THE COMMISSIONER OF INCOME-TAX, LAHORE ZONE, LAHORE Versus SALEEM SAIGOL

MUHAMMAD HABIBULLAH, J . -The respondent who had newly-purchased shares of Azam Agencies Ltd. received a sum of Rs. 1,25,828 from the Com pany, in the previous year relatable to the tax year 1970/71, as undistributed dividends which had accrued in the years 1962/63 and 1963/64 on his shares when he was not a member. He claimed that this amount was exempt from tax under section 23-A (4) of the Income-tax Act, because the members from whom he bad purchased the shares had already paid tax on these undistri buted dividends under section 23-A (1). The Income-tax Officer however did not accept this plea upon the view that the dividends had been initially taxed in the hands of some other share-holders under section 23-A (1), and the benefit of subsequent exemption under section 23-A (4) was available only to the members who had earlier paid the tax, and that the respondent could not get any benefit, because he himself had never paid any tax on these dividends.

2. Aggrieved by the order of the Income-tax Officer, the respondent filed an appeal before the Income-tax Appellate Tribunal. The respondent's appeal was accepted by the Tribunal and the amount was excluded from his total income for computing tax. While accepting the appeal the Tribunal observed as follows: --

"We must therefore, hold that he was not liable to pay tax on the same. However, even if it is assumed that the appellant did receive these dividends in the year under consideration, then the admitted position is that the original share-holder has already been taxed on these very dividends under the provisions of section 23-A (1) and, therefore, the protection of section 23-A (4) would be available to the appellant because these provisions of section 23-A (4) save double taxation in respect of the undistributed profits of the Company when tax has already been paid under section 23-A (1) and do not protect the person who has paid the tax."

3. The Commissioner of Income-tax has applied to refer the following question of law arising from the order of the Tribunal: -

"Whether on the facts and in the circumstances of the case, the Appellate Tribunal were right in holding that the dividends income received by the respondent was not assessable in his hands by virtue of sub section (4) of section 23-A of the Income-tax Act?"

4. Subsections (1) and (4) of section 23-A of the Income-tax Act as they existed at the relevant time are reproduced below:

"23-A.--(1) Where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any Company (upto the date hereinafter specified) are less than sixty percent of the assessable income of the Company of that previous year, (as reduced by the amount of Income-tax and super-tax payable by the Company in respect thereof) (before taking into account any credit that may be due under an agreement referred to in section 49-AA) he shall, unless he is satisfied that having regard to losses incurred by the Company in earlier years or to the smallness of the profit made, the payment of a dividend or a larger dividend than that declared would be unreasonable, make with the previous approval of the Inspecting Assistant Commissioner an order in writing that the undistributed portion of the assessable income of the company of that previous year as computed for income-tax purposes (and reduced by the amount of income-tax and super-tax payable by the company to respect there of), before taking into account any credit that may be due under an agreement referred to in section 49-AA, shall be deemed to have been distributed as dividends amongst the share-holders as (at the date here inafter specified), and thereupon the proportionate share there of each shareholder shall be included in the total income of such share-holder for the purpose of assessing his total income.

(2) . . . . . . . . . . . . . . . . . . . . .. .

(3) . . . . . . . . . .. . . . . . . . . . . .

(4) Where tax has been paid in respect of any undistributed profits and gains of a company under this section, and such profits and gains are subsequently distributed in any year, the proportionate share therein of any member of the company shall be excluded in computing his total income of that year."

5. Learned counsel appearing on behalf of the Commissioner of Income tax submits that the amount received by the respondent during the previous year in question was nothing but income which had accrued to him and received by him during that year, and as such it was liable to tax. There was no question of any double taxation involved. because during the years 1962-63, 1963-64, it was the original share-holder who had been subjected to tax on the undistributed dividends, and not the respondent. It is argued that to seek exemption it is for the assessee to show that his case falls squarely within the four corners of the provision granting exemption. Learned counsel contends that the word "member" which describes person to whom sub section (4) grants exemption does not include a present member, but only that person from whom tax had been recovered under subsection (1).

6. We are not persuaded to hold that such a restricted meaning can be given to the word "member". Subsection (4) lays down that when such profits are subsequently distributed, "the share therein of any member of the company shall be excluded in computing his total income of that year". Any member in these circumstance, cannot mean only that member who hart earlier paid the tax. It is apparent from the section, when read as a whole, that the intention of the Legislature was to tax members for at least sixty per cent of the income of a company, whether or not the Company actually) paid any dividends, and having charged tax on notional dividend income, to allow exemption at the time of actual disbursement.

5. We, therefore, hold that provisions of subsection (4) of section 23-A of the Income-tax Act were attracted in the circumstances of the case, and the B Tribunal seas quite correct in allowing exemption to the respondent. The question is therefore answered, in the affirmative.

Question answered in affirmative.