Bacha F. Guzdar v. Commissioner of Income-Tax, Bombay.

Chagla C.J. and Tendolkar J., who heard the refer-ence, answered the question in the negative. by two separate but concurring judgments dated March 28, 1952.

The facts lie within a narrow compass. The appel-lant, Mrs. Bacha F. Guzdar, was, in the accounting year 1949-50, a shareholder in two Tea compa111es, Patrakola Tea Company Ltd., and Bishnauth Tea Company Ltd., and received from the aforesaid com-panies dividends aggregating to Rs. 2,750. The two -companies carried on business of growing and manu-facturing tea. By rule 24 of the Indian Income-tax Rules, 1922, made in exercise of the powers conferred by section 59 of the Indian Income-tax Act, it is provided that "income derived from the sale of tea .grown and manufactured by the seller in the taxable territories shall be computed as if it were income derived from business and 40% of such income shall be deemed to be income, profits and • gains, liable to tax." It is common ground that 40%. of the income -0f the Tea companies was taxed as income from the manufacture and sale of tea and 60% of such income was exempt from tax as agricultural income. According to the appellant, the dividend income received by her in respect of the shares held by her in the said Tea <:ompanies is to the extent of 60% agricultural income in her hands and therefore pro tanto exempt from tax while the Revenue contends that dividend income is "'!" not agricultural income and therefore the whole of the 1954

income is liable to tax. The Income-tax Officer and, Bacha F. Guzdar on appeal, the Appellate Assistant Commissioner both v. concurred in holding the whole of the said income to Commissioner of I ncomt-tax, be liable to tax. The Income-tax Appellate Tribunal Bombay. confirmed the view that the dividend income could not Ghulam Hasan :J. be treated as agricultural income in the hands of the i shareholder and decided in favour of the Revenue, but i agreed that its order gave rise to a question of law and

formulated the same as set out above and referred it to the High Court. The High Court upheld the order of the Tribunal but granted leave to appeal to this Court.

The question, we comprehend, is capable of an easy solution and can best be answered by reference to the material provisions of the Income-tax Act. Under section 2(1) 'agricultural income' means:

"(a) any rent or revenue derived from land which is used for agricultural purposes, and is either assessed to land-revenue in the taxable territories or subject to a local rate assessed and collected by officers of the Government as such ;

(b) ....................... ' ' .......... .

(i) ............... . ' .. ' .......... . .

\~9 (111) ..........•.....

(c) .......................... "

Sub-section ( 15) of section 2 defines "total income"

as total amount of income, profits and gains, referred to in sub-section ( 1) of section 4 computed in the manner laid down in this Act, Section 3 authorises income-tax to be charged upon a person in respect of the total income of the previous year. Section 4 lays down that the total income of any previous year of any person to be charged must include all income, profits and gains, from whatever source derived and defines the scope of its application for purposes of tax.

Sub-section (3) of the same section enacts c;ertain exemptions upon the chargeability of the income and clause (iii) includes agricultural income in the category of exemptions. Section 6 mentions the various heads of income, profits and gains, chargeable to income-tax

1954 including in that category clause ( v) 'income from Bacha F. Gut:dar other sources.' It is common ground that dividend

v. falls under this category.

CommissioTUr of In order, however, that dividend may be held to be

lnromeMtax, Bombay. agricultural income it will be incumbent upon the GhuJam Hasan ]. appellant to show that, within the terms of the defini-

tion, it is rem or revenue derived from land which is used for agricultural purposes. Mr. Kolah, for the -li appellant, contends that it is revenue derived from land because 60% of the profits of the company out of which dividends are payable are referable to the pur-suit of agricultural operations on the part of the company. it is true that the agricultural process renders 60% of the profits exempt from tax in the hands of the company from land which is used for agricultural purposes but can it be said that when such company decides to _distribute its profits to the share-holders and declares the dividends to be allocated to them, such dividends in the hands of the shareholders also partake of the character of revenue derived from land which is used for. agricultural purposes ? Such a position if accepted would extend the scope of the vital words 'revenue derived from land' beyond its legitimate limits. Agricultural income as defined in the Act is obviously intended to refer to the revenue received by direct association with the land which is used for agricultural purposes and not by indirectly extending it to cases where that revenue or part there-cf changes hands either by way of distribution of dividends or otherwise. In fact and truth dividend is derived from the investment made in the shares of the company and the foundation of it rests on the contractual relations between the company and the shareholder. Dividend is not derived by a share-holder by his direct relationship with the land. There can be no doubt that the initial source which has produced the revenue is land used for agricultural pur-poses but to give to the words 'revenue derived from land' the unrestricted meaning, apart from its direct association or relation with the land, would be quite unwarranted. For example, the proposition that a creditor advancing money on interest to an agriculturist and receiving interest out of the produce of the lands 1954 in the hands of the agriculturist can claim exemption Bacha F. Guz:dar of tax upon the ground that it is agricultural income v. within the meaning of section 4, sub-section (3) (viii), is Commissioner of Income-tax, hardly statable. The policy of the Act as gathered from Bombay. the various sub-clauses of section 2(1) appears to be to Ghulam Hasan J. exempt agricultural income from the purview of Income-tax Act. The object appears to be not to subject to tax either the actual tiller of the soil or any other person getting land cultivated by others for deriving benefit therefrom, but to say that the benefit intended to be conferred upon this class of persons should extend to those into whosoever hands that revenue falls, however remote the receiver of such revenue may be, is hardly warranted.

It was argued by Mr. Kolah on the strength of an observation made by Lord Anderson in Commis-sioners of Inland Revenue v. Forrest (1), that an investor buys in the first place a share of the assets of the industrial concern proportionate to the number of shares he has purchased an<l also buys the right to participate in any profits which the company may m::ike in the future. That a shareholder acquires a right to participate in the profits of the company may be readily conceded but it is not possible to accept the contention that the shareholder acquires any interest in the assets of the company. The use of the word 'assets' in the passage quoted above cannot be exploited to warrant the inference that a shareholder, on invest-ing money in the purchase of shares, becomes entitled to the assets of the company and has any share in the property of the company. A shareholder has got no interest in the property of the company though he has undoubtedly a right to participate in the profits if and when the company decides to divide them. The interest of a shareholder vis-a-vis the company was explained in the case of Chiranjitlal Chowdhuri v. The Union of India and Others(2). That judgment negatives the position taken up on behalf of the appellant that a shareholder has got a right in the property of the company.

It is true that the shareholders of the company have 1954 the sole determining voice m administering the Bacha F. Gui:.dar affairs of the company and are entitled, as provided

v. by the Articles of Association, to declare that dividends Commissioner of should be distributed out of the profits of the company

Income-tax~ BomOtg. to the shareholders but the interest of the shareholder Ghulam Hll.fanJ. either individually or collectively does not amount to

more than a right to participate in the profits of the company. The company is a juristic person and is. distinct from the shareholders. It is the company which owns the property and not the shareholders. The dividend is a share of the profits declared by the company as liable to be distributed among the share-holders. Reliance is placed on behalf of the appellant on a passage in Buckley's Companies Act, 12th Ed., page 894, where the etymological meaning of, dividend is given as dividendum, the total divisible sum but in its ordinary sense it means the sum paid and received as the quotient forming the share of the divisible sum payable to the recipient. This statement does not justify the contention that shareholders are owners of a divisible sum or that they are owners of the property of the company. The proper approach to the solution of the question is to concentrate on the plain words of the definition of agricultural income which connects in no uncertain language revenue with the land from which it directly springs and a stray observation in a case which has no bearing upon the present question does not advance the solution of the question. There is nothing in the Indian law to warrant the assump-tion that a shareholder who buys shares buys any interest in tlle property of the company which is a juristic person entirely distinct from the shareholders. The true position of a shareholder is that on buying shares an investor becomes entitled to participate in the profits of the company in which he holds the shares if and when the company declares, subject to the Articles of Association, that the profits or any portion thereof should be distributed by way of dividends among the shareholders. He has undoubtedly a further right to participate in the assets of the company which rvould be left over after winding up but not in the assets as a whole as Lord Anderson puts it.

The High Court expressed the view that until a 1954 dividend is declared there is no right in a shareholder Bacha F. Guzdar to participate in the profits and according to them the v. declaration of dividend by the company is the effective Commissioner of lnconu-tax, source of the dividend which is subject to tax. This Bomhqy. statement of the law we are unable to accept. Indeed Ghulam Hasan J. the learned Attorney-General conceded that he was not prepared to subscribe to that propos1t1on. The declaration of dividend is certainly not the source of the profit. The right to participation in the profits exists independently of any declaration by the com-pany with the only difference that the enjoyment of profits is postponed until dividends are declared.

It was argued that the position of shareholders in a company is analogous to that of partners inter se. This analogy is wholly inaccurate. Partnership is merely an association of persons for carrying on the business of partnership and in law the firm name is a compendious method of describing the partners. Such is, however, not the case of a company which stands as a separate juristic entity distinct from the shareholders. In Halsbury's Laws of England, Volume 6 (3rd Ed.), page 234, the law regarding the attributes of shares is thus stated :

"A share is a right to a specified amount of the share capital of a company carrying with it certain rights and liabilities while the company is a going concern and in its winding up. The shares or other interest of any member in a company are personal estate transferable in the manner provided by its articles, and are not of the nature of real estate."

In Borland's Trustee v. Steel Brother/ & Co. Ltd. (1), Farwell J. held that "a share in a company connot properly be likened to a sum of money settled upon and subject to executory limitations to arise in the future; it is rather to be regarded as the interest of the shareholder in the company, measured, for the pur-poses of liability and dividend, by a sum of money ......................... " It was suggested that the dividend arises out of the profits accruing from land and is impressed with the same character as the profits

(1) L. R. [1901] I Ch. 279.

1954 and that it does not change its character merely Bacha F. Guzdar because of the incident that it reaches the hands of the

v. shareholder. This argument runs counter to the defini-Commissionn nf tion of agricultural income which - emphasizes the

lncorru-tax, Bombqy. necessity of the recipient of income having a direct Chulam Hasan J. and an immediate rather than an indirect and remote

relation with land. To accept this argument will be tantamount to saying that the creditor recovering interest on money debt due from the agriculturist who pays out of the produce of the land is equally entitled to the exemption. In fairness to Mr. Kolah it must, however, be stated that the contention was not so broadly put but there is no reason why one should stop at a particular stage and not pursue the analogy to its logical limits.

English decisions resting upon the peculiarities of the English Income-tax law can hardly be a safe guide in determining upon the language of the Indian Income-tax Act the true meaning of the words 'agri-cultural income.' A few cases of the Privy Council decided with reference to the provisions of the Indian Income-tax Act, howeyer, deserve notice_ The first -case, viz., Commissioner of Income-tax, Bihar and Orissfl v. Raja Bahadur Kamakshya Narayan Singh and Others( 1 ), dealt with the question whether interest on .arrears of rent payable. in respect of land used for agricultural purposes is agricultural income . and there-fore exempt from income-tax. It was held that it was neither rent nor revenue derived from land within tl1e meaning of section 2(1) of the Income-tax Act. Lord Uthwatt who delivered the judgment of the Privy Council used the following piquant language in coming to that conclusion :

"The word 'derived' is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. In the _genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective ~ource is rent, which has suffered the accident of non-payment. And rent is not land within the 1951 meaning of the definition." Bacha F. Guzdar

The second case, viz., Premier Construction Co Ltd. v. v. dealt Commissioner of

Commissioner of Income-tax, Bombay City('), Income-tax, with the nature of the commission of a managing agent Bombay. of the company a part of whose income was agricultural Ghu/am Hasan]. income. The assessee claimed exemption from tax on the ground that his remuneration at 10 per cent. of the profits was calculated with reference to the income of the company part of which was agricultural income. It was held that the assessee received no agricultural income as defined by the Act but that he received a remuneration under .a contract for personal service ·calculated on the amount of profits earned by the employer, payable n.ot in specie out of any item of such profits, but out of any moneys of the employer avail-able for the purpose, and that the remuneration there-fore was not agricultural income and was not exempt from tax. Sir John Beaumont in the above case ·observed :,

"In their Lordships' view the principle to be derived from a consideration of the terms of the Income-tax Act and the authorities referred to is that where an .asses see receives income, not itself of a character to fall within the definition of agricultural income contained in the Act, such income does not assume the character of agricultural income by reason of the source from which it is derived, or the method by which it is -calculated."

In the third case, viz., Maharajkumar Gopal Saran Narain Singh v. Commissioner of Income-tax, Bihar and Orissa(2), an annual payment for life to the assessee was not held to be agricultural income and therefore not ·exempt from tax where the annuity arose out of a transfer made by the assessee of a portion of his estate for discharging his debts and for obtaining an adequate income for his life it being held that it was not rent or revenue derived from land but money paid under a -contract imposing personal liability on the convenantor the discharge of which was secured by a charge on

(1) [1948] 16 I. T. R. 380 (2) [1935] 3 I. T. R. 237.

1954 land. But reliance was placed upon another judgment .J!acha F. Gut:dar of the Privy Council in the same volume at page 305

v. in Commissioner of Income-tax, Bihar and Orissa v. Commissioner of That was a case of a usufruc-

lnco~-tax, Sir Kameshwar Singh(').

Bombqy. tuary mortgagee the profits received by whom were G!mlam H(JjarJ J. exempt from income-tax en the ground that they

were agricultural income in his hands. Lord Macmillan, after referring to certain sections of the Act, observed that "the result of those sections is to exclude agricul-tural income altogether from the scope of the Act howsoever or by whomsoever it may be received." These observations must be held to be confined to the facts of that particular case which was a case of usufructuary m()rtgagee who had received profits directly from the land. The obvious implication of the words used by Lord Macmillan was that whosoever receives profit from the land directly is entitled to the exemption.

Reference was also made to some English decisions but they have no bearing upon the present case as they were founded on the English Income-tax law and the provisions of the particular statute.

The learned Attorney-General also contended that the conclusion that dividend is not agricultural income also follows from the provisions of section 16, sub-section (2) and the proviso to the Act. According to him, this section compels the assessee to show in his return the whole dividend including the portion which is excluded on the ground of agricultural income. We do not consider it necessary to express any opinion upon this contention as our conclusion reached as a result of the foregoing discussion is sufficient to dispose of the appeal. We accordingly dismiss the appeal with costs.

Appeal dismissed. (t) [1935] 3 I. T. R. 305.