Padmavati R. Saraiya And Others 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 Appeals Nos. 704 to 715 of 1963

Decision Date: 22 September 1964

Coram: S.M. Sikri, J.C. Shah

In this matter the Supreme Court of India heard an appeal concerning Padmavati R. Saraiya and several other respondents against the Commissioner of Income‑Tax, Bombay. The judgment was delivered on 22 September 1964 by a bench consisting of Justice S. M. Sikri, Justice J. C. Shah and Justice K. Shah. The case is reported in the 1965 volume of the All India Reporter at page 1263 and also appears in the 1965 Supplementary Court Reporter at page 307. The dispute arose under the provisions of the Income‑Tax Act of 1922, specifically sections 16(2) and 49AA, and involved the Indo‑Pakistan Agreement dated 10 December 1947 which was intended to prevent the double taxation of income earned by residents of the two countries.

The respondents were shareholders in a company that conducted business both in India and in Pakistan. The company declared a dividend that represented profits accrued in each jurisdiction. For the following financial year the company adopted a resolution stating that one half of the dividend would be payable on a specified date, while the remaining half would be payable “within two months after remittances from Pakistan became free.” Two questions were framed for consideration. First, whether a shareholder who had received the portion of dividend attributable to Pakistan could obtain relief under the 1947 Indo‑Pakistan Agreement in accordance with section 49AA of the Income‑Tax Act. Second, whether the entire dividend, including the portion to be paid later, could be included in the shareholder’s total taxable income. The Bombay High Court answered the first question negatively and the second question affirmatively, a decision that was appealed by both the respondents and the Commissioner.

The Supreme Court dismissed both appeals. Regarding the first question, the Court observed that Articles IV and VI of the Indo‑Pakistan Agreement permitted each Dominion to make its own tax assessment under its domestic law, and the Agreement only limited the authority to retain tax and to provide certain abatements when the stipulated conditions were satisfied. The Court noted that the respondents had failed to produce a Pakistani certificate of assessment before the Income‑Tax Officer, as required by Article VI(b); consequently, they were not entitled to any relief under the Agreement.

Concerning the second question, the Court held that the dividend due to the respondents had not been credited to a separate account from which they could withdraw it. Accordingly, the portion attributable to Pakistan did not constitute a credit or payment within the meaning of section 16(2) of the Income‑Tax Act and therefore could not be included in the respondents’ total income. The Court relied on the earlier decision in J. Dalmia v. Commissioner of Income‑Tax, Delhi, reported in the 53 I.T.R. at page 83. The judgment was rendered under the civil appellate jurisdiction for Appeals Nos. 704 to 715 of 1963, which were filed against the Bombay High Court’s orders dated 17 March 1958 in Income‑Tax Reference Nos. 41, 42, 43, 57, 58, 59, 69 and 77 of 1957. The High Court judges who rendered the appealed orders were Justice A. V. Viswanatha Sastri and Justice T. A. Ramachandran, with the assistance of Justices B. Dada‑chanji, O. C. Mathur and others.

Ravinder Nairain appeared on behalf of the appellants in civil appeals numbered 704, 706, 707, 709, 710, 711, 713 and 714 of 1963, and also represented the respondents in civil appeals numbered 705, 708, 713 and 715 of the same year. S. V. Gupte, the Additional Solicitor‑General, together with R. Ganapathy Iyer and R. N. Sachthey, acted for the appellants in civil appeals numbered 705, 708, 712 and 715 of 1963, and for the respondents in civil appeals numbered 704, 706, 707, 709, 710, 711, 713 and 714 of 1963. The judgment was delivered by Justice Sikri. This judgment was intended to resolve twelve separate appeals that had been filed against the orders of the High Court of Bombay dated 17 March 1958, orders in which the High Court had answered several questions partly in favour of the assessee and partly in favour of the Revenue Department. The High Court had addressed four specific questions. The first question asked whether the commencement of proceedings under section 34 for the purpose of taxing the net dividend income of Rs 579, after appropriate grossing up, was legally valid. The second question examined whether the portion of the dividend income that originated in Pakistan formed part of the assessee’s total income as defined in section 2(15) of the Indian Income Tax Act, 1922. The third question considered whether, in view of the provisions of the Indo‑Pakistan Agreement, the assessee was entitled to any relief with respect to that Pakistani portion of the dividend. The fourth question sought to determine whether the remaining portion of the dividend, amounting to Rs 1,71,992 and declared by the company on 14 October 1952, should be included in the assessee’s total income for the previous year S.Y. 2008, which corresponded to the assessment year 1953‑54. All monetary figures in these questions related to the late Shri Purshottamdas Thakurdass. In civil appeals 709/63 and 713/63, questions one, two and three arose; in civil appeals 710/63, 711/63, 704/63, 707/63, 714/63 and 706/63, only questions two and three were relevant; and question four was presented in civil appeals 712/63, 705/63, 708/63, 712/63 and 715/63. The appeals that involved question four were filed by the Commissioner of Income Tax, whereas the appeals concerning questions one to three were filed by the assessees. For clarity, the factual background concerning the assessee, the late Shri Purshottamdas Thakurdass, hereinafter referred to as Assessee A, is set out. Assessee A held shares in Narandas Rajaram Ltd., a company that operated both in India and in Pakistan and earned profits in each jurisdiction. The company declared a dividend drawn from those combined profits. Of the dividend attributable to Assessee A, the share that corresponded to profits earned in Pakistan was Rs 2,722 for the assessment year 1949‑50. On 20 May 1952, the Income Tax Officer incorporated this amount of Rs 2,722 into Assessee A’s total income but concluded that no income tax or super‑tax was payable on that sum. Subsequently, the Income Tax Officer reopened the assessment for the year 1949‑50 because Assessee A was also a shareholder in Industrial Corporation Ltd., and an order had been issued under section 23A of the Indian Income Tax Act, 1922, which affected that corporation.

The Income Tax Officer had earlier made an order under the Act that deemed Rs 579 to have accrued to the assessee as a result of his shareholding in the corporation. In the reassessment order dated 17 January 1955, the officer not only imposed tax on that Rs 579 but also added the amount of Rs 2,722, which represented the portion of dividend received from Narandas Rajaram Ltd. that was attributable to profits earned in Pakistan. Both the Appellate Assistant Commissioner and the Appellate Tribunal affirmed the assessment in respect of the Rs 579 and the Rs 2,722, thereby upholding the officer’s decision. After confirming the assessment, the Appellate Tribunal referred the first three questions that had been raised to the High Court, but it declined to refer an additional question that asked whether, on the facts and circumstances of the case, the relief granted under section 23(3) for the portion of dividend income arising from the Pakistani operations of Narandas Rajaram & Co. Private Ltd. could be withdrawn when a reassessment was made under section 34(1)(b). The assessee consequently filed a notice of motion seeking a reference of this particular question. The High Court, by its judgment dated 17 March 1958, answered the three original questions in a manner adverse to the assessee and also instructed the Appellate Tribunal to refer the outstanding question—hereinafter termed the “Supplementary Question”—to the Court, noting that the Tribunal had previously refused to do so. When the Appellate Tribunal eventually referred the supplementary question, the High Court delivered a judgment on 14 April 1960, this time ruling in favour of the assessee on that issue. Subsequently, on 7 February 1961, the High Court issued the certificate of fitness that the assessee required. The Commissioner of Income Tax, reference sup./64‑7, chose not to appeal against the High Court’s decision on the supplementary question. For the assessment year 1952‑53, the assessee received a net dividend of Rs 1,12,867 from Narandas Rajaram & Co., Ltd., of which Rs 23,167 was attributable to profits that had accrued in Pakistan. The Income Tax Officer taxed this Pakistani portion, and the assessment was again confirmed by both the Appellate Assistant Commissioner and the Appellate Tribunal. Two questions were then referred to the High Court; the second question corresponded exactly to question 3 cited earlier in the judgment, while the first question was substantively identical to question 2. The High Court, on 10 July 1959, granted a certificate of fitness under section 66A(2) of the Act. A further question, labelled “Question D,” arose concerning the assessment year 1953‑54. On 14 October 1952, the ordinary general meeting of Narandas Rajaram & Co. Ltd. passed a resolution declaring dividends out of the company’s profits as follows: (a) a dividend of four per cent on ‘A’ Preference Shares and four per cent on ‘B’ Preference Shares; (b) a dividend of thirty‑two per cent free of income‑tax on the Ordinary Shares together with an additional consequential dividend of thirteen per cent; and (c) a provision that one half of the dividend would be payable to shareholders whose names were entered in the register as of 6 October 1952 on or after 16 October 1952, with the remaining half to be postponed until such time as remittances from Pakistan became free and the monies were actually received.

In the resolution passed on 14 October 1952 the company declared, in addition to the previously mentioned dividends, a dividend that was to be free of income tax on the “B” Preference Shares. The resolution further stipulated that the dividend would be paid in two parts: one part, or moiety, was to be paid to those shareholders whose names were entered in the register of the company as on 6 October 1952, on or after 16 October 1952; the remaining moiety was to be postponed and paid within two months after the date on which remittances from Pakistan became free and the money was actually received. The certificate issued by the company under section 20 of the Act echoed this arrangement, stating that half of the dividend was payable on or after 16 October 1952 and that the balance was payable “within 2 months after remittances from Pakistan become free.” The Income Tax Officer, however, treated the entire sum of Rs 1,71,992 as assessable income of Assessee ‘A’. Both the Appellate Assistant Commissioner and the Appellate Tribunal affirmed the officer’s inclusion of the whole amount. When Assessee ‘A’ applied to the Tribunal, the Tribunal formulated three questions for consideration. The first of these was identified as Question ‘D’, while the second and third questions corresponded respectively to Question 2 and Question 3 that were reproduced at the beginning of the judgment. The High Court, in response, rejected Question ‘D’, thereby ruling against the Commissioner of Income Tax, and decided the remaining two questions in the same manner as the earlier references, that is, against the assessee. The High Court also granted certificates under section 66A(2) of the Act to both Assessee ‘A’ and the Commissioner of Income Tax. The facts of the other assessee cases are not set out in detail because, apart from the amount of dividend involved, those cases are fact‑wise similar. The first question, which dealt with the validity of proceedings under section 34 of the Act, is not examined further because it has become merely academic. This conclusion rests on the fact that the Commissioner of Income Tax did not file an appeal against the High Court’s judgment dated 14 April 1960, a judgment that had decided the supplementary question in favour of Assessee ‘A’. Concerning the second question, counsel for the Revenue, Mr Viswanatha Sastri, correctly acknowledged that the portion of the dividend attributable to Pakistan formed part of the assessee’s total income as defined in section 2(15) of the Act. The High Court had relied upon its earlier decision in Commissioner of Income‑Tax, Bombay City v. Shanti K. Maheshwari (1) and, in this view, the Court holds that the High Court was right to answer that question against Assessee ‘A’. The subsequent question required an interpretation of section 49AA of the Act, as it stood at the relevant time, together with the Indo‑Pakistan Agreement dated 10 December 1947. Counsel for the Revenue, Mr Sastri, argued that a proper reading of the agreement meant that each Dominion could tax only the proportion of income that the agreement assigned to it. The Revenue’s position, in reply, was that each Dominion was entitled to assess an assessee on the total income in the ordinary manner, but it must allow a reduction in tax liability in accordance with the conditions laid down in the agreement.

The Court observed that Section 49AA of the Income‑Tax Act stipulated that the Central Government was empowered to conclude an agreement with Pakistan or the United Kingdom for the purpose of avoiding double taxation of income, profits and gains under the Act and under the corresponding law in force in the other jurisdiction, and that the Government could, by issuing a notification in the official gazette, make any provision deemed necessary for implementing such an agreement. In accordance with this statutory authority, an agreement for the avoidance of double taxation of income was executed between the Government of the Dominion of India and the Government of the Dominion of Pakistan. The Court identified the portions of that agreement which were material to the issue before it. Article IV of the agreement provided that each Dominion was to make assessments in the ordinary manner under its own domestic law; however, where either Dominion, by operation of its own law, charged tax on income arising from sources or categories of transactions listed in column 1 of the Schedule to the agreement, and the tax charged exceeded the amount calculated in accordance with the percentages set out in columns 2 and 3 of that Schedule, the Dominion was required to grant an abatement equal to the lower of the two tax amounts payable on the excess, as prescribed in Article VI. Article VI dealt with the method of calculating the abatement. Sub‑paragraph (a) stipulated that, for the purpose of granting the abatement allowed under Article IV (or Article V), the tax payable in each Dominion on the excess or on the doubly‑taxed income would be proportionate to the share that the excess or doubly‑taxed income represented of the total income of the assessee in each Dominion. Sub‑paragraph (b) addressed the situation where, at the time of assessment in one Dominion, the tax payable on the total income in the other Dominion was not yet known. In such cases, the first Dominion was directed to issue a tax demand without allowing an abatement, but to suspend collection of a portion of that demand equal to the estimated abatement for a period of one year, or for a longer period if the Income‑Tax Officer permitted. If the assessee subsequently produced a certificate of assessment from the other Dominion within the prescribed one‑year period—or within any extended period allowed by the officer—the amount that had been held in abeyance would be adjusted against the abatement permissible under the agreement. Conversely, if the assessee failed to produce such a certificate, the abatement would cease to operate and the outstanding demand would become immediately payable. The Court then set out the Schedule referred to in Article IV, which listed the various sources or natures of income and the corresponding percentages of income that each Dominion was entitled to tax under the agreement. For the item labelled “Dividends,” the Schedule indicated that each Dominion could tax dividends in proportion to the profits of the company that were chargeable by that Dominion under the agreement, with a remark that fifty percent of the profits were to be taxed by the Dominion in which the goods were sold, and that relief would be granted for any excess tax resulting from this allocation.

In this case the Court observed that the provision relating to income‑tax deemed to be paid by the shareholder must be allowed by each Dominion in proportion to the profits of the company that are chargeable to that Dominion under the Agreement. The Court noted that the opening sentence of Article IV of the Agreement states that each Dominion is entitled to make an assessment in the ordinary manner under its own laws, which clearly indicates that each Dominion may assess tax irrespective of the Agreement. However, the Court explained that a limitation is placed not on the power to assess but on the liberty to retain the tax that has been assessed. Article IV therefore directs each Dominion to permit an abatement on any amount that exceeds the figure specified in the Schedule. The Schedule’s purpose, according to the Court, is to apportion income from various sources between the two Dominions. For dividends, the Schedule provides that each Dominion may levy tax “in proportion to the profits of the company chargeable by each Dominion under this agreement,” which refers back to the other items in the Schedule. For example, where the assessee manufactures goods partly in one Dominion and partly in the other, each Dominion is permitted to tax fifty percent of the profits. The Court emphasized that the Schedule does not restrict either Dominion’s power to assess, in the normal way, all income that is liable to taxation under its own law. The Schedule has been inserted solely for the purpose of calculating the amount of abatement that must be allowed. Article VI, the Court added, supports the same conclusion because without an assessment on the amount that is subject to abatement there could be no demand made without first allowing the abatement and holding in abeyance for a period the collection of a portion of the demand equal to the estimated abatement. The Court accepted as common ground that no certificate of assessment from the other Dominion had been produced before the Income‑Tax Officer and agreed with the High Court that the answer to that point is negative. The remaining issue, identified as question ‘D’, was then considered. The High Court had examined this question in light of the Bombay High Court decision in Commissioner of Income Tax v. Laxmidas Mulraj Khatau, concluding that the resolution created only a contingent liability and therefore the dividend could not be said to have been paid in the previous year of the assessment year 1953‑54. The learned Additional Solicitor‑General argued that this view was erroneous and, relying on the recent Supreme Court decision in J. Dalmia v. Commissioner of Income Tax, Delhi, contended that it was unnecessary to decide the point because the Supreme Court had dissented from the Bombay High Court ruling. Nevertheless, he maintained that the amount had been credited within the meaning of section 16(2) of the Act and asserted that the company's profit and loss account reflected this credit.

The profit and loss account of the company was debited with Rs. 5,85,000, which represented the total amount of dividend that had been declared. The corresponding credit entries, as pointed out, were recorded as follows: to the seventh Dividend Account, being the amount payable to shareholders, Rs. 5,74,144‑4‑0; to the Income‑tax Reserve Account, being the amount of income‑tax deducted on dividend warrants, Rs. 10,500‑0‑0; and to the Non‑resident shareholders’ supertax Account, being the amount of super‑tax deducted from the dividend payable to non‑resident shareholders, Rs. 355‑12‑0. After the company effected the payment, the seventh dividend account continued to show a credit balance of Rs. 2,92,500, which represented the portion of the dividend that remained unpaid out of the total dividend declared of Rs. 5,85,000. The Court was unable to accept the contention that the dividend had been credited. In J. Dalmia v. Commissioner of Income Tax, Delhi, Shah J., speaking for the Court, observed that “in general, dividend may be said to be paid within the meaning of s. 16(2) when the Company discharges its liability and makes the amount of dividend unconditionally available to the member entitled thereto”. The Court explained that the same condition must be fulfilled when a dividend is credited; that is, the credit must be in such a form that the dividend is unconditionally available to the member. It was noted that the dividend due to the assessee had not been credited to any separate account of the assessee, so that the assessee could, if desired, draw it. Before the High Court, it was never suggested that the dividend had been credited or actually distributed. Accordingly, the Court held that the Pakistan portion of the dividend had not been credited or paid within the meaning of s. 16(2) of the Income Tax Act. The answer to the remaining question was therefore negative. As a result, all the appeals were dismissed, each party bearing its own costs, and the appeals were dismissed.