Bacha F. Guzdar versus CIT Bombay, AIR 740 (1955)

The judgement averred that as long as the income is derived from an agricultural source forming as the primary source, the exemption from tax laws can be claimed under the Income Tax Rules.
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Introduction

Rule 24 of the Indian Income Tax Rules exempt certain incomes from being taxed, on account of being agricultural incomes. However, there are some incomes where the source may seem to be an agricultural source, but it is actually not liable to be exempted from being taxed since the primary source does not turn out to be an agricultural source. The case Bacha F. Guzdar versus CIT Bombay involved a tea-manufacturing company paying dividends to its shareholders, where one shareholder claimed the dividend to be exempted from being taxed on account of the dividend received being agricultural income as well.

Facts of the Case

The assessee held shares in two companies that dealt in tea. The two companies were – Patrakola Tea Co. Ltd., and Bishnauth Tea Co. Ltd. The assessee received the dividend from the shares that she held in the companies. The business that these tea companies carried on was of growing and manufacturing tea. On account of that, the 40 per cent of the income of the company was taxed only, while on the other hand, the remainder of the 60 per cent of the income was exempt from being taxed on account of being agricultural income. This exemption had been laid down in Rule 24 of the Indian Income Tax Rules. The assessee claimed that since the 60 per cent of the income was exempt from taxation under Rule 24, thus the same should also apply to the income earned by her as dividends from the shares that she held in the companies.

Issues

Whether the income earned by the assessee in the form of the dividend was capable of qualifying as agricultural income, and thus be exempted from tax?

Held

The court held the opposite of what had been presented by the petitioner in his/her averments before the court. The Court was of the opinion that the income derived from the land would be qualified as agricultural income only when the immediate source of the income would be land, and not if the land serves as a secondary source of the income derived. Indeed, the plaintiff averred that the income received by the assessee was not liable to be taxed at all since the profit from which the dividend had been paid was not liable to be taxed in the hands of the company in the first place. However, the Court noted that the judicial precedents in which this approach had been followed had referred to the income where the primary source was an agricultural source. This was not the case for the assessee. Keeping that in mind, the Court rejected the assessee’s claim for exemption from tax on the income received by her as a dividend.

Analysis

The judgment in Bacha F. Guzdar versus CIT Bombay averred that as long as the income is derived from an agricultural source forming as the primary source, the exemption from tax laws can be claimed under the Income Tax Rules. However, in this case, the same had not been found by the court. The income received by the assessee in the case was in the form of dividends which were paid out by the companies as against the plaintiff holding shares in the respective companies. The judgment was indeed correct, since the claim so maid by the assessee had no basis to stand on. In the case of Caltex (India), Ltd. v. Comm. of I. T. 54 Bom. L. R. 222 the Court had held that if the source from which the dividend is paid to an individual is the profit made by the company, then the dividend which is received by the individual arises from the source of the profit of the company. The same logic was used to arrive at a conclusion in the present case by the Court. The Court considered the question whether the dividends which were received by the Assessee, in this case, would themselves constitute as an income derived from the land for the plaintiff.

The court, however, also considered the fact that until and unless the profits are earned by the company, the dividends cannot be declared by the company to the shareholders. This implied that the income which is earned by the assessee was only possible once the company declared the payment of dividends from the profits they had earned. This in turn implied that the source of income would then be the profits and not the agricultural land itself. These reasons cumulatively allowed the court to conclude that the income earned by the assessee in the form of the dividends would not be receiving any exemption from Income Tax Rules on account of being agricultural income.


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