JUDGMENT JAGDISH SAHAI J. - This is a reference made under section 66(1) of the Income-tax Act, 1922 (hereinafter referred to as the "Act"), at the instance of the assessee, the Benaras State Bank Ltd. The question referred to us are as follows :
"1. Whether the interest on securities issued by the erstwhile Indian States of Travancore and Cochin is assessable under section 8 of the Act or under section 12 of the Act ?
2. Whether the dividend of Rs. 23,000 in respect of shares held by the assessee in the Vibhuti Glass Works Ltd. is liable to inclusion in the total income of the company for the assessment year 1951-52, either in view of the provisions of section 16(2) of the Act or as income accruing or arising to the assessee within the meaning of section 4(i)(b) of the Act ?"
The assessment giving rise to the reference relates to the year 1951-52, the accounting period being the calendar year 1950. The assessee, the Benaras State Bank Ltd. (hereinafter referred to as the "bank"), carries on its business at Ramnagar which was the capital of the erstwhile States of Benaras. The bank held securities issued by the erstwhile State of Travancore and Cochin. The The bank was also getting some dividends from Vibhuti Glass Works Ltd., a company carrying on the business of production of glassware, On September 27, 1950, the Vibhuti Glass Works Ltd. declared its dividend by means of a resolution which reads :
"To consider the declaration of a dividend : The recommendation of the board of directors for making provision for payment of the dividend on ordinary shares free of income-tax was approved, with the qualification that if the court allows only then payment will be made, otherwise not."
In the balance-sheet "as on 30th of September, 1950" of the Vibhuti Glass Works Ltd., a sum of Rs. 30,000 was shown as "unpaid dividend and bonus". This included the sum of Rs. 23,000 dividend payable to the bank. The statement of the case is clear on the point that a litigation was going on in which the bank was a party and the right of the bank to receive the dividend was in dispute. On November 18, 1954, the Vibhuti Glass Works issued the following certification to the bank :
"Certified that a sum of Rs. 23,000 (Rupees twenty-three thousand) only payable to Benaras State Bank Ltd., being the 10% dividend declared by the company for the year ended 30th September, 1949, has not yet been paid to them, although a provision has been made to this effect in our balance-sheet."
During the accounting year, the bank also received a sum of Rs. 69,000 as interest on the securities issued by the erstwhile States of Travancore and Cochin. The Income-tax Officer included Rs. 23,000 as dividend received from the Vibhuti Glass Works and Rs. 69,000 as income from interest on securities issued by the Travancore and Cochin States, in the total income received by the assessee. On appeal by the assessee, the order of the Income-tax Officer was affirmed by the Appellate Assistant Commissioner, and on a second appeal by him by the Income-tax Appellate Tribunal (hereinafter referred to as the "Tribunal"). We will deal with the questions referred to us serially.
Admittedly the securities were issued by the erstwhile States of Travancore and Cochin some time before 1947, and certainly before the erstwhile State of Benaras merged in the Union of India on October 15, 1949. The taxation laws were made applicable to the areas forming part of the erstwhile State of Benaras on December 1, 1949. Section 8 of the Act, so far as it is relevant for our purpose, reads :
"8. Interest on securities. - The tax shall be payable by an assessee under the head Interest on securities in respect of the interest receivable by him on any security of the Central Government or of a State Government, or on debentures or other securities for money issued by or on behalf of a local authority or a company :
Provided that no income-tax shall be payable under this section by the assessee in respect of any reasonable sum expended by him for the purpose of realising such interest or in respect of interest payble on money borrowed for the purpose of investment in the securities by the assessee except interest chargeable under this Act which is payble without the taxable territories, not being interest on a loan issued for public subscription before the 1st day of April, 1983, unless in respect of interest which is so chargeable, tax has been paid or deducted under section 18, or unless there is a person in the taxable territories who may be appointed an agent under section 43 in respect of such interest :
Provided further that no income-tax shall be payable on the interest received on any security of the Central Government issued or declared to be income-tax free :
Provided further that the income-tax payable on the interest receivable on any security of a State Government issued income-tax free shall be payable by the State Government.
The submission on behalf of the assessee is that the expression "State Government" should be read so as to be inclusive of the State of Kerala in which the States of Travancore and Cochin have merged resulting in the securities of these States being the securities of the Kerala State. At the time of the assessment the State of Kerala did not exist. It was formed later. This submission of the learned counsel, therefore, is unfounded.
The alternative argument of the assessee is that since the two merged States at the relevant time formed part of the part B States of Travancore-Cochin, the words "State Government" should be read so as to include the same and inasmuch as the erstwhile States of Trvancore and Cochin had issued the securities free of income-tax and the same were succeeded by the Part B Travancore Cochin State, the liability for the payment of the tax should be on that State or its successor, the Kerala State, and not on the assessee. In order to support his argument, learned counsel placed reliance upon section 3(60) of the General Clauses Act (Central), which defines a "State Government" in the following words :
"3. (60) State Government -
(a) as respects anything done before the commencement of the Constitution, shall mean, in a Part A State, the Provincial Government of the corresponding Province, in a Part B State, the authority or person authorised at the relevant date to exercise executive Government in the corresponding acceding State and in a Part C State, the Central Government;
(b) as respects anything done after the commencement of the Constitution and before the commencement of the Constitution (Seventh Amendment) Act, 1956, shall mean, in a Part A State, the Governor, in a Part B State, the Rajpramkuh, and in a Part C State, the Central Government;
(c) as respects anything done or to be done after the commencement of the Constitution (Seventh Amendment) Act, 1956, shall mean, in a State, the Governor, and in a Union territory, the Central Government;
and shall in relation to functions entrusted under article 258A of the Constitution to the Government of India, include the "Central Government acting within the scope of the authority given to it under that article."
On behalf of the department reliance is placed upon section 3(24) of the General Clauses Act (Central), which reads :
" 3(24) Government securities shall mean securities of the Central Government or of any State Government, but in any Act or Regulation made before the commencement of the Constitution shall not include securities of the Government of any Part B State."
The Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal on the basis of the definition contained in section 3(24) of the General Clauses Act (Central), which does not include a security issued by a Part B State, came to the conclusion that the securities issued by the erstwhile States of Travancore and Cochin could not be deemed to be Government securities. Learned counsel for the assessee has contended that the Act does not use the expression "Government security"; on the other hand it uses three different expressions - a security of the Central Government, a securities of the State Government and a security issued on behalf of the local authority. He has, therefore, urged that the definition given in section 3(24) of the General Clauses Act cannot be relevant for interpreting the provisions of section 8 of the Act. It appears to us that the words "Government security" is a comprehensive expression which includes securities issued by the Central Government and those issued by the State Government and consequently that definition would be relevant for interpreting the words "any security of the Central Government or a State Government and consequently that defination would be relevant for interpreting the words "any security of the Central Government or a State Government" occuring in section 8 of the Act. Section 3(24) expressly excludes securities issued by the Government of any Part B State. Section 8 of the Act does not create an absolute immunity from taxation in respect of the securities issued by the state Governments. It only provides for the realisation of the tax from the State Governments issuing securities instead of from the person who holds it. Proviso (3) itself indicates that section 8 of the Act is meant for such cases where the tax is to be paid by the State Government and not by the holder of the security. In the present case we have already held above that the securities of the erstwhile States of Travancore and Cochin are not securities issued by a State Government. The result, therefore, is that section 8 of the Act would not apply and the interest on the securities issued by the erstwhile States of Travancore and Cochin would not be assessable under that section. Section 12 of the Act, however, provides for assessment of "Income from other sources". The relevant parts of that section read :
12. Other sources. - (1) The tax shall be payable by an assessee under the head Income from other sources in respect of income, profits and gains of every kind which may be included in his total income (if not included under any of the preceding heads).
(IA) Income from other sources shall include dividends.".....
Admittedly, the interest income from the securities of the erstwhile State of Travancore and Cochin cannot be included under any of the heads provided for earlier with the result that the same are liable to be taxed under section 12 of the Act.
For the reasons mentioned above, we answer the first question referred to us in the affirmative, against the assessee and in favour of the department by saying that the interest on securities issued by the erstwhile States of Travancore and Cochin is assessable under section 12 of the Act.
We have already reproduced the resolution of the Vibhuti Glass Works and the certificate issued by them. The Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal were of the opinion that the effect of that resolution was that the amount of Rs. 23,000 stood credited in the name of the assessee. The Tribunal observed as follows :
"It is contended for the department that the dividend was rightly included in the total income in view of the provisions of section 16(2) of the Act. Under section 16(2) of the Act any dividends is deemed to be income of the previous year in which it is paid, credited or distributed or deemed to have been paid, credited or distributed to the assessee. By its letter dated November 18, 1954, Vibhuti Glass Works Ltd. has given the following certificate :....
We have also examined the balance-sheet of the company and find that the sum of Rs. 23,000 is included on the liabilities side of the balance-sheet under the head unpaid dividend.
It is clear, therefore, that the dividend has been credited to the assessee-company in the books of Vibhuti Glass Works Limited."
In our judgment the legal inference which the Tribunal drew from the facts stated in the case is incorrect. It is not possible on the basis of those facts to hold that the amount of Rs. 23,000 had been credited to the assessee in the books of Vibhuti Glass Works. To credit an amount in the name of another is a mode of payment to him. Instead of paying cash the amount is entered in the name of the other person and it is acknowledged that the money belongs to him. That is not the position in the present case. The resolution of the Vibhuti Glass Works Ltd., which we have already reproduced earlier, clearly shows that the amount was to be paid to the assessee only if the assessee succeeded in the litigation that was going on. The certificate issued by the Vibhuti Glass Works categorically states that the amount has been only provisionally kept for payment top the assessee. Under the Companies Act, an annual balance-sheet has got to be prepared and every amount is to be accounted for. The company had declared a dividend of 10 per cent and had also to pay bonus. Rupees 30,178-8-0 had been shown in the balance-sheet under the head "Unpaid Dividend and Bonus". In the balance-sheet it has not been stated that either this sum of Rs. 30,178-8-0 or any part thereof is credited to the account of the assessee. In fact the heading is not "Dividend Unpaid to the Benaras State Bank" but "Unpaid Dividend and Bonus". The balance-sheet, therefore, does not show that there has been actual credit of the amount of Rs. 23,000 in favour of the bank. The certificate also shows that the amount has not been paid or credited in the name of the assessee but that only a provision has been made in the balance-sheet. The resolution of the company is also clear that the amount of Rs. 23,000 is not payable forthwith or payable unconditionally to the assessee-bank but that the amount may be paid after the bank succeeds in the litigation. We are, therefore, unable to agree with the Tribunal that the sum of Rs. 23,000 stood credited in the name of the bank in the books of Vibhuti Glass Works. Mr. Gulati has not contended that the sum of Rs. 23,000 could be assessable under section 4(i)(b) of the Act. We have held above that the sum of Rs. 23,000 cannot be held to have been credited or deemed to have been credited to the assessee-bank under section 16(2) of the Act.
For the reasons mentioned above, we answer the second question in the negative, in favour of the assessee and against the department by saying that the dividend of Rs. 23,000 held by the assessee is not liable to inclusion in the total income of the company for the assessment year 1951-52 either under section 16(2) or section 4(1)(b) of the Act. In the circumstances of the case, we direct the parties to bear their own costs. For the purposes of assessing the counsels fee for the department, we fix it at a figure of Rs. 200.