Key Takeaways
Shareholder of the company is not part owner of the company and hence he is not entitled to claim exemption from payment of tax for income received as dividend a result of agricultural activities.
Dividend is received as a result of investing in shares of the company and not from engaging in agricultural activities.
Income from agricultural activities is exempt from tax to the extent of 60 % to the company and not to the shareholders of the company.
Date of Judgement
28th October,1954
Bench
Mahajan, Mehar Chand (CJ), Das, SudhiRanjan, Hasan, Ghulam, Bhagwati, Natwarlal H.,
Parties
Appellant – Bacha F. Guzdar
Respondent – Commissioner Of Income-Tax, Bombay.
Subject
This case dealt with the concept of Income Tax provisions applicable on the company engaged in the agricultural sector. The case highlighted that company and shareholder are two separate legal entities and the same provisions of Income Tax are not applicable to the shareholder.
Legal Provisions
- Rule 21 of the Indian Income Tax Rules,1922 states that income derived by growing and manufacturing tea shall be taxable as business income to the extent of 40 %.
- Section 192 of the Companies Act, 1913 states that the shareholder does not acquire any interest or right in the property by virtue of becoming a shareholder.
Overview
- The appellant Bacha Guzdar was a shareholder in two tea companies: Patrakola Tea Company Ltd., and Bishnath Tea Company Ltd., and received dividends amounting to Rupees 2750.
- The appellant filed a suit refusing to pay Income Tax accruing on the dividend income.
- The appellant claimed exemption to the extent of 60 % on the ground that income received as dividend was by engaging in agricultural activities.
- The Income-Tax Officer and on appeal, the Appellate Assistant Commissioner both affirmed to the respondents claim that whole of the said income of the appellant
- to be liable to tax.
- The Income-Tax Appellate Tribunal confirmed the view that the dividend income could not be treated as agricultural income and stated that its order gave rise to a question of law.
Issues
- Can the dividend income be exempt from tax on the ground that it was received as a result of agricultural activities?
Judgement Analysis
- The counsel for the appellant contented that the dividend income received from the company engaged in manufacturing and growing tea shall be exempt to the extent of 60 % as a result of agricultural income.
- The respondent contented that dividend income is received as a result of investing in the shares of the company and the total income of the appellant shall be liable to tax and no exemptions whatsoever can be claimed.
- The Supreme Court stated that it shall be incumbent on the appellant to show that the income derived falls within the definition of agricultural income.
- The Supreme Court while rejecting the contention of the appellant stated that the in order to be agricultural income, there should be direct association with land as defined in the Act.
Conclusion
The Supreme Court rejected the contention of the appellant and stated that tax exemption to the extent of 60 % is available to only companies and not shareholders.The company and shareholders are separate entities and a share is a right to participate in the company’s affairs while the company is a going concern. Therefore any exemption of tax on the ground that the company is engaged in agricultural activities cannot be claimed by shareholders.
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