Commissioner of Income Tax v. Shaw Wallace & Co. Ltd. (1981)

Quick Summary

This case explains how Section 5(1)(c) of the Income Tax Act, 1961 works for foreign dividends. Shaw Wallace, an Indian company, received dividends from companies in the UK and Ceylon (Sri Lanka). Those companies had already deducted taxes abroad. The key question: should India tax the gross dividend or the net amount received in India?

The Calcutta High Court discussed what “income” means. It said income is a regular return from a definite source. The case helps students see how accrual-based taxation applies when money is earned outside India but belongs to a resident company.

Issues

• Is the dividend received from foreign companies income under Section 5(1)(c)?
• Should the company be assessed on the gross dividend (before foreign tax) or the net amount actually received in India?

Rules

Section 5 tells us what parts of a person’s income are taxable for a given year. If income is taxed on an accrual basis, tax does not wait for actual receipt. The focus is on when the right to receive income arises.

Therefore, the scope of total income for a resident can cover income accruing or arising outside India, subject to the Act.

Arguments

Judgment

The Calcutta High Court described “income” as a periodical monetary return coming in with some regularity from a definite source. It is different from a mere windfall. A source may not be forever productive, but it aims to produce a definite return.

Using this understanding, the Court addressed how dividends—though subject to foreign deductions—are treated within the scope of Section 5(1)(c) for a resident assessee.

Ratio Decidendi

“Income” means a regular return from a defined source. In cross-border dividend cases, the concept of income under Section 5 focuses on accrual—i.e., the right to receive—rather than only the net cash received after foreign tax. This framing guides how dividends are brought into the Indian tax base for resident companies.

Why It Matters

• Clarifies the scope of income for residents earning abroad.
• Shows how accrual-based taxation works with foreign deductions.
• Helps in exam answers on gross vs net dividend and Section 5(1)(c).

Key Takeaways

• “Income” = periodic return from a definite source, not a chance gain.
• For residents, foreign-source income can be taxed in India on accrual.
• Foreign tax deduction does not erase the character of income earned.

Mnemonic + 3-Step Hook

Mnemonic: “GNA: Gross–Net–Accrual”

1. Gross idea: Dividend is income from a definite source.
2. Net confusion: Foreign tax deduction changes cash, not the nature of income.
3. Accrual rule: Tax looks at the right to receive, not only the receipt.

IRAC Outline

Glossary

• Accrual: When a legal right to receive income arises, even if cash is not yet received.
• Gross Dividend: Dividend before foreign tax deduction.
• Net Dividend: Amount actually remitted after deductions abroad.
• Source of Income: The asset or activity that regularly produces returns (e.g., shares producing dividends).

FAQs

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