Bacha F. Guzdar v. Commissioner of Income-tax, Bombay.
GHULAM HASAN J.-This appeal raises an interest
ing point of law under the Indian Income-tax Act.
The question referred by the Tribunal to the High
Court of Judicature at Bombay was stated thus :
"Whether 60% of the dividend amounting to
Rs. 2,750---received by the assessee from the two Tea
companies is agricultural income and as such exempt
under section 4(3) (viii) of the Act."
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
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S.C.R. SUPREME COURT REPORTS ~9
"'!" not agricultural income and therefore the whole of the
income is liable to tax. The Income-tax Officer and,
on appeal, the Appellate Assistant Commissioner both
concurred in holding the whole of the said income to
be liable to tax. The Income-tax Appellate Tribunal
confirmed the view that the dividend income could not
i
be treated as agricultural income in the hands of the
shareholder and decided in favour of the Revenue, but
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
Bacha F. Guzdar
v.
Commissioner of
I ncomt-tax,
Bombay.
Ghulam Hasan :J.
1954
Bacha F. Gut:dar
v.
CommissioTUr of
lnromeMtax,
Bombay.
GhuJam Hasan ].
including in that category clause ( v) 'income from
other sources.' It is common ground that dividend
falls under this category.
In order, however, that dividend may be held to be
agricultural income it will be incumbent upon the
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
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
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S.C.R. SUPREME COURT REPORTS 881
and receiving interest out of the produce of the lands
in the hands of the agriculturist can claim exemption
of tax upon the ground that it is agricultural income
within the meaning of section 4, sub-section (3) (viii), is
hardly statable. The policy of the Act as gathered from
the various sub-clauses of section 2(1) appears to be to
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
(r) [1924] 8 T. C. 704, 710. (2) [1950] S. C. R. 869, 904.
1954
Bacha F. Guz:dar
v.
Commissioner of
Income-tax,
Bombay.
Ghulam Hasan J.
1954
Bacha F. Gui:.dar
v.
Commissioner of
Income-tax~
BomOtg.
Ghulam Hll.fanJ.
882 SUPREME COURT REPORTS [1955}
the sole determining voice m administering the
affairs of the company and are entitled, as provided
by the Articles of Association, to declare that dividends
should be distributed out of the profits of the company
to the shareholders but the interest of the shareholder
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.
I
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S.C.R. SUPREME COURT REPORTS 883
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 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
Bacha F. Guzdar
v.
Commissioner of
lnconu-tax,
Bomhqy.
Ghulam Hasan J.
1954
Bacha F. Guzdar
v.
Commissionn nf
lncorru-tax,
Bombqy.
Chulam Hasan J.
884 SUPREME COURT REPORTS fl9551
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 defini
tion 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.
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
(1) [1948] 16 I. T. R. 325.
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S.C.R. SUPREME COURT REPORTS 885
non-payment. And rent is not land within the
meaning of the definition."
The second case, viz., Premier Construction Co Ltd.
v. Commissioner of Income-tax, Bombay City('), 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 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.
1951
Bacha F. Guzdar
v.
Commissioner of
Income-tax,
Bombay.
Ghu/am Hasan].
1954
.J!acha F. Gut:dar
v.
Commissioner of
lnco~-tax,
Bombqy.
G!mlam H(JjarJ J.
886 SUPREME COURT REPORTS [1955T
land. But reliance was placed upon another judgment
of the Privy Council in the same volume at page 305
in Commissioner of Income-tax, Bihar and Orissa v.
Sir Kameshwar Singh('). That was a case of a usufruc
tuary mortgagee the profits received by whom were
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.
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