributed was not liable to income-tax in the hands of the company, the increase to be made under this section shall be calculated upon only such proportion of the dividend as the amount of the profits and gains of the company liable to income-tax bears to the total profits and gains of the company.'
19. This process of determining the total income of the assessee with regard to the dividends is called ' grossing-up '. In determining the income of a shareholder who has received or is deemed to have received some dividend, certain process is to be adopted as provided for under Section 16(2). That, however, cannot be done in the case of a joint family, inasmuch as the
joint family which is not a registered shareholder, cannot be said to get any dividend income in respect, of the shares which are registered in the name of the individual member of the undivided family.
20. At this stage some of the cases may be referred to. Reliance is placed by the assessee on the case of Howrah Trading Co. Ltd. v. Commissioner of Income-tax, [1959] 36 I.T.R. 215, [1959] Supp. 2 S.C.R. 448. In this case the facts were that the assessee had received certain sums in the relevant years as income from dividends. The shares in respect of the dividend income received were the property of the applicant but in the books of the various companies these stood in the names of other persons. These shares were purchased by the assessee from other persons under blank transfer but the transfer had not been registered. On that basis the assessee had claimed that although these shares were not registered in his name, these were his property and thus this dividend income should be grossed up under Section 16(2) and credit for the tax deducted should be allowed to the applicant tinder Section 18(5). This was rejected by the Income-tax Officer. The Supreme Court held that although the shares were owned by the assessee, as his name was not registered in the books of the company, he was not a shareholder in respect of such shares within the meaning of Section 18(5) of the Act and was thus not entitled to have his dividend income grossed up under Section 16(2) of the Act by the addition of the income-tax paid by the company in respect of those shares and claimed credit for the tax deducted at source under Section 18(5) of the Act. Their Lordships of the Supreme Court accepted the interpretation put by the Bombay High Court in the case of Shree Shakti Mills Ltd. v. Commissioner of Income-tax, [1948] 16 T.T.R. 187 that the word 'shareholder' in Section 18(5) meant the shareholder whose name is registered in the books of the company.
21. To similar effect was the decision of Jaluram Bhikulal Firm of Itwara v. Commissioner of Income-tax, [1952] 22 I.T.R. 490; Arvind N. Mafatlal v. 'income-tax Officer, North Satara, [1957] 32 I.T.R. 350 and Bikaner Trading Co. v. Commissioner of Income-tax, [1953] 24 I.T.R. 419
22. In the case of In re Wala Wynaad Indian Gold Mining Company, (1882) 21 Ch. D. 849 Chitty J. observed as follows :
' I use now myself the term which is common in the courts, 'a shareholder', that means the holder of the shares. It is the common term used, and only means the person who holds the shares by having his name on the register. '
23. This definition of the word ' shareholder ' has also been accepted by their Lordships of the Supreme Court in the case referred to above.
24. The next case is Commissioner of Income-lax v. Shakuntala, [1961] 43 I.T.R. 352 (S.C.) . This case deals with the provisions of Section 23A of the Act. The facts were that a Hindu undivided family which was the beneficiary of certain shares itself in a company in which the public were not substantially interested, held those shares in the names of different members of the family. The Income-tax Officer applying the provisions of Section 23A of the Indian Income-tax Act, 1922 (before the amendment in 1955 with which we are concerned), passed an order that the undistributed portion of the distributable income of the company shall be deemed to be distributed, and the amount appropriate to the shares of the family were sought to be included in the income of the family. It was held that the word ' shareholder ' in Section 23A of the Indian Income-tax Act, 1922, meant the shareholder registered in the books of the company. The amount appropriate to the shares had to be included in the incomes of the members of the family in whose names the shares stood in the register of the company ; and as the Hindu undivided family was not a registered shareholder of the company, the amount could not be assessed as the income of the family under Section 23A. The argument in this case was advanced on behalf of the department that the word ' shareholder' in Section 23A means the person who owns the shares irrespective of the circumstance whether that person is registered in the books of the company as a shareholder or not. This argument was based on the reasoning that the very object of the section is to prevent avoidance of super-tax by the shareholders of a company, and if the beneficial owner of the shares is a Hindu undivided family, that family will not come within the purview of Section 23A, because a Hindu undivided family as such cannot be a shareholder in a company and this narrow interpretation put on Section 23A will defeat the very purpose of the section, and the second argument was that the legal fiction must be carried to its logical conclusion. Both these arguments were repelled. The following observation is apposite :
'The question is really one of interpretation of Section 23A, and we must interpret Section 23A with reference to its own terms. The section in express terms says that 'the proportionate share of each shareholder shall be included in the total income of the shareholder for the purpose of assessing his total income'. The section does not talk of the beneficial owner of the share. It talks of the shareholder only. Section 18(5) of the Act deals with grossing up of dividend and two expressions occur therein : 'Owner of the security' and the 'shareholder'. So far as the expression 'owner of the security' is concerned it may perhaps include a beneficial owner ; but it has been decided by this court that the expression ' shareholder ' in Section 18(5) means the shareholder registered in the books of the company. As we have earlier said, no good reason exists as to why the expression ' shareholder ' in Section 23A shall not have the same meaning.'
25. The next case referred to is Income-tax Officer, North Satara v. Arvind N. Mafatlal, [1962] 45 I.T.R. 271 (S.C.). The facts of this case were that a private company was assessed to income-tax and super-tax but as it had not distributed any part of its income as dividend the Income-tax Officer took action under Section 23A of the Act and sought to assess 3 shareholders in respect of the undistributed income of the company. The real owner of these shares held by the 3 shareholders was a registered firm in which the 3 shareholders were partners. The Income-tax Officer treated the dividend attributable to the shares held by the 3 partners as the dividend income of the firm and proceeded to apportion the said income among the four partners of the firm after giving credit to the tax paid by the company and added this to their individual income. In doing so he failed to gross up the dividend, and he proceeded subsequently in exercise of his power to rectify errors under Section 35, to readjust the dividends to be added to the income of the 3 partners after grossing up. These proceedings were quashed by the High Court and on appeal the Supreme Court held that the procedure adopted by the Income-tax Officer was erroneous as only the registered shareholders were entitled to the benefit of the credit for tax paid by the company under Section 18(5) of the Act.
26. The Tribunal has distinguished these cases on the ground that the language of sections 23A and 18(5) is different from that of Section 2(6A)(e). The Tribunal has remarked that Section 23A by necessary implication ruled out the taxability of such artificial dividends in the hands of the real owner or the beneficiary of the shares when it laid down that the proportionate share of the notional dividend created by the section ' shall be included in the total income of such shareholder for the purpose of assessing his total income'. Regarding the case of Howrah Trading Co. Ltd., it remarked that the credit of tax allowable under Section 18(5) was available only to the person registered as a shareholder and not to the purchaser of the share under a blank transfer. The section expressly lays down that such credit for tax paid at source by the company concerned ' shall be given to him '. This also, according to the Tribunal, by necessary implication confines the allowance of the credit to the registered shareholder and not the beneficial or equitable owner of the shares. The Tribunal further observed that Section 2(6A)(e) while providing that dividend shall include loans or advances paid by a private company to a ' shareholder ', which, no doubt, means a registered shareholder, does not lay down that such dividend is in the total income of that shareholder. The Tribunal is not right in distinguishing the cases on the ground indicated above. Their Lordships decided those cases on the interpretation of the word 'shareholder' occurring in sections 23A and 18(5) and if the word ' shareholder ' in those sections means a registered shareholder, there is no reason why the same meaning should not be given to this word in Section 2(6A)(e). Secondly, when Section 2(6A)(e) makes an advance made to the shareholder a notional dividend, it by necessary implication means that a payment can be regarded as a notional dividend only if it is paid to the registered shareholder and further that it can be regarded as a dividend income only of the registered shareholder to whom it is actually paid. How can a payment made to A be regarded as a payment made to B Nor can a payment made to A be regarded as an income of C, even though A may have after receiving the amount handed it over to C and C was the beneficial owner of the shares to which this payment was attributable.
27. The counsel for the department relies upon the case of Kishanchand Lunidasingh Bajaj v. Commissioner of Income-tax, [1964] 53 I.T.R. 604 in which it was held that the provisions of sections 18(5), 23A and 16(2) and other provisions of the Indian Income-tax Act, 1922, relating to shares and dividends do not lead to the conclusion that for the purposes of assessment to income-tax, dividend income derived by the benami-holder of shares should be treated as his own income and not that of the real owner of the shares which have yielded the dividend income. Dealing with the decision of their Lordships of the Supreme Court in Income-tax Officer. North Satara v. Arvind N. Mafatlal, it was observed as follows:
' From these decisions, I do not think we will be justified in drawing the conclusion that for all purposes under the Act dividend income realised by a benami shareholder should be treated as his own income and not that of the real owner of the shares which have yielded the dividends in question. It is because of the language of Section 18(5) read with Sections 23A and 16(2), the courts have to come to the conclusion that the benefit of the grossing up provision in Section 16(2) is only available to a ' shareholder ' and none else. That does not mean that the dividend as such cannot be treated as the income of the real owner of the shares.'
28. We do not agree with this decision. In our opinion the case is not consistent with the decision of their Lordships of the Supreme Court in the case of Commissioner of Income-tax v. Shakuntala. That case does not appear to have been considered by their Lordships of the Mysore High Court. Apart from it, as I have already pointed out, there is no reason why the word ' shareholder ' in Section 2(6A)(e) should be given a different meaning. In the result, we would answer question No. 2 in the negative. In view of our answer to question No. 2, it is not necessary to answer the other questions. The assessee is entitled to his costs, which we assess at Rs. 250.