Provat Kumar Mitter vs Commissioner Of Income Tax, West Bengal

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

Court: supreme-court

Case Number: Civil Appeal No. 366 of 1959

Decision Date: 08/12/1960

Coram: S.K. Das, M. Hidayatullah, J.C. Shah

In this case, the Court recorded that the petitioner, Provat Kumar Mitter, held five hundred ordinary shares of the Calcutta Agency Ltd. and that on 19 January 1953 he executed a deed by which he assigned to his wife, Ena Mitter, the right, title and interest to every dividend and sum of money that might be declared or become due in respect of those shares for the duration of her natural life. During the accounting year that ended on 31 March 1953 a dividend of Rs 12,000 was declared on the shares, and when the assessment for the year 1953‑54 was made the Income‑Tax Officer included that amount in the petitioner’s income under section 16(i)(c) and section 16(3) of the Indian Income‑Tax Act, 1922. The petitioner contended that, because the settlement was limited to the lifetime of his wife, the third proviso to section 16(i)(c) should apply, rendering the dividend received by his wife incapable of being deemed his income, and further argued that section 16(3) was inapplicable since there had been no transfer of the shares themselves to his wife. The Court examined the nature of the deed and held that, on proper construction, the instrument did not constitute a transfer of any existing property of the petitioner, namely the shares, but merely created a contract to transfer in the future every dividend and sum of money that might become payable on the shares to his wife during her lifetime. Because the company could pay the dividend only to the registered shareholder or at his direction, the income continued to accrue to the petitioner, who subsequently applied it towards payment to his wife under the terms of the contract. Consequently, the Court concluded that the dividend was assessable in the hands of the petitioner. The Court relied upon the authority of Howrah Trading Co. Ltd. v. Commissioner of Income‑Tax, Calcutta, [1959] SUPP. 2 S.C.R. 448, and distinguished the cases of Bacha F. Guzday v. Commissioner of Income‑Tax, Bombay, [1955] 1 S.C.R. 876 and Bejoy Singh Dhudhuria v. Commissioner of Income‑Tax, (1933) L.R. 60 I.A. 196. The judgment arose from Civil Appeal No. 366 of 1959, an appeal against the judgment and order dated 18 September 1958 of the Calcutta High Court in Income Tax Reference No. 9 of 1955. Counsel for the appellant and counsel for the respondent appeared for the respective parties.

The judgment was delivered by Justice S K DAS on December 8, 1960, after counsel Gupta appeared for the respondent. The matter before the Court was an appeal against a certificate of fitness that had been issued by the High Court of Calcutta under section 66A(2) of the Indian Income‑Tax Act, 1922. The appellant in this appeal was the assessee, Provat Kumar Mitter, who held as a registered shareholder five hundred ordinary shares of Calcutta Agency Ltd. By a deed dated 19 January 1953, the appellant had executed a written instrument in which he assigned to his wife, Ena Mitter, the right, title and interest to every dividend and any sum of money that might be declared or become payable in respect of those shares for the duration of her natural life. The deed, in its material portion, stated that the settlor, who was the beneficial owner of the shares, transferred to the beneficiary the right to receive all dividends and related sums (excluding the price or value of the shares themselves), promised to deliver any dividend warrant or title document to the beneficiary, and undertook to instruct the company to pay the dividends directly to the beneficiary, holding such income absolutely for the beneficiary during her lifetime. The deed further declared that the beneficiary would be absolutely entitled to receive and possess every dividend and sum of money arising from the shares throughout her life, and that the settlor would retain no right, title or interest in such income during that period. It is important to note that, under the terms of the instrument, the legal ownership of the shares remained with the appellant; only the income generated by the shares was intended to be assigned to his wife. During the financial year ending 31 March 1953, the shares generated a dividend of Rs 12,000. When assessing the appellant for the assessment year 1953‑54, the Income‑Tax Officer included the amount of Rs 12,000 in the appellant’s taxable income under sections 16(1)(c) and 16(3) of the Act, as recorded in the assessment order. The appellant contested this inclusion, arguing that because the assignment of dividend rights was for the lifetime of his wife, the third proviso to section 16(1)(c) should apply, thereby preventing the dividend received by his wife from being treated as his own income under that provision. With respect to section 16(3), the appellant asserted that the provision was inapplicable because there was no transfer of the

The assessee appealed the assessment order to the Appellate Assistant Commissioner. Before that authority the Department advanced an unusual argument, contending that the third proviso to section 16(1)(c) should be disregarded because it conflicted with the principal provisions of section 16(1)(c) and with the overall scheme of the Income‑Tax Act. The Department further argued that, since the shares remained in the assessee’s name and the dividends were declared in his name, the conveyance of the dividend to his wife amounted only to an application of income already accrued to the assessee; consequently, the assessee could not claim any exemption from tax on that income as part of his own earnings. The Appellate Assistant Commissioner accepted both of these contentions and dismissed the appeal.

Subsequently, the assessee took the matter to the Income‑Tax Appellate Tribunal, once again relying on the third proviso to section 16(1)(c). The Department’s representative reiterated the two earlier arguments and introduced an additional claim that the deed transferring the dividend was invalid because it was an unregistered instrument, and therefore no lawful transfer of dividend income to the wife had occurred. The Tribunal rejected the Department’s view that the third proviso conflicted with the main provisions of section 16(1)(c) or with the Act’s scheme. Regarding the second argument—that the dividend transfer was merely an application of income already accrued to the assessee—the Tribunal expressed no explicit opinion. However, the Tribunal gave effect to the Department’s third argument, holding that the unregistered deed did not constitute a valid transfer of dividend income to the assessee’s wife. Following this, both the assessee and the Commissioner applied to the Tribunal for a reference of the disputed questions to the High Court, each seeking review of the decisions that were adverse to their respective positions. The Tribunal agreed to the request and referred three specific questions to the High Court, two raised by the Commissioner and one raised by the assessee.

The questions referred were as follows: (1) whether the deed dated 19 January 1953, which assigned the dividends to accrue solely on account of natural love and affection, was void because it was not registered; (2) whether the third proviso to section 16(1)(c) is inconsistent with the main clause of that section and with the general scheme of the Act, and therefore should not be given effect; and (3) whether, considering the facts and circumstances of the case, the payment of dividend income to the assessee’s wife, Ena Mitter, under the covenant in the deed of assignment dated 19 January 1953, amounted merely to an application of the assessee’s income. The High Court answered the first two questions in favour of the assessee, but answered the third question against the assessee and in favour of the Department.

In this case, the Court noted that the Department had been favoured by the High Court’s answer to the third question, and it reproduced the High Court’s reasoning verbatim: “............... the conclusion must be that there being only a voluntary covenant entered into by the settlor to pay over the dividends received by him to the wife or to instruct the company to pay them to her and the income not having been made the wife’s income from the beginning, what the settlement provides for is only an application of the income and therefore the income is assessable in the hands of the settlor, irrespective of whether the wife is also assessable on her receipts. The case is outside the main clause of section 16(1)(c) and, therefore, the third proviso to the section is also not relevant.” The appeal before the Court was confined to the correctness of the High Court’s answer to that third question. Because the first two questions had been decided in favour of the assessee and the Department had not appealed those decisions, the Court declared that it would not express any opinion on those answers. The appellant argued that the High Court should not have addressed the third question because it did not arise from the Tribunal’s order. The appellant relied on section 66 of the Income‑Tax Act, contending that the Tribunal could refer only those questions of law that actually arose out of its order, and that a question not so arising could not be referred. The Court rejected that contention. It observed that, although the Tribunal had not articulated a specific finding on the third question, the Tribunal’s statement of case under section 66 expressly recorded that the question had been raised by the Department and, by implication, decided against the respondent. Moreover, the respondent’s own application to the Tribunal identified the question as one decided adversely to it, and the Tribunal itself held that the question did arise from its order. No objection to the Tribunal’s reference of the three questions, including the present one, was recorded in the High Court. Consequently, the Court held that the appellant could not now claim that the question did not arise from the Tribunal’s order and therefore overruled that submission. Turning to the correctness of the High Court’s answer, counsel for the appellant contended that the High Court had misinterpreted the instrument dated 19 January 1953, arguing that a proper construction would have shown a present‑time transfer of a property right in favour of the wife.

In the appellate stage, counsel argued that the High Court had misinterpreted the instrument dated 19 January 1953. According to the counsel, a proper construction of that instrument would have shown that a present‑time right of property had been assigned in favour of the wife. The counsel explained that the assessee, being the registered holder of five hundred ordinary shares of Calcutta Agency Ltd., possessed a bundle of rights in the company. Those rights comprised (i) the right to vote at shareholders’ meetings, (ii) the right to partake in the distribution of the company’s assets in the event of dissolution or liquidation, and (iii) the right to share in the profits of the company, for example through any dividend that might be declared.

The counsel contended that the third right—the right to share in profits—had been expressly assigned by the assessee to his wife. It was further asserted that the High Court had ignored this assignment while emphasising other covenants that related to the endorsement or delivery of dividend warrants and similar matters. To support this position, the counsel relied on observations made by this Court in Bacha F. Guzdar v. Commissioner of Income‑tax, Bombay, reported at page 883 of the 1955 law reports. In that case, the issue was whether a dividend declared by a tea‑growing and manufacturing company qualified as agricultural income under section 2(1) of the Income‑tax Act and therefore exempt under section 4(3)(viii). The Court held that a shareholder’s dividend arose from his right to participate in the profits of the company, a right that existed independently of any declaration by the company; the only distinction was that enjoyment of the profit was deferred until a dividend was actually declared.

The appellate court observed, however, that those observations did not assist the appellant in resolving the present question, which centered on the construction of the 19 January 1953 instrument. The court explained that a transfer of property could be effected either presently or in the future, but the property to be transferred must exist at the time of transfer. The court concluded that the instrument in question was not a transfer of any existing property belonging to the assessee. Rather, it was fundamentally a contract that sought to transfer or assign, in the future, every dividend and any sum of money that might become payable on account of the shares held by the assessee, to his wife for the duration of her lifetime. The other covenants in the instrument were ancillary and served to support this primary objective.

Accordingly, the court held that the assessee had not assigned the shares themselves and therefore retained his right to participate in the company’s profits. He had not relinquished that right. The contract merely provided that the beneficiary—the wife—would receive from the assessee every dividend and any other sum of money that might be declared or become payable in respect of those shares. This construction, the court affirmed, demonstrated that the High Court’s answer to the question referred to it was correct.

In respect of the shares, the Court held that if the document was truly construed in the manner described, then the answer supplied by the High Court to the question that had been referred was correct. The High Court had rightly pointed out that a company paying a dividend could make the payment only to the registered shareholder or pursuant to his directions, as explained in Howrah Trading Co. Ltd. v. Commissioner of Income‑tax, Central, Calcutta (1). Accordingly, section 16(1)(c) of the Income‑tax Act did not become applicable, nor did the third proviso to that provision. The dividend income therefore continued to accrue to the assessee, and only afterwards was it transferred to his wife under the terms of the contract. The Court consequently found that the income was assessable in the hands of the assessee because it formed part of his income, even though it was subsequently applied to satisfy the contractual obligation to pay the wife. The related authority is recorded in the 1959 Supplement 2 of the Supreme Court Reporter at page 448 (1). In the Court’s view, it was unnecessary to resolve the subsidiary question as to whether a contract of this character operated solely as a future‑performance contract that could be specifically enforced when the property came into existence, or whether it attached to the property as soon as the settlor acquired it. Under either interpretation, the income from the shares would first accrue to the settlor before the beneficiary could receive it, and such income would undeniably be assessable to the settlor despite the existence of the contract.

The Court further explained that the proper position was that where a person alienated or assigned the source of his income so that the source no longer belonged to him, taxation on the income arising after such assignment would not be imposed, except where special statutory provisions such as section 16(1)(c) or section 16(3) artificially treated the income as belonging to the assignor. However, where the assessee merely applied the income so that it passed through him to an ultimate purpose, even if he had entered into a legal obligation to do so, the income remained his for tax purposes. This factual situation precisely described the present case. The Court added that the principle laid down by the Privy Council in Bejoy Singh Dudhuria v. Commissioner of Income‑tax (3) did not apply, because the present matter did not involve an allocation of a sum out of revenue before it became income in the assessee’s hands; rather, it involved the application of income after it had accrued. Accordingly, the Court concluded that the High Court had correctly answered the referred question, the appeal failed, and it was dismissed with costs.