Purshottamdas Thakurdas vs Commissioner Of Income-Tax, Bombay

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 597 of 1961

Decision Date: 04 December 1962

Coram: S.K. Das, J.L. Kapur, A.K. Sarkar, M. Hidayatullah, Raghubar Dayal

In the matter titled Purshottamdas Thakurdas versus Commissioner of Income‑Tax, Bombay, the Supreme Court of India delivered its judgment on 4 December 1962. The opinion was authored by Justice S.K. Das and the judgment was pronounced by a bench comprising Justices S.K. Das, J.L. Kapur, A.K. Sarkar, M. Hidayatullah and Raghubar Dayal. The petitioner was Purshottamdas Thakurdas and the respondent was the Commissioner of Income‑Tax, Bombay. The case is reported in 1963 AIR 1066 and in the 1963 Supplementary Civil Reports (2) page 668. The statutory framework involved the Indian Income‑Tax Act, 1922 (11 of 1922), specifically sections 16, 18, 18‑A and 49‑B, and the issue concerned the advance payment of tax on dividend income, the concept of “deduction of income‑tax at the time of payment”, and whether tax on dividends was to be treated as payable by the company or the shareholder.

The assesse​e had filed an estimate of income for the purpose of making an advance payment of tax under section 18‑A, but he omitted the dividend income from that estimate. The Income‑Tax Officer held that section 18‑A(2) required the assesse​e to include dividend income in his estimate and to pay the corresponding advance “super‑tax”. Because the assesse​e failed to do so and the advance tax paid was less than eight hundred per cent of the tax determined on the regular assessment, the officer imposed penal interest under section 18‑A(6) on the unpaid super‑tax relating to the dividend income. The assesse​e argued that dividend income fell within the ambit of section 18, which provides for a “deduction of income‑tax at the time of payment”, and therefore section 18‑A should not apply to it. He further contended that, since section 18(5) applied to dividend income, the penal provisions of section 18‑A(6) were not triggered. The Court, by a majority of Justices Das, Kapur and Hidayatullah, held that section 18(5) read together with sections 16(2) and 49‑B provides for a deduction of income‑tax at the time of payment in respect of dividend income; consequently, section 18‑A does not apply to such income. The Court explained that a shareholder’s right to a dividend arises upon its declaration, and that the legal fiction created by section 49‑B deems the income‑tax on a dividend, though paid by the assessed company, to have been paid by the shareholder himself, thereby granting the shareholder a credit under section 18(5). Accordingly, the deemed payment by the shareholder satisfies the definition of “deduction of income‑tax at the time of payment” within section 18‑A(1). In dissent, Justices Sarkar and Dayal held that the dividend income should have been included in the assesse​e’s estimate and that the penal interest imposed was proper, reasoning that dividend income is not subject to tax deduction at the time of payment under section 18 and that any tax paid by the assesse​e, whether fictional or actual, on income received by him does not constitute a deduction of tax under section 18 by the person who made the payment.

The Court explained that, for the purpose of section 18‑A, a deduction had to be made under section 18 itself; any deduction taken under other provisions was not relevant to the operation of section 18‑A. Under subsection (5) of section 18, the credit for tax paid by the company was to be granted to the shareholder, but not at the time the dividend was actually paid. Instead, the credit became available only at the time of assessment. The Court further held that the provisions of subsection (6) of section 18‑A were applicable to dividend income. The words “income to which provisions of section 18 do not apply” that appear in subsection (6) were interpreted to refer to those classes of income for which section 18 provides a deduction of tax at source. Because dividend income falls within the scope of section 18, it was not included in the description “income to which provisions of section 18 do not apply.” Consequently, dividend income could not be treated as falling within the exception contemplated in subsection (6). The Court therefore concluded that the special treatment of interest provided by subsection (6) was not available for dividend income.

The judgment was delivered in a civil appellate jurisdiction concerning Civil Appeal No. 597 of 1961, which arose from the order of the Bombay High Court dated 3 July 1959. The reference number was 45 of 1958. Counsel for the appellant included senior advocates, while counsel for the respondent appeared on the opposite side. The judgment was pronounced on 4 December 1962 by Justice Das, with separate opinions delivered by Justices Kapur, Hidayatullah, Sarkar and Dayal, the latter delivering a judgment on behalf of Justice Sarkar. The appeal concerned a certificate of fitness that the High Court of Bombay had granted under section 66‑A(2) of the Indian Income‑Tax Act, 1922. The original assessee was Purshottamdas Thakurdas, a well‑known businessman of Bombay, who died after the high‑court proceedings had concluded; his legal representatives were the appellants. The Court noted that the distinction between the deceased assessee and his legal representatives was immaterial for the determination of the issues. A notice issued under section 18‑A(1) required the assessee to make an advance tax payment for the assessment year 1947‑1948. On 15 September 1946 the assessee filed an income estimate under subsection (2) of section 18‑A, showing total income of Rs 4,64,000. He deducted Rs 3,64,000 as dividend income, asserting that section 18 applied to that amount, and claimed a double‑taxation relief credit of Rs 10,000. Accordingly, he calculated the advance tax payable as Rs 2,67,752. The Income‑Tax Officer, however, held that under subsection (2) of section 18‑A the assessee was required to include the dividend income in his estimate and to pay advance super‑tax on it. Because the assessee failed to do so and because the advance tax paid was less than eighty per cent of the tax that would be determined on regular assessment, the Officer levied penal interest under subsection (6) of section 18‑A on the super‑tax due on the dividend income.

An appeal was made to the Appellate Assistant Commissioner, who affirmed the view of the Income‑Tax Officer. The assessee then appealed to the Appellate Tribunal, and by an order dated 25 October 1957 the Tribunal held that sub‑section (6) of section 18‑A did not apply to dividend income and consequently the assessee was not liable to pay penal interest in respect of that dividend income. The Commissioner of Income Tax, Bombay City, who appears as the respondent, moved the Tribunal to state a case to the High Court of Bombay on the following question of law that arose from the Tribunal’s order: “Whether, on the facts and circumstances of the case, the assessee is liable to pay interest in respect of dividend income as provided under section 18‑A(6) of the Income‑Tax Act?” The Tribunal subsequently stated the case on that question, and the reference was dealt with by a Division Bench of the High Court of Bombay in a judgment dated 3 July 1959. The High Court altered the question framed by the Tribunal only slightly, an alteration that is not material for the present purpose. Justice J. C. Shah concluded that dividend income was not income for which section 18 made any provision “for deduction of income‑tax at the time of payment” within the meaning of sub‑section (1) of section 18‑A. Although the language of sub‑section (6) of section 18‑A differs slightly from that of sub‑section (1), the two subsections essentially convey the same meaning. Accordingly, he answered the question in the affirmative, that is, against the assessee. Justice S. T. Desai also answered the question in the affirmative, though he arrived at that conclusion on a somewhat different basis. He held that, on a proper construction of sub‑section (6) of section 18‑A, an assessee is liable to pay interest on tax pertaining to dividend income to the extent that sub‑section (5) of section 18 does not apply to that income. He explained that an assessee who is required to make an advance payment of tax under section 18‑A(1) may, under sub‑section (2), pay an amount that corresponds with his own estimate; however, if he excludes the amount of super‑tax on dividend income from his estimate, he assumes the risk that the eighty per cent ratio will be applied, resulting in a shortfall, and he will have to pay interest “upon the amount by which the tax so paid falls short of the said eighty per cent.” The eighty per cent is calculated on the tax determined on the basis of the regular assessment, insofar as such tax relates to income to which the provisions of section 18 do not apply. The provisions of section 18(5), as already indicated, do not apply to super‑tax, and the amount of super‑tax on the dividend income must be included and taken into consideration in the computation necessary for

The Court noted that it had previously answered the question presented to it affirmatively, holding that the purpose of fixing the amount of tax to which the eighty‑percent ratio was to be applied was clear. The assessee subsequently obtained a certificate of fitness from the High Court and then prefixed an appeal before this Court. The assessee contended that the answer rendered by the High Court to the referred question was erroneous. This contention was premised on two distinct grounds. Firstly, the assessee argued that a proper construction of sub‑section (2) of section 16, sub‑section (5) of section 18 and section 49‑B of the Act would show that dividend income is a head of income for which section 18 provides for “deduction of income‑tax at the time of payment,” and consequently section 18‑A would not be attracted to such income. Secondly, the assessee raised an alternative argument based on sub‑section (6) of section 18‑A, which provides that where an assessee has paid tax under sub‑section (2) on the basis of his own estimate and the tax so paid is less than eighty per cent of the tax determined on the basis of the regular assessment, interest at six per cent per annum is payable on the shortfall, but only to the extent that the tax relates to income to which the provisions of section 18 do not apply. The assessee submitted that the phrase “to which the provisions of section 18 do not apply” expressly excludes dividend income because sub‑section (5) of section 18 undeniably applies to dividends. Hence, under sub‑section (6) of section 18‑A the assessee was not liable to pay penal interest for failing to make advance tax on that head of income. In other words, the alternative submission was that sub‑section (6) of section 18‑A refers to a broader category of income than that mentioned in sub‑section (1) of section 18‑A; consequently, if any provision in section 18 covers a particular head of income—even if that provision does not amount to a deduction of tax at the time of payment—failure to pay advance tax on that head will not trigger the penal provisions of sub‑section (6) of section 18‑A. The Court proceeded to examine these two arguments advanced on behalf of the appellant and the corresponding replies offered by the respondent. The first point for consideration was whether, on a proper construction of sub‑section (2) of section 16, sub‑section (5) of section 18 and section 49‑B, dividend income indeed falls within the ambit of section 18 for “deduction of income‑tax at the time of payment.”

In order to address the issues raised, it is necessary first to refer to the scheme of sections 18 and 18‑A of the Income‑Tax Act. Under the Indian Income‑Tax Act of 1922, tax for a particular year of account is assessed and paid in the succeeding year based on the results of the previous year. The legislature, by inserting section 18‑A, created a provision that imposes a liability on taxpayers who had previously been assessed and also on those who had not yet been assessed, requiring them to make an advance payment of tax in respect of income that exceeds a certain threshold for which section 18 does not provide a deduction of tax at the time of payment.

Sections 18 and 18‑A together exhaust all categories of taxable income under the Act. The statute provides two modes of tax collection: a direct levy and a levy by deduction at source. The ordinary method of collection is the direct levy of tax from the assessee, and this method is dealt with by sections 19, 45 and 46. Deduction of tax at source is authorized only in certain specified cases mentioned in section 18.

Sub‑section (2) of section 18 relates to salaries. It makes the person responsible for paying any income chargeable under the head “salaries” deduct income‑tax and super‑tax on the amount payable at a rate representing the average of the rates applicable to the estimated total income of the assessee under that head.

Sub‑section (3) of section 18 relates to interest on securities. It requires the person responsible for paying any income chargeable under the head “interest on securities” to deduct, at the time of payment, income‑tax but not super‑tax on the amount of interest payable at the maximum rate, unless a different provision is prescribed for a security of the Central Government.

Sub‑sections (3‑A) to (3‑E) deal with other cases that are not material for the present purpose; therefore, they need not be referred to.

Sub‑section (4) of section 18 provides that all sums deducted in accordance with the provisions of this section shall, for the purpose of computing the income of an assessee, be deemed to be income received.

Sub‑section (5) of section 18, which is relevant to the issue at hand, states that any deduction made and paid to the account of the Central Government pursuant to this section, and any sum that a dividend has been increased under sub‑section (2) of section 16, 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. A credit shall be given to that person on the production of the certificate furnished under subsection (9) or section 30, as the case may be, in the assessment, if any, made for the following year under this Act, provided that if such person or owner obtains a refund of any portion of the tax under the provisions of the Act, no credit shall be given for the amount of such refund.

The provision stipulates that where an amount previously deducted is later refunded, no credit may be allowed for the refunded sum. The brief purpose of section eighteen is to provide for the deduction of income‑tax at source on certain classes of income. For two of those classes—salaries and interest on securities—there is no difficulty in application. Difficulty arises only with respect to the class of income described in sub‑section five of section eighteen, namely dividend income, and the Court indicated that it would address that difficulty later. Section eighteen‑A, which was added in the year 1944, deals with the advance payment of tax. Although it was originally introduced as a wartime measure, probably intended to combat inflation, it has, like many other innovations in tax legislation, continued to operate beyond the emergency that gave rise to it. The section applies to those taxpayers whose total income in the most recent assessment, as well as to those who have not yet been assessed but whose total income in the preceding year, exceeded, by a specified sum, the maximum amount that is not chargeable to tax. In effect, the section seeks to harmonise the principle of paying tax in advance with the overall scheme of the Income Tax Act, which taxes the income of the preceding year. The underlying basis of the section is the “pay‑as‑you‑earn” principle, that is, the concept that tax may be paid by instalments in respect of the income of the very year in which the tax is actually paid. Sub‑section (1) requires the payment of tax in respect of the income of the latest preceding year, while sub‑section (II) treats the tax so paid as if it were paid for the year of payment, and consequently a credit is given to the taxpayer in the regular assessment made in the following financial year. The so‑called advance payment of tax is only provisional; if, after the regular assessment is completed, the amount paid in advance exceeds the tax that is finally payable, the taxpayer is entitled to a refund of the excess. It is also important to note that the provision for advance payment of tax under section eighteen‑A applies only to income on which tax is not deductible at source under section eighteen. Where tax is already deducted at source, that deduction itself amounts to an advance payment of tax, and therefore such income falls outside the scope of section eighteen‑A. Sub‑section (2) of section eighteen‑A permits a taxpayer to make his own estimate of tax liability if, in his opinion, the income for the year is likely to be lower than the amount on which he has been asked to make an advance payment in accordance with sub‑section (1). Finally, sub‑section (6) of section eighteen‑A, to the extent relevant for the present discussion, provides that where, in any year, a taxpayer has paid tax under sub‑section (2) or sub‑section (3) on the basis of his own estimate, and the tax so paid is less than eighty per cent of the tax that would be determined on the basis of the regular assessment, further consequences follow as set out in the provision.

According to the provision, when an assessee makes an advance tax payment that is determined on the basis of the regular assessment, the interest rule applies only to the portion of tax that relates to income to which the provisions of section eighteen do not apply and only where the shortfall is not caused by variations in the tax rates introduced by the Finance Act for the year of the regular assessment. In such a case, the assessee must pay simple interest at the rate of six per cent per annum, calculated from the first day of January in the financial year in which the tax was paid, up to the date on which the regular assessment is completed. The interest is payable on the amount by which the tax actually paid falls short of the prescribed eighty per cent threshold, as indicated by the placeholders xx xx xx xx xx xx xx xx XX. This clause is intended for situations where the assessee’s own estimate of tax liability proves to be too low. It expressly provides that where an assessee has paid advance tax under sub‑section two and the amount so paid is less than eighty per cent of the final assessment of his income for that year, the assessee becomes liable to pay interest at six per cent. However, the provision is qualified by the requirement that the income concerned must be of the kind to which section eighteen does not apply.

The court then turned to the principal question of whether sub‑section five of section eighteen, in its true scope, treats dividend income as income from which a deduction of income‑tax has already been made at the time the dividend is paid. The assessee argued that, when read together with sub‑section two of section sixteen and section forty‑nine‑B, sub‑section five of section eighteen has precisely that effect. The respondent contended that it does not. The court accepted the assessee’s contention as correct. Sub‑section two of section sixteen first declares that any dividend shall be deemed to be income of the year in which it is paid, irrespective of when the profits that fund the dividend were earned. Consequently, a shareholder’s right to a dividend arises at the moment of declaration. The second part of that sub‑section requires that the net dividend received by the shareholder be “grossed up” before inclusion in the shareholder’s total income by adding the amount of income‑tax paid by the company. Under general law, the company is a separate taxable entity and pays tax on its profits in discharge of its own liability, not on behalf of the shareholder. This point was emphasized by the respondent’s counsel. Nonetheless, section forty‑nine‑B creates a legal fiction whereby, for the purpose of taxation, the income‑tax on the dividend is deemed to have been paid by the shareholder himself.

The Court observed that under section 49‑B, when a dividend is paid by a company that is subject to tax assessment, the income‑tax (but not super‑tax) in respect of that dividend was deemed to have been paid by the shareholder himself. Because the income‑tax on the dividend was, by operation of section 49‑B, treated as having been paid by the shareholder on his own income, although in reality the tax was settled by the company in discharge of its own liability, the shareholder was accorded credit in the assessment pursuant to sub‑section (5) of section 18. Consequently, the shareholder was not required to pay income‑tax again on the same dividend and could claim a refund under section 48 where the maximum corporate tax rate did not apply to him. The Court further explained that the combined effect of sub‑section (2) of section 16, section 49‑B and sub‑section (5) of section 18 was to treat the so‑called tax‑free dividend not as the amount actually received but as a larger sum from which tax had been deducted. In the same manner as tax‑free salaries and tax‑free securities, the gross amount—including the tax paid by the company—was to be included in the shareholder’s total income because the tax paid by the company remained part of the income derived from the shareholding. If this interpretation was correct, then sub‑section (5) of section 18 provided for “deduction of income‑tax at the time of payment” within the meaning of sub‑section (1) of section 18‑A. Counsel for the respondent, however, drew attention to the portion of sub‑section (5) of section 18 that referred to “any deduction made and paid to the account of the Central Government in accordance with the provisions of this section” and to “any sum by which a dividend has been increased under sub‑section (2) of section 16.” The argument presented was that the sub‑section dealt with two distinct matters: one being the deduction of tax referred to in the earlier sub‑sections, and the other being the addition of a sum to the dividend. According to counsel, these two aspects stood on separate footing; the former represented a genuine “deduction of income‑tax at the time of payment,” whereas the addition under sub‑section (2) of section 16 was not a deduction of tax at the time of payment but merely a provision to credit the shareholder for the amount added to his dividend. The Court rejected this line of argument, holding that it failed to give full effect to the legal fiction created by section 49‑B, whereby the tax paid by the company was deemed to have been paid by the shareholder himself in respect of his dividend income grossed up under sub‑section (2) of section 16. If the shareholder was deemed to have paid the tax himself at the time the company paid the dividend, the Court saw no reason why this payment should not be treated as a “deduction of income‑tax at the time of payment” within the meaning of sub‑section (1) of section 18‑A.

In the present case the Court observed that if a shareholder is deemed to have paid the tax at the moment the company distributes the dividend, that payment must be regarded as “deduction of income‑tax at the time of payment” within the meaning of sub‑section (1) of section 18A. The Court explained that deduction at source is merely a method of collecting tax from the person whose income is subject to the deduction; consequently the tax paid by the company when the dividend is paid is treated as part of the shareholder’s income and the gross amount of the dividend must be included in his total income. By the same reasoning, tax deducted at source and remitted to the Government is also treated as having been paid by the shareholder himself. Accordingly, sub‑section (5) operates to give effect to the principle embodied in sub‑section (41) of section 18, namely that all sums deducted under the provisions of that section shall, for the purpose of computing an assessee’s income, be deemed to be income received.

The Court noted that there had been argument concerning the omission of the word “shareholder” in the first proviso to sub‑section (5) of section 18. Although the Amending Act of 1939 inserted the reference to “shareholder” in the substantive part of the subsection, it did not amend the first two provisos, and the Court held that whether this omission was an oversight was irrelevant to the present determination. The Court therefore based its conclusion on the substantive part of sub‑section (5). On the chief contention raised on behalf of the appellant, the Court held that section 18A does not apply to the dividend income of the assessee; consequently the assessee was not liable to penal interest under sub‑section (6) of section 18A. Because this conclusion resolved the principal issue, it was unnecessary to consider the alternative argument based on the wording of sub‑section (6). The Court observed that sub‑section (6) refers to “income to which the provisions of section 18 do not apply,” and it is difficult to sustain the view that sub‑section (5) of section 18 does not apply to dividend income, since it expressly mentions such income. The respondent’s contention that sub‑section (6) would be unworkable in the case of dividend income unless it carried the same meaning as in sub‑section (1) was rejected. Counsel for the respondent relied on two earlier decisions of this Court—Commissioner of Income‑Tax v. Teja Singh and Gursahai Saigal v. Commissioner of Income‑Tax, Punjab. The Court noted that the first decision, which held that when construing a legal fiction all facts on which the fiction can operate must be assumed, was contrary to the respondent’s position on the principal argument, while the second decision concerned sub‑section (8) of section 18A and was not required for the present determination.

The Court observed that it is proper to interpret a statutory “machinery” provision in a way that renders it functional. Accordingly, the Court held that sub‑section (6) of section 18‑A would not be rendered ineffective, even if that sub‑section were to refer to a broader category of income than the one described in sub‑section (1). The Court noted that the authorities cited – namely the decisions reported in (1) [1959] Supp. 1 S.C.R. 394 and (2) [1963] 48 I.T.R. 1 – support a construction that avoids unworkability. The Court deemed it unnecessary to elaborate further on this point. On the basis of its analysis, the Court concluded that sub‑section (5) of section 18, when read together with sub‑section (2) of section 16 and section 49‑B, creates a provision for “deduction of income‑tax at the time of payment” with respect to dividend income. Consequently, section 18‑A does not apply to dividend income. In light of this conclusion, the Court allowed the present appeal, set aside the judgment of the High Court, and answered the question that had been referred to the High Court in the negative, thereby granting relief in favour of the assessee. The appellants were also awarded their costs of this Court and of the High Court.

The Court then turned to the statutory framework of the Income‑tax Act, 1922. Under the ordinary rule of that Act, tax for a given fiscal year is levied on the income of the preceding year. Section 18‑A creates an exception to that rule by providing for the advance payment of tax, meaning that tax is payable during the year in which the income is earned. The central issue in the appeal concerned the proper interpretation of certain provisions of section 18‑A and of a few related sections. The Court explained that the contentions could be understood only after referring to the wording of those provisions. Sub‑section (1) of section 18‑A provides that where income is not covered by the deduction‑at‑the‑time‑of‑payment mechanism of section 18, the Income‑tax Officer may require the assessee to pay, on a quarterly basis, an amount equal to one‑quarter of the income‑tax and surcharge that would be payable on that portion of income which is included in the assessee’s total income of the latest previous year for which assessment has already been made. This liability to pay arises only if the total income of that latest previous year exceeds the threshold specified in the sub‑section, so the advance tax demand is calculated on the basis of income shown in a prior assessment. The Court recognised that an assessee might believe that his income for the current period will be lower than the income shown in the earlier assessment. In such a circumstance, sub‑section (2) allows the assessee to submit an estimate of the tax payable and to remit the estimated amount in equal instalments. Thus, sub‑section (2) gives the assessee the discretion to base the advance tax payment on his own estimate rather than on the amount derived from the previous year’s assessment. The Court noted that, as with sub‑section (1), the assessee’s estimate must be confined to income for which section 18 does not provide for deduction of tax at the time of payment.

In making an estimate of tax under sub‑section (2) the assessee may consider only that income for which section 18 does not provide for tax deduction at the time of payment. Sub‑section (3) deals with a person who has never been assessed yet whose total income is expected to exceed the threshold that triggers advance tax under sub‑section (1). That provision requires such a person to send the Income‑tax Officer an estimate of tax on that portion of his income to which the provisions of section 18 are not applicable, and to pay the estimated amount on the dates specified in the statute. In both sub‑sections (2) and (3) the assessee makes his own calculation of tax liability. The advance tax paid under any of the sub‑sections (1), (2) or (3) is provisional; after the regular assessment for the year the assessee may be entitled to a refund if the advance tax exceeds the final liability, or he may be required to pay the balance if the advance tax was insufficient. Because the responsibility for estimating tax under sub‑sections (2) and (3) rests on the assessee, sub‑section (6) provides a mechanism to penalise an excessively inaccurate estimate. The appeal largely concerns this sub‑section, which provides: “Where in any year an assessee has paid tax under sub‑section (2) or sub‑section (3) on the basis of his own estimate, and the tax so paid is less than eighty per cent of the tax determined on the basis of the regular assessment, so far as such tax relates to income to which the provisions of section 18 do not apply … simple interest at the rate of six percent per annum … shall be payable by the assessee upon the amount by which the tax so paid falls short of the said eighty per cent.” The provision also specifies the period for which interest is to be calculated, but that period is not material to the present appeal. In the present case Purshottamdas Thakurdas, the assessee, submitted an estimate under sub‑section (2) of section 18A for the tax payable in advance for the year 1947‑48. In that estimate he omitted the dividends received on shares he owned. After the regular assessment it was found that the tax he had estimated was less than eighty per cent of the tax determined by the assessment, and consequently he was ordered to pay interest under sub‑section (6) of section 18A. The shortfall would not have occurred if the dividends had been included in his estimate. The assessee appealed this decision to the Appellate Assistant Commissioner, but his appeal was dismissed.

The appellant’s first appeal to the Appellate Assistant Commissioner was dismissed, after which he appealed to the Income‑Tax Appellate Tribunal and obtained a successful outcome there. Subsequently, at the request of the respondent Commissioner of Income‑Tax, the Tribunal invoked section 66(1) of the Act and referred to the High Court two specific questions for determination. The first question asked whether, based upon the facts and circumstances of the present case, the assessee was liable to pay interest on the dividend income pursuant to Section 18A(6) of the Income‑Tax Act. The High Court answered this question in the affirmative, although the individual judges on the bench reached that conclusion for slightly differing reasons. After that decision, the matter proceeded to the Supreme Court on further appeal. While the appeal was pending, the original assessee passed away; consequently, his legal representatives were substituted in his place and now appear as the appellants before this Court. The principal issue that this appeal presents is whether, when making an estimate under section 18A(2) of the tax payable by the assessee, the dividends actually received by him should have been taken into account. It is not contested that, in preparing such an estimate, only that portion of income which is not subject to a provision for deduction of income‑tax at the time of payment under section 18 may be considered. Counsel for the appellants argues that dividend income falls within the category of income for which section 18 provides a deduction at the time of payment; therefore, if that contention is correct, no liability to pay interest under section 18A(6) would arise. The appellants rely on three statutory provisions to support their position: sub‑section (2) of section 16, sub‑section (5) of section 18, and section 49B of the Act. Sub‑section (2) of section 16 provides that, for the purpose of inclusion in total income, a dividend is deemed to be income of the previous year in which it is actually paid and that it shall be increased in a prescribed manner; without delving into the detailed mechanics of that increase, it may be stated that the increase is essentially equivalent to the amount of income‑tax that the company would have paid on the dividend at the applicable rate in the financial year of payment. Sub‑section (5) of section 18 further declares 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 sub‑section (2) of section 16, shall be treated as payment of income‑tax or super‑tax on behalf of the person whose income gave rise to the deduction, or on behalf of the owner of the security or the shareholder, as the case may be, and that credit shall be given against that person upon production of the certificate prescribed in sub‑section (9) or the relevant section.

In this case the Court referred to the language of section 49B, which provides that when a dividend has been paid or is deemed to have been paid to a person who is a shareholder specified in section 3, that person shall, if the dividend is included in his total income, be deemed to have paid income‑tax—excluding super‑tax—equal to the amount by which the dividend was increased under sub‑section (2) of section 16. The appellants argued, through their counsel, that these two provisions create a fictitious deduction of tax on dividends; they contended that this fiction must be given effect to, so that, when estimating income under section 18A(2), dividends should be excluded and treated, on the basis of the fiction, as income on which tax has already been deducted at the time of payment. The Court could not accept this argument. It observed that the provisions relied upon by the appellants merely indicate that a shareholder who receives dividends is entitled, in his assessment, to have a certain sum paid or payable as tax by the company, which is to be treated as tax paid on his behalf and deemed to have been paid by the shareholder himself. The Court clarified that its concern was not with tax paid by or on behalf of the assessee, but with income on which income‑tax has been deducted at the time of payment by the person making the payment, as mandated by section 18. The Court held that a payment of tax by the assessee, whether real or fictional, on income he receives does not constitute a deduction of tax under section 19 by the payer of that income. Consequently, no deduction as contemplated by section 18 exists in the circumstance described. The Court further explained that sections 16(2), 18(5) and 49B do not require the creation of any fictional deduction under section 18. Section 18(5) expressly distinguishes between “any deduction made … in accordance with this section” and “any sum by which a dividend has been increased under sub‑section (2) of section 16,” indicating that the increased amount is not a deduction under section 18. It is also important to remember that for the application of sections 18A(1), (2) and (3), a deduction under section 18 is necessary to exclude any part of the income; deductions under other provisions are not sufficient. Moreover, under section 18(5), an assessee is entitled to credit for the amount, but this credit relates only to deductions that fall within the meaning of section 18, not to the increased dividend amount contemplated in section 49B.

It was observed that an amount could be added to a dividend under section 16(2) as tax paid on the assessee’s behalf, but that addition could occur only at the time of the assessment, if any, for the following year. The Court explained that no credit could be given before the assessment, that is, after the dividend had already been paid to the assessee. This observation demonstrated that dividends were not the kind of income on which tax was deducted under section 18 at the time of payment. The Court further pointed out that where the assessee had not undergone an assessment, no tax could be treated as having been paid by him. The position under section 49B was held to be the same. If tax were deducted at source under section 18, the deduction would occur in every case and would not depend on any assessment. This added another reason for saying that dividends were not income on which tax was deducted at the time of payment under section 18.

The appellants then argued that even if dividends were not such income, no interest should be chargeable under section 18A(6) for a different reason. They contended that to determine the shortfall under subsection (6) of section 18A, the tax paid by the assessee on the basis of his own estimate must be compared with the tax determined on the regular assessment, taking into account only that part of the income “to which the provisions of section 18 do not apply.” Accordingly, they argued that while making this comparison, the portion of the assessee’s income to which the provisions of section 18 apply should be excluded. They further noted that subsection (5) of section 18 applied to income received in the form of dividends. Therefore, they said, dividends should be excluded when computing the tax payable on the regular assessment under subsection (6) of section 18A, and that doing so would eliminate any shortfall. The Court accepted that if dividends were excluded from both the regular assessment and the estimate, the shortfall would indeed disappear. However, the Court found this argument to be erroneous. The language “tax determined on the basis of the regular assessment, so far as such tax relates to income to which the provisions of section 18 do not apply” referred specifically to tax on income of the types mentioned in any provision of section 18. Only income of those specified types was to be left out of consideration for the purpose of the regular assessment under section 18A(6). The Court then turned to a discussion of section 18, noting that it contained a large number of subsections, with subsection (1) omitted, and that further analysis would be required.

The Court observed that sub‑sections (2A), (2B), (4) and those from (6) through (9) were excluded from consideration because none of them addressed any particular category of income that was not already covered by other provisions. It then noted that each of the remaining sub‑sections, with the sole exception of sub‑section (5), dealt specifically with the deduction of tax at source from a distinct type of income. In certain instances, both income‑tax and super‑tax were deducted, whereas in other instances only income‑tax was deducted; however, the Court declared that this distinction was not material for the purposes of the present judgment. The Court proceeded to examine the various sub‑sections that related to deductions from different heads of income. Sub‑section (2) concerned deductions from salaries; sub‑section (3) related to interest on securities where the recipient was a resident; sub‑section (3A) dealt with interest on securities where the recipient was a non‑resident; sub‑section (3B) concerned interest that was not interest on securities or any other sum chargeable under the Act in the case of non‑residents; sub‑section (30) covered any sum chargeable under the Act other than interest payable to a non‑resident; and sub‑section (3D) addressed dividends payable to non‑residents. The Court pointed out that at the relevant time the statute contained no provision for the deduction of income‑tax from dividends paid to a resident shareholder, and it was precisely this omission that gave rise to the argument before it. Regarding sub‑section (5), the Court observed that this provision did not target any single or specific type of income but rather dealt collectively with all the various kinds of income previously mentioned as well as with dividends payable to a resident. Consequently, the Court concluded that sub‑section (5) was not among the provisions contemplated by section 18A(6), because it did not specify any particular class of income that should be excluded from the account in determining the amount due on a regular assessment under sub‑section (6) of section 18A. The Court therefore interpreted the words of the subsection under discussion as referring exclusively to those provisions of section 18 that identify particular categories of income and prescribe deduction of tax therefrom. It held that any alternative interpretation would lead to anomalous results that could not have been intended by the legislature. Applying this construction to the first contention raised by the appellants, the Court found it evident that, under sub‑section (1) of section 18A, dividend income could not be omitted from the account for the purpose of calculating tax payable in advance. The Court further noted that the same position applied under sub‑section (2). It then questioned how the requirement under sub‑section (2) to include dividend income in the estimate could be enforced if interest under sub‑section (6) was not payable when dividends were omitted. The Court explained that the question of interest under sub‑section (6) arose only upon a regular assessment, and although the amount determined on such assessment could be recovered in the usual manner, that recovery would not satisfy the obligation imposed by sub‑section (2), namely the requirement to pay tax in advance.

In this interpretation, there would be no effective provision for the payment of tax in advance when the taxpayer prepares his own estimate, which could not have been the legislative intention. It is noteworthy that subsection (3) contains the same words “income to which the provisions of section 18 do not apply”. If those words were given the meaning proposed by the appellants, dividends would not have to be taken into account in computing tax payable in advance under that subsection. However, dividends are clearly required to be taken into account when either subsection (1) or subsection (2) applies. It is hard to conceive that the legislature intended a different treatment for a case falling under subsection (3). As previously observed, the primary purpose of section 18 is to provide for tax deduction at source. Consequently, the expression “income to which the provisions of section 18 do not apply” should be understood as referring to that category of income for which section 18 mandates source deduction. This interpretation is consistent with the overall scheme of section 18A. Once tax has been deducted at source, there is no longer any question of paying tax on that income again, either in advance or otherwise. For all of these reasons, the Court concluded that the phrase “income to which the provisions of section 18 do not apply” does not include dividends payable to a resident taxpayer. Accordingly, the appeal was dismissed with costs. By the Court: In accordance with the opinion of the majority, the appeal is allowed with costs.