Messrs. Howrah Trading Co., Ltd vs The Commissioner Of Income-Tax

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 65 of 1956

Decision Date: 26 March 1959

Coram: M. Hidayatullah, Bhuvneshwar P. Sinha, J.L. Kapur

In the matter entitled Messrs. Howrah Trading Co., Ltd versus The Commissioner of Income-Tax, the Supreme Court delivered its judgment on 26 March 1959. The judgment was authored by Justice M. Hidayatullah, who was joined on the bench by Justices Bhuvneshwar P. Sinha and J. L. Kapur. The petitioner in the case was Messrs. Howrah Trading Co., Ltd and the respondent was the Commissioner of Income-Tax, Calcutta. The decision was reported in the 1959 volume of the All India Reporter at page 775 and also in the 1959 Supplement to the Supreme Court Reports at page 448, together with several subsequent citations in later reports. The operative provisions of the Indian Income-Tax Act, 1922 (XI of 1922) that were examined were sections 16(2) and 18(5). The central issue concerned whether an assessee who had acquired shares in various companies by means of “blank transfers” and whose name did not appear on the companies’ registers of members could claim that dividend income received on those shares should be grossed up under section 16(2) and that a credit for tax deducted at source should be allowed under section 18(5).

The Court held that the assessee was not entitled to the benefits of either section 16(2) or section 18(5) because the assessee’s name was not entered in the register of members of the relevant companies. The Court explained that the benefit contemplated by section 18(5) could accrue only to a shareholder, and that the term “shareholder” in that provision was to be interpreted in the same sense as in the Indian Companies Act, 1913, namely a “member having his name on the register.” The Court noted that the Companies Act employed the expressions “member,” “shareholder,” and “holder of a share” interchangeably, and that a “holder of a share” was equivalent to a “shareholder” only when the person’s name was recorded in the register of members. The judgment referred to earlier authorities including In re Wala Wynaad Indian Gold Mining Company (1882) 21 Ch. D. 849, Shree Shakti Mills Ltd. v. Commissioner of Income-Tax [1948] 16 I.T.R. 187, Jalu Ram Bhikulal v. Commissioner of Income-Tax [1952] 22 I.T.R. 491, Arvind N. Mafatlal v. Income-Tax Officer [1957] 32 I.T.R. 350, and Bikaner Trading Co. v. Commissioner of Income-Tax [1953] 24 I.T.R. 419. The Court further observed that a company paying income-tax does so not on behalf of its shareholders but for the benefit of the shareholders, who generally enjoy a higher rate of tax on the corporate entity than on individuals, and that the process of grossing up the dividend provides the dividend recipient with a fiscal advantage. The Court also cited Cull v. Inland Revenue Commissioners (1940) A.C. 51 as supporting authority.

In the decision cited as Inland Revenue Commissioners v. Blott, (1921) 2 A.C. 171, the Court explained the operation of a blank transfer of shares. Under a blank transfer, the deed signed by the transferor is delivered together with the share certificate to the transferee, who may then complete the transfer by entering his own name on the certificate and applying to the company for registration of his name in the register of members. The company, however, recognizes only those persons whose names appear on the register of members, and only those persons are legally entitled to receive any dividend declared by the company. Consequently, when a share is transferred by means of a blank transfer, an equitable relationship arises between the transferor and the transferee. The transferee acquires the right to claim the dividend from the transferor, who holds the dividend in trust for the transferee, but the company’s liability remains solely to the transferor and not to the transferee. Thus, although the transferee enjoys an equitable ownership of the shares, he does not become the full legal owner because the legal interest in the eyes of the company continues to rest with the transferor. The Court then recorded the judgment in the civil appellate jurisdiction relating to Civil Appeal No. 65 of 1956, which was an appeal from the judgment and order dated 31 August 1954 of the Calcutta High Court in Income-tax Reference No. 57 of 1953. Counsel for the appellant was N. C. Chatterjee together with B. P. Maheshwari, and counsel for the respondent was K. N. Rajagopala Sastri, R. H. Dhebar and D. Gupta. The judgment was delivered on 26 March 1959 by Justice Hidayatullah. The appellant, Messrs. Howrah Trading Company, Ltd., Calcutta (referred to as the assessee), had obtained on 28 April 1955 a certificate under section 66A(2) of the Indian Income-tax Act from the Calcutta High Court, authorizing an appeal to this Court against the High Court’s decision dated 31 August 1954 in Income-tax Reference No. 57 of 1953. The Division Bench of the Calcutta High Court, comprising Chief Justice Chakravarti and Justice Lahiri, in the judgment under appeal, simply followed an earlier judgment delivered on the same day in Income-tax Reference No. 22 of 1953, reported as Hindustan Investment Corporation v. Commissioner of Income-tax (1). That earlier judgment provided the reasons for the decision. The facts of the present case were summarized with sufficient completeness, though briefly, in the statement of the case filed by the Income-tax Appellate Tribunal (Calcutta Bench), and the Tribunal’s own wording was quoted as follows: “The applicant had received sums of Rs 3,831, Rs 6,606, Rs 7,954 and Rs 8,304 in the four assessment years 1944-45, 1945-46, 1946-47 and 1947-48 as income from dividends. The shares that yielded these dividends were the property of the applicant, but the entries in the registers of the various companies showed the names of other persons. It appears that the applicant had purchased these shares from other persons by means of a blank transfer, but the transfers had not been registered with the respective companies. The applicant contended in these income-tax proceedings that, although the shares were not registered in his name, they were his property. He further claimed that the dividend income should be grossed up under section 16(2) and that credit for tax deducted at source should be allowed under section 18(5).”

In the proceedings before the Income-tax Officer, the applicant asserted that the dividend income he received should be increased, or “grossed up,” under section 16(2) of the Income-tax Act, and that the tax which had been deducted at source ought to be allowed as a credit under section 18(5). The Officer rejected this claim, and the applicant’s appeals were subsequently dismissed by the Appellate Assistant Commissioner of Income-tax, Calcutta, and by the Appellate Tribunal. The Tribunal, however, was asked to refer a specific question to the High Court. The question framed by the Tribunal was whether, given the facts and circumstances of the case, the applicant, who was the assessee, was entitled to have his dividend income grossed up under section 16(2) and to claim credit for tax deducted at source under section 18(5) of the Income-tax Act. The High Court examined this issue and answered in the negative, thereby confirming the earlier decisions of the Department and the Appellate Tribunal. The applicant challenged the High Court’s decision, contending that it was erroneous and that he should indeed be permitted to have the dividend grossed up pursuant to section 16(2) and to claim the tax credit provided by section 18(5). The parties consequently centered their arguments on the interpretation and application of the relevant statutory provisions.

Section 16(2) states that for the purpose of inclusion in an assessee’s total income, any dividend shall be deemed to be income of the previous year in which it is paid, credited, distributed, or deemed to have been so, and shall be increased to an amount that, if income-tax (excluding super-tax) at the rate applicable to the company’s total income were deducted, would equal the amount of the dividend. The provision includes a proviso that is omitted here. Section 18(5) provides that any deduction made and paid to the Central Government in accordance with the provisions of that section, together with any sum by which a dividend has been increased under subsection (2) of section 16, shall be treated as a payment of income-tax or super-tax on behalf of the shareholder, and a credit shall be given to him upon production of the certificate furnished under section 20, in the assessment for the following year. Section 49B(1) adds that if a dividend is paid, credited, or distributed to any person specified in section 3 who is a shareholder of a company assessed to income-tax, and the dividend is included in his total income, that person shall be deemed, with respect to that dividend, to have paid income-tax equal to the sum by which the dividend has been increased under subsection (2) of section 16. In the High Court, it was argued that because section 16(2) referred to an “assessee,” the applicant company could be entitled to have the dividend grossed up by the addition of income-tax paid by the various companies at source and thereby enjoy the credit allowed under the remaining sections. The High Court, however, concluded that an assessee whose name did not appear in the register of members of the companies was not eligible for the benefit of these provisions, interpreting the term “shareholder” in section 18(5) as having the same meaning as “member” under the Companies Act, and holding that the applicant was not a shareholder despite acquiring the shares through a blank transfer.

In this case, the Court observed that the addition of income-tax paid by the various companies at source permitted the assessee to claim the credit allowed under the two remaining sections of the Act. The High Court had held that an assessee whose name did not appear in the register of members of the companies could not obtain the benefit of those provisions. The learned judges of the High Court further reasoned that the word “shareholder” in section 18(5) carried the same meaning as the word “member” used in the Indian Companies Act, and consequently the assessee could not be regarded as a shareholder even though it had acquired the relevant shares by a blank transfer. The Supreme Court agreed with the High Court’s conclusion. It explained that when a company pays income-tax, it does so on its own liability and not on behalf of its shareholders; the company itself is chargeable under the Act. In support of this view, the Court quoted Lord Atkin’s judgment in Cull v. Inland Revenue Commissioners (1), where he stated that it is now clearly established that a limited company is liable to tax on its profits and pays tax to discharge its own liability, not as an agent for its shareholders. The Court noted that the earlier theory that a company pays tax on behalf of shareholders has been rejected by subsequent decisions of this House. It further explained that when a company pays its own income-tax and thereafter declares a dividend out of the balance of its profits, it may deduct from that dividend a proportionate portion of the tax it has already paid. This principle was reiterated in Inland Revenue Commissioners v. Blott (2), where Viscount Cave declared that a company paying tax on its profits does not act as an agent for its shareholders; if no dividend is declared, the shareholders have no direct concern in the tax payment. If a dividend is declared, the company is entitled to deduct from the dividend a proportionate part of the tax previously paid, and that deduction operates as relief to the shareholder, without any agency relationship. Accordingly, the shareholders obtain the benefit of the tax paid by the company. Although under section 16(2) the dividend is increased by a proportionate amount of tax paid by the company, the payment of tax by the company is deemed, under sections 18(5) and 49B(1), to be a payment made by the shareholders themselves. The rates of income-tax applicable to the company …

In this case the Court observed that the income-tax rates that apply to a company are, in most situations, higher than the rates that apply to individual shareholders, and that the practice of “grossing up” the dividend – a term commonly used – gives the dividend recipient a certain advantage. The Court explained that a shareholder whose name appears in the register of members and who receives a dividend presents no difficulty. However, the Court noted that share transfers occur frequently, and such transfers may be effected either by a fully executed transfer instrument as contemplated by Regulation 18 of Table A of the Indian Companies Act 1913, or by a “blank transfer”. In a blank transfer the name of the transferor is entered on the instrument, the deed of transfer signed by the transferor is handed over together with the share scrip to the transferee, and the transferee, if he wishes, completes the transfer by inserting his own name and then applying to the company for registration of his name in place of the former holder. The Court stressed that the company recognises as a shareholder only the person whose name is entered in the register of members, and that only that person may be called upon for unpaid capital and is entitled to receive the dividend declared by the company.

The Court further explained that, between the transferor and the transferee, certain equities arise even at the stage of executing and delivering a blank transfer. Among those equities is the transferee’s right to claim the dividend that has been declared and paid to the transferor, who at that stage is regarded as a trustee for the transferee. The Court made clear, however, that these equities do not affect the company itself, and that a transferee whose name has not yet been entered in the register of members cannot assert any claim against the company if the transferor retains the dividend money and fails to pass it on. A review of the scheme of the Indian Companies Act 1913 shows that the expressions “member”, “shareholder” and “holder of a share” are used interchangeably in the statute. The Court cited the general consensus of legal writers, referring to Buckley on the Companies Act (12th Edition, p. 803), which observes that the transferee’s only right is to request the company to register his name; no substantive rights arise until such registration is completed.

Finally, the Court highlighted the relevant statutory provisions. Section 2(16) of the Indian Companies Act 1913 defines a “share” as a share in the share capital of the company. Section 5 deals with the formation of incorporated companies and provides that, for companies limited by shares, the liability of members is limited to any unpaid amounts on the shares they hold. Section 18 makes Table A applicable to companies unless the articles of a particular company expressly exclude or modify its terms. Regulation 18 of Table A, quoted by the Court, states that the instrument of transfer of any share shall be executed by both the transferor and the transferee, and that the transferor is deemed to remain the holder of the share until the transferee’s name is entered in the register of members.

The Court explained that the instrument of transfer of any share must be executed by both the transferor and the transferee, and that the transferor is deemed to remain the holder of the share until the name of the transferee is entered in the register of members in respect thereof. It clarified that the expression “holder of a share” is essentially synonymous with the term “shareholder,” and that for the purposes of the company a holder of a share is only a person whose name appears on the register of members as a shareholder. The Court noted that a comparable view was adopted in the Companies Clauses Consolidation Act, 1845, in the case of Nanney v. Morgan, where the learned Lord Justices held that under section 15 of that Act the transferee did not acquire the benefit of legal title until certain conditions were fulfilled. The Court quoted the passage of Lord Justice Lopes, who observed that the transferor, until the deed of transfer is delivered to the secretary, remains subject to all liabilities and entitled to all rights belonging to a shareholder or stockholder, and that, in his opinion, until the requisite formalities are complied with, the transferor continues to be the legal proprietor of the stock or shares, a proprietorship that may be divested at any moment by compliance with those formalities (Nanney v. Morgan (1888) 37 Ch. D. 346, 356). The Court further observed that the same principle obtains in India, although the completion of the transaction by entering the transferee’s name in the register of members retrospectively relates back to the moment the transfer was first made, as discussed in Nagabushanam v. Ramachandra Rao. During the interval in which the transfer exists between the transferor and the transferee without becoming a binding document upon the company, equitable rights arise between the two parties, but no such rights arise between the transferee and the company. Accordingly, the transferee may require the transferor to attend meetings, to vote in accordance with the transferee’s directions, to sign documents relating to the issue of fresh capital, to call extraordinary meetings, and, inter alia, may compel the transferor to pay any dividend that the transferor may have received, as noted in E. D. Sassoon & Co. Ltd. v. Patch (see also Mathalone v. Bombay Life Assurance Co. Ltd.). However, the Court emphasized that although these rights furnish the transferee with an equitable ownership, they do not make the transferee a full legal owner because the legal interest vis-à-vis the company continues to vest in the transferor. Consequently, the company credits dividends only to the transferor and also demands that the transferor pay any unpaid capital that may be required. The Court mentioned that the authorities in Black v. Homersham and in Wimbush, In re Richards v. Wimbush do not substantially modify this position. In sum, under the Indian Companies Act, 1913, the expressions “shareholder” or “holder of a share” designate no one other than a “member” of the company, that is, a person whose name is entered in the register of members. The issue before the Court, therefore, was whether, by virtue of sections 16(2) and 18(5), a transferee who holds a blank transfer is entitled to the benefits of the grossing up of dividend income.

In this matter, the assess­see, who had acquired the shares through a blank transfer, argued that he was entitled to the gross-up benefit on the dividend income under sections 16(2) and 18(5). Counsel for the assess­see asserted strongly that the assess­see, being an equitable owner of the shares and consequently of the dividend, should receive the benefit. He pointed to the expression “the assess­see” appearing in section 16(2) as support for this view. The revenue department, on the other hand, maintained that the increase of dividend under section 16(2) and the credit allowed under section 18(5) could be granted only to a “shareholder”. In support of its view, the department cited several authorities, namely (1) (1922) I.L.R. 45 Mad. 537, (3) [1954] S.C.R. 117, (2) (1922) 45 Bom. L.R. 46, (4) (1878-79) L.R. 4 Ex. D. 24, and (5) [1940] 1 Ch. D. 92. According to the department, the term “shareholder” denotes a person whose name is entered in the register of members, and not a person who merely holds an equitable interest in the share. Consequently, the department argued that the assess­see could not claim the gross-up benefit because his name did not appear on the register.

The assess­see countered that the word “shareholder” should be interpreted to include a person who acquires a share through a blank transfer, even though the name is not entered in the register. He cited numerous authorities that had been discussed by the Calcutta High Court, all of which opposed his position, such as Shree Shakti Mills Ltd. v. Commissioner of Income-tax (1), Jaluram Bhikulal v. Commissioner of Income-tax (2), Arvind N. Mafatlal v. Income-tax Officer (3) and Bikaner Trading Co. v. Commissioner of Income-tax (4). The core issue for determination was whether the meaning attached to “shareholder” in section 18(5) by those decisions was correct. No satisfactory justification was found to suggest that “shareholder” in section 18(5) should be given a meaning different from that employed in the Indian Companies Act, 1913. In In re Wala Wynaad Indian Gold Mining Company (5), Justice Chitty observed that the term “shareholder” is the common term used in courts and refers only to the holder of shares whose name stands on the register. Counsel for the assess­see also referred to cases in which courts held that a transferee, whose name was not yet entered in the register, was entitled to the dividend after the transfer. Those cases included Commissioners of Inland Revenue v. Sir John Oakley (6), Spence v. Commissioners of Inland Revenue (7) and others cited at page 367 in Multipar Syndicate Ltd. v. Devitt (1).

In this case the Court expressed doubt that the proposition advanced in the earlier authorities was correct. The Court observed that moving from an equitable right that allows the transferor to be compelled to surrender the dividend to the transferee, to allowing the transferee to claim the dividend as a “shareholder” against the company, represented a substantial leap. The Court noted that, for the company, the dividend-tax certificate required by section 20 of the Income-Tax Act is issued only in the name of the person whose name appears in the company’s register, namely the transferor, and not in the name of an unregistered transferee. Section 20, as quoted by the Court, requires the principal officer of every company at the time of dividend distribution to furnish each dividend recipient with a certificate stating that the company has paid or will pay income tax on the distributed profits and to include any other prescribed particulars. The Court further explained that the meaning of section 20, together with that of section 18(5), becomes clear when read in conjunction with section 19A, which obliges the company to supply dividend information to the Income-Tax Officer upon demand. Section 19A, also quoted, mandates that the principal officer must, on or before the fifteenth day of June each year, submit a return in the prescribed form, verified as required, containing the names and addresses entered in the register of shareholders of those shareholders who received dividends exceeding a prescribed amount during the previous year, and the amount distributed to each such shareholder.

The Court emphasized that section 19A leaves no ambiguity that the term “shareholder” refers only to the person whose name and address are entered in the register of shareholders maintained by the company. The Court pointed out that the company maintains a single register; there is no separate register of “shareholders” as the assessee had claimed, but only a register of “members”. By referring to the register of members, the Court demonstrated that, for the purposes of the Indian Income-Tax Act, the words “member” and “shareholder” are synonymous. Consequently, the words of section 18(5) must be interpreted in the same sense as the term “shareholder” is employed in the subsequent sections. Applying this interpretation, the Court concluded that the present assessee, despite having an equitable right to the dividend, could not be treated as a “shareholder” within the meaning of section 18(5) of the Act. The Court held that the benefit of the dividend-tax certificate can accrue only to the person who, both in law and in equity, is regarded as the owner of the shares and with whom the company has the relationship of membership and share ownership.

Having examined the issue that concerned the share capital of the company, the Court concluded that the matter was properly addressed by the earlier decision of the Calcutta High Court. In view of the material before it, the Court was satisfied that the answer rendered by the Calcutta High Court to the specific question framed by the Tribunal was correct. Accordingly, the Court held that there was no ground on which the present appeal could succeed. The appeal was therefore dismissed, and the Court ordered that the costs of the proceedings be awarded against the appellant. The final order expressly stated that the appeal was dismissed.