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Maharajkumar Gopal Saran Narain Singh v. CIT

This document discusses whether dividends paid to shareholders constitute agricultural income under the Indian Income Tax Act. It examines several past cases related to the definition of agricultural income. The document concludes that dividends received by shareholders cannot be considered agricultural income, as shareholders have an indirect relationship to the company's lands from which profits are derived, whereas the definition of agricultural income requires a direct relationship.

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Ronit Kumar
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275 views3 pages

Maharajkumar Gopal Saran Narain Singh v. CIT

This document discusses whether dividends paid to shareholders constitute agricultural income under the Indian Income Tax Act. It examines several past cases related to the definition of agricultural income. The document concludes that dividends received by shareholders cannot be considered agricultural income, as shareholders have an indirect relationship to the company's lands from which profits are derived, whereas the definition of agricultural income requires a direct relationship.

Uploaded by

Ronit Kumar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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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 shareholders. Reliance is placed on behalf
of the appellant on a passage in Buckley’s Companies Act (12th Edn.), p. 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 1s 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 assumption that a shareholder who buys shares
buys any interest in the 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 would be left
over after winding up but not in the assets as a whole as Lord Anderson puts it. 8. The High
Court expressed the view that until a dividend is declared there is no right in a shareholder to
participate in the profits and according to them the declaration of dividend by the company is
the effective source of the dividend which is subject to tax. This statement of the law we are
unable to accept. Indeed the learned Attorney-General conceded that he was not prepared to
subscribe to that proposition. 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
company with the only difference that the enjoyment of profits is postponed until dividends
are declared. 10. It was suggested that the dividend arises out of the profits accruing from
land and is impressed with the same character as the profits and that it does not change its
character merely because of the incident that it reaches the hands of the shareholder. This
argument runs counter to the definition of agricultural income which emphasizes the
necessity of the recipient of income having a direct 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.

Vodafone International Holdings B.V. v. Union of India (UOI) and Anr

13

11. 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 ―agricultural income‖. A few cases of the Privy Council decided with
reference to the provisions of the Indian Income Tax Act, however, deserve notice. The first
case viz. CIT v. Raja Bahadur Kamakshya Narayan Singh [AIR 1949 PC 1] dealt with the
question whether interest on arrears of rent payable in respect of land used for agricultural
purposes is agricultural income and therefore exempt from Income Tax. It was held that it
was neither rent nor revenue derived from land within the 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
Article 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
source is rent, which has suffered the accident of non-payment. And rent is not land within
the meaning of the definition. The second case viz. Premier Construction Co. Ltd. v. CIT
[AIR 1949 PC 20] dealt, with the nature of the commission of a managing agent of the
company a part of whose income was agricultural 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 not in specie out of any item of such profits, but out of any moneys
of the employer available for the purpose, and that the remuneration therefore 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 assessee 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. CIT [AIR 1935 PC 143], 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 covenator the discharge of which was secured by a
charge on land. But reliance was placed upon another judgment of the Privy Council in the
same volume at p. 305 in CIT v. Sir Kameshwar Singh. That was a case of a usufructuary
mortgagee the profits received by whom were exempt from Income Tax on 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 agricultural income

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