Rajagopala Ayyangar, J.
1. These four references raise the same question of law as to whether the income from the dividend received by the assessees concerned in the several references was liable to be grossed up under Section 16(2) of the Income-tax Act so as to enable the assessees to have the benefit of the relief under Section 18 (5) of the Act.
2. It is sufficient to state the facts of case referred No. 20 of 1953, as the others which relate to other shareholders in receipt of similar dividends for the same company are exactly' similar.
3. The assessee was a share-holder in the Chettinad Company Ltd., Pudukottai, incorporated under the Pudukottai Companies Act with its registered office at Pudukottai -- a non-resident company. During the assessment year 1946-47 (the accounting year ended 31-3-1946) the assessee received a dividend income of Rs. 47,612 from this company, the amount having been remitted to British India in the same accounting year.
4. The Chettinad Company was not assessed to income-tax in British India under the Indian Income-tax Act; hut the assessee stated that the Chettinad Company had been in receipt of interest income on advances made by it to a resident company -- the South Indian Corporation (Madras) Ltd., registered under the Indian Companies Act, 1913, and that the resident company as required by Sub-sections (3-A) and (3-C) of Section 18 of the Indian Income-tax Act, deducted tax on the interest paid to the Chettinad Company. On the basis of this deduction of the tax by the South India Corporation (Madras) Ltd., the assessee claimed that he was entitled to the grossing up of his dividend income under Section 16 (2) and to a rebate under Section 18 (5) of the Indian Income-tax Act.
There was no dispute that the South India Corporation (Madras) Ltd., had paid interest to the Chettinad Company, Pudukottai, nor, as regards the fact that there had been a deduction of income-tax and super-tax at the time of the payment of interest and that these sums deducted and withheld had been paid over to the Government. The Income-tax Officer however negatived the claim of the assessee on the ground that Section 49 (B) determined the conditions which the dividend-paying company ought to satisfy before the recipient of the Dividend was entitled grossing up under Section 16 (2) and that as the Chettinad Company had not been assessed to income-tax this statutory condition was not satisfied.
He also held that deduction at the source did not amount to an assessment. The appeal filed by the assessee to the Appellate Assistant Commissioner was allowed and this appellate authority held that as tax at the maximum rate had admittedly been deducted at the source fn respect of the interest Income of the Chettinad Company, the assessee was entitled to the grossing up to the extent of the interest-income included in the total income of the Chettinad Company. The department preferred an appeal to the Tribunal against this order of the Appellate Assistant Commissioner and this appeal was allowed.
5. Before the Tribunal, just as before the departmental authorities, counsel for the assessee relied on a compromise which had been come to between the department and the Chettinad Company. The Chettinad Company was a private limited company with a small number of share-holders all of whom were residents in British India. Owing to the business connection between the Chettinad Company and certain resident assesses, the income of the former was sought to be assessed in the hands of the latter.
Under the compromise the Chettinad Company undertook to distribute 60 per cent, of its total income as dividend. As these dividends were received by the assessees resident in British India, it enabled the Indian Government to obtain its proper share of the tax leviable, on the British Indian income of the Chettinad Company. On the basis of this compromise, the argument put forward on behalf of the assessee in the present instance before the Tribunal was that the Indian Income-tax authorities had before them the data to ascertain what the total income of the Chettinad Company was, as this was being furnished for the purpose of satisfying the authorities that the Chettinad Company was implementing its undertaking.
If the total income was thus known it was merely an arithmetical calculation that was required to ascertain the proportion which the interest paid by the South India Corporation on which tax was deducted at the source bore to the total income. Out of this proportion it was urged by the assessee that 60 per cent. must be taken to have been distributed and he was therefore entitled to a grossing up on that basis.
6. But the Tribunal however rejected this contention of the assessee and held that so long as the Chettinad Company was not assessed to income-tax the assessee was not entitled to the benefit of Sections 16 (2) and 18 (5). They also held that the certificate for deduction of tax granted by the Chettinad Company was not in accordance with the form prescribed by Rule 14 framed under Section 20 of the Act and negatived the claim of the assessee on this further ground.
7. In pursuance of the direction of this Court under Section 66 (2) of the Indian Income-tax Act. the Tribunal submitted the following question of law for determination of this Court:
'Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the dividend received by the petitioner from the Chettinad Company Ltd., WP.S not liable to be grossed up in the manner provided in the proviso to Section 16 (2) of the Act?'
The argument of learned counsel for the assessee was briefly this. The income now in dispute was certainly a 'dividend' as defined by Section 2 (6-A) of the Act. This dividend was declared by 'a company'' as defined by Section 2 (6) of the Income-tax Act, as it stood in 1946, which ran:
''Company' means a company as defined in the Indian Companies Act, 1913, or formed in pursuance of an Act of Parliament or of Royal Charter or Letters Patent, or of an Act of the Legislature of a British possession or of a law of an Indian State, and includes any foreign association whether incorporated or not which the Central Board of Revenue may, by general or special order, declare to be a company for the purposes of this Act.' As the Chettinad Company which declared the dividend was formed in pursuance of- the law of an Indian State, it was a company within the Indian Income-tax, Act. Learned counsel therefore urged that every condition necessary for entitling the assessed to the grossing up under Section 16 (2) was satisfied in the present case. Section 16 (2) as it stood in 1946 ran:
'16 (2). For the purposes of inclusion in thetotal income of an assessee any dividend shall bedeemed to be income of the previous year in whichit is paid, credited or distributed or deemed to havebeen paid, credited or distributed to him, and shallbe increased to such amount as would, if income-tax(but not super-tax) at the rate applicable to the totalincome of a company for the financial year in whichthe dividend is paid, credited or distributed or deemed to have been paid, credited or distributed werededucted therefrom, be equal to the amount of thedividend:
Provided that when any portion of the profitsand gains of the company out of which such dividend has been paid, credited or distributed or deemed to have been paid, credited or distributed wasnot liable to income-tax in the hands of the company,the increase to be made under this section shall becalculated upon only such proportion of the dividendas the amount of the profits and gains of the companyliable to income-tax bears to the total profits andgains of the company.''
Learned counsel urged that as the income received by the assessee was 'dividend' as defined in the Act, the grossing up provision contained in the concluding portion of para. 1 of Section 16 (2) would be attracted. He urged that as under the Finance Act relevant to the assessment year in this case the rate applicable to the total income of a company was fixed and was not fluctuating, that is, not dependent upon the quantum of the total income of the company, there was no difficulty in finding out the rate applicable, and that, therefore the assessee was entitled to the grossing up on that basis. Dealing with the proviso, learned counsel argued that since under the compromise between the Chettinad Company and the Income-tax authorities, the former had agreed to distribute 60 per cent. of their total income as dividend and as the balance-sheets of the dividend-paying company were being filed with the Indian Income-tax authorities and were available to them, the proportion which the total income bore to the interest received from the South Indian Corporation could be worked out and taking that 60 per cent. of the total was distributed as dividend, the adjustments to be made under the proviso could be worked out. Learned counsel also contended that the Tribunal were wrong in holding that the company in respect of whose dividend grossing up was claimed should have been assessed to the income-tax. In this connection counsel urged that the Tribunal were wrong in placing any reliance on Section 49-B of the Act, in support of their conclusion that unless a company was assessed to fax under the Indian Income-tax Act, an assessee who received the dividend from that company was not entitled to the benefit of the grossing up under Section 16(2) and therefore not entitled to the relief under Section 18(5) of the Act. Section 49-B on which the Tribunal relied for this purpose ran thus:
'49-B. Where any dividend has been paid, credited or distributed or is deemed to have been paid, credited or distributed to any of the persons specified in Section 3 who is a share-holder of a company which is assessed to income-tax in British India or elsewhere, such person shall be deemed in respect of such dividend himself to have paid income-tax (exclusive of super-tax) at the rate applicable to the total income of a, company for the financial year in which the dividend has been paid, credited or distributed or is deemed to have been paid, credited or distributed on so much of the dividend as bears to the whole the same proportion as the amount of income on which the company is liable to pay income-tax bears to the whole income of the company.'
In regard to the defect in the form of the deduction certificate on which also the decision of the Tribunal was rested learned counsel pointed out that no objection of that sort had been raised either before the Income-tax Officer or before the Appellate Assistant Commissioner or even in the grounds of appeal to the Tribunal, that the point was not urged even in the course of the arguments but that it had been a surprise sprung upon the assessee by the Tribunal. He also contended that apart from the inequity of permitting the department to raise this ground which could have been remedied by the assessee if taken at an earlier stage, by producing a proper certificate, the Tribunal had no jurisdiction to raise such a question which did not arise on the order of the Appellate Assistant Commissioner and was not formulated or urged in the appeal before them. Finally he urged that the certificates actually filed were in substantial compliance with the form prescribed and that the Tribunal was wrong in holding to the contrary,
8. We shall first deal with the question as to the proper construction of Sections 16(2) and 18(5) and examine the position as to whether a company has to be assessed under the Indian Income-tax Act before its dividend can be grossed up under Section 16(2) or whether it is sufficient if in respect of some portion of the company's income it has paid tax by way of deduction under Section 18(3-A) of the Act. The entire group of sections comprising Sections 16(2), 18(3-A), 18 (5) in its present form and 49-B, etc., were all introduced by the Indian Income-tax Amendment Act VII of 1939. The normal rule of law is that each person pays tax on his income or profits. A company is a unit under the Indian Income-tax Act as much as an individual and when a company pays tax on its income, it is paying it as a unit liable to tax and on its own behalf. When an individual who is a share-holder in a company receives a dividend, he gets that as part of his income and on that he, as another unit of assessment, has to pay the fax. But this position however ignores, and correctly ignores, the fact that the income on which tax is paid by a company is the source for the moneys for the payment of dividend to share-holders so that when it pays tax on that income in a sense it is with the income of the share-holders that the tax is paid. This assuredly leads to a certain amount of injustice in the same income suffering tax twice by reason of the company being treated as a jural entity distinct from the share-holders who are its proprietors and it is in order to remedy this state of affairs that the group of sections we have mentioned above were introduced into the Income-tax Act by the amendment effected in 1939. Section 16(2) provides for the grossing up of dividend income. The scheme of the relief granted is that the income received by way of dividend is treated not merely as the amount of the dividend actually received but the amount of that dividend plus the income-tax paid by the company on that portion of the company's income represented by the dividend. That in brief is the grossing up effected by Section 16 (2) of the Act. Section 18(5) provides the machinery by which the addition made under Section 16(2) is treated as tax paid by the assessee so that when the rate of tax payable by the assessee is less than the rate of tax paid by the company the assessee gets relief in regard to this difference; This is wholly based upon the fact that the income which is received as dividend has borne a particular amount of tax capable of ascertainment and computation.
9. We shall be referring to the terms of Section 16 (2) a little later after disposing of the objection raised on behalf of the assessee as regards the irrelevance of the terms of Section 49-B, on the proper construction of Section 16(2). Learned counsel drew our attention to the Judgment of the Bombay High Court in Commissioner of Income-tax, Bombay City v. Blundell Spence and Co. Ltd., : [1952]21ITR28(Bom) (A) where the scope of Section 49-B in relation to Section 16(2) has been pointed out. In that case the question related to the dividend received from a company which was assessed to income-tax both in India and the United Kingdom. The Income-tax Officer grossed up the dividend income of the assessee under Section 16(2) by adding to it the tax levied in the United Kingdom at 9 sh. per . and also the standard rate of tax under the relevant Indian Finance. Act and having thus grossed up the income the departmental, authorities gave relief in regard to the Indian Income-tax alone under Section 18(5). The question before the High Court was whether for the purpose of grossing up under Section 16(2) the income-tax paid in the United Kingdom had to be included. The learned Judges answered this question in the negative and in favour of the assessee. Chagla, C. J., after referring to Section 49-B on which reliance was placed by the revenue, said:
'Frankly I must confess that that section does present some difficulty, because that section deals with the case of refund and it provides for refund on the basis that income-tax on the company's dividend is deemed to have been paid by the share-holder, and relief is intended to be given to the shareholder of a company which is assessed to income-tax not only in India but also elsewhere.....Mr. Joshi says that, as in this case the company whose dividends are in question was assessed to income-tax not only in India but also in the United Kingdom, we must, in grossing up, take into consideration the tax paid by the company in the United Kingdom.....
As I said before, that section deals with a question of refund, and here we are not dealing with a case of refund; we are dealing with a case where the assessee is entitled to credit in respect of the tax paid by the company under Section 18(5).
Sections 16(2) and 18(5) constitute self-contained provisions with regard to grossing up of dividend income and with regard to relief to be given to an assessee in respect of that grossing up. Section 49-B deals with an altogether different matter, and that is a case where a refund is asked for by the assessee.'
10. We are in entire agreement with these observations, that though these two Sections 16(2) and 43-B have a somewhat common purpose and are designed to achieve a similar object, their content is different and that one cannot be used to interpret the provisions of the other or to determine the relief open to an assessee under the other provision. One of the grounds therefore upon which the Tribunal have rested their decision in favour of the department must be held to be wrong.
11. The question however still remains as to whether on a proper construction of Section 16(2) an assessee is entitled to the grossing up and relief under Section 18(5) in cases where the income of a company whose dividends are in question is not assessed to tax under the Indian Income-tax Act. Section 16(2) which we have set out consists of two paragraphs. If the matter rested wholly on the first paragraph without the proviso, the construction contended for on behalf of the assessee might have to be accepted. The main provision to Section 16(2) comprised in para. 1 no doubt uses the expression 'total income' and 'total income' is defined by Section 2(15) as meaning ''total amount of income, profits and gains referred to in Sub-section (1) of Section 4 computed in the manner laid down in this Act.' But as the definitions in Section 2 are subject to there being nothing repugnant in the subject or context, it might be capable of being argued that 'total income' is used not in the technical sense of an amount computed and ascertained by the authorities under the Act but in a loose and general sense as signifying the total income of the company as computed by it for its own purposes. The plausibility of the latter construction would appear to be favoured by the fact that in the Finance Acts as they were upto the assessment year in question the ''rate of tax applicable' was a flat one not dependent on the quantum of the total income of a company. If the first paragraph of Section 16(2) was ambiguous and equally capable of two constructions, the normal rules for the construction of taxing enactments might favour the adoption of that interpretation which was beneficial to the assessee.
12. But all this reasoning is inapt by virtue of the provisions enacted in the second paragraph in the form of a proviso to the main part of the sub-section which throws considerable light upon the meaning of the expression 'total income' used in the main clause. It is after the application of the proviso that in any case it can be determined whether it is the entirety or a portion of it alone in regard to which there could be grossing up. By reason of the qualification introduced by the proviso the assessee is not entitled to grossing up -- and is not bound to have his income grossed up -- beyond the proportion which the assessable income of the company bore to its total income. The proviso therefore introduces two factors, (1) the total income of the company and (2) a portion of that total income which is liable to income-tax. The liability to income-tax referred to in the proviso can only be the liability to assessment and tax under the Income-tax Act for it is the amount of that tax which is grossed up under Section 16(2) and for which relief is provided under Section 18 (5). From this it follows that the expression 'total profits and gains of the company' at the end of the proviso can only mean total profits and gains of the company, as computed under the Indian Income-tax Act, for it is the ratio between this figure and the amount of income actually subjected to income-tax which determines the proportion of the dividend in regard to which an assessee is entitled to -- or bound to suffer -- grossing up. The entire fallacy in the argument of learned counsel for the assessee was in reading this expression 'total profits and gains of the company' as meaning 'total profits and gains as disclosed in the balance-sheet'. The latter figure might or might not have been arrived at on a basis identical with the method of computation prescribed by the Indian Income-tax Act. But until the total profits and gains are thus ascertained -- and this can be ascertained only in the course of assessment proceedings against a company whose dividends are in question -- the terms of the proviso could not be applied and the proportion could not be ascertained. We are thus clearly of the opinion that the mere deduction of tax under Section 18(3-A) is wholly irrelevant for the grossing up under Section 16(2). Taking the present case, that deduction would be relevant and credit could be given to the Chettinad Company if its income happened to be assessed under the Indian Income-tax Act but beyond this, the deduction cannot serve any other purpose or be treated an assessment for by reason of it the 'total income' cannot be determined. We have thus reached the same conclusion as the Tribunal though by a different line of reasoning.
13. In the view that we have taken we do not consider it necessary to pronounce upon the correctness or otherwise of the view of the Tribunal as regards the defect in the Income-tax deduction certificate produced or as regards the objection to the Tribunal's decision in that regard urged by learned counsel for the assessee, to which we have already adverted.
14. Mr. Rama Rao Sahib, learned counsel for the department invited our attention to the amendment to the proviso to Section 16(2) effected by Section 12 of the Finance Act XXIX of 1956. He urged that this section was retrospective in its operation and would govern the rights of the assessees notwithstanding that the assessment related to the year 1946-47. As we have reached a conclusion against the assessee even on the terms of the proviso as it stood in 1946 we do not consider it necessary to pronounce upon the correctness of the admission of learned counsel for the department.
15. The result is that the view of the Tribunal adverse to the assessee's claim to the grossing up must be upheld.
16. In case referred Nos. 20 to 23 of 1953 weanswer the questions referred to us by stating thatthe view of the Tribunal was right and that theapplicant in each of these cases was not entitledto the grossing up claimed by him. As the references have been answered against the assessee, theCommissioner of Income-tax is entitled to his costs.Counsel's fee Rs. 250 in each of the referred cases.