Section 235 — Relief to Shareholders re Agricultural Income-tax Attributable to Dividends (Omitted) (Omitted)

CHAPTER XVIII - RELIEF RESPECTING TAX ON DIVIDENDS IN CERTAIN CASES

Section 235 - Relief to Shareholders in Respect of Agricultural Income-tax Attributable to Dividends (Omitted)

Case Laws & Commentary - Income-tax Act, 1961 (as amended by the Finance Act, 2026) - bharattax.co Treatise

Status: OMITTED. Section 235 was omitted by the Finance (No. 2) Act, 1971, with effect from 1 April 1972. Before its omission it had been amended by the Taxation Laws (Amendment) Act, 1970 (w.e.f. 1 April 1971 and, in part, with retrospective effect from 1 April 1962), the Finance Act, 1966 (w.e.f. 1 April 1966) and the Finance Act, 1965 (w.e.f. 1 April 1965).

Finance Act, 2026: No amendment. The section has stood omitted for over five decades. (The reference to "section 235" in clause 64 of the Finance Act, 2026 is to section 235 of the Income-tax Act, 2025, and has nothing to do with the 1961 Act.)

Companion provisions: Section 236 (relief to a company in respect of dividend paid out of past taxed profits) and section 236A (relief to certain charitable institutions or funds in respect of certain dividends) - the other two provisions of Chapter XVIII.

Litigation profile: No reported decision construes section 235 itself. It was a relief provision tied to the dividend "grossing-up" regime that was dismantled between 1959 and 1965; cognate authorities concern the character of a dividend (and of plantation-company dividends in particular) and the grossing-up fiction.

A. SECTION COMMENTARY

1. Placement and function within Chapter XVIII

Chapter XVIII of the Income-tax Act, 1961 ("Relief respecting tax on dividends in certain cases") gathered three provisions that softened the impact of tax on dividends during the period when company profits and the dividends distributed out of them were, in substance, taxed in an interlocking manner. Section 235 addressed the special case of a shareholder whose dividend was traceable to the profits of a company - characteristically a tea, coffee or rubber plantation company - part of whose income had borne State agricultural income-tax rather than (or in addition to) Central income-tax. The object was to give the shareholder a measure of relief for the agricultural income-tax element so embedded in the dividend, mitigating a double burden.

2. The dividend regime the section assumed

Until the reforms of 1959-1965, a dividend was "grossed up" in the shareholder's hands: the income-tax paid by the company was, by legal fiction, treated as income-tax paid by the shareholder, who was given credit for it (the machinery of section 16(2) read with section 18(5) and section 49B of the Indian Income-tax Act, 1922, carried forward into the early years of the 1961 Act). Where the company's profits had suffered agricultural income-tax at the State level, the ordinary grossing-up did not fully neutralise the shareholder's burden, and section 235 supplied the corresponding relief.

3. Why the section was omitted (1 April 1972)

The grossing-up scheme was progressively abolished. The Finance Act, 1959 began the dismantling, and by the Finance Act, 1965 dividends came to be taxed on a net basis in the shareholder's hands without grossing up and without the associated credit. Once the premise of the relief had disappeared, section 235 was redundant. It was formally omitted by the Finance (No. 2) Act, 1971 with effect from 1 April 1972.

4. Effect of the omission

Omission operates prospectively. Any relief that had accrued, and any assessment governed by the section for assessment years up to its omission, was unaffected; but the section can have no application to any current year. It is reproduced here for completeness and to preserve the structure of Chapter XVIII.

B. STATUTORY POSITION (verbatim text)

Reproduced verbatim from the Income-tax Act, 1961 (as amended up to the Finance Act, 2025); the Finance Act, 2026 makes no change.

Relief to shareholders in respect of agricultural income-tax attributable to dividends.

235. [Omitted by the Finance (No. 2) Act, 1971, w.e.f. 1-4-1972. Prior to its omission, it was amended by the Taxation Laws (Amendment) Act, 1970, w.e.f. 1-4-1971 and with retrospective effect from 1-4-1962, the Finance Act, 1966, w.e.f. 1-4-1966 and the Finance Act, 1965, w.e.f. 1-4-1965.]

C. AUTHORITIES

Candour note. There is no reported judgment construing section 235. The provision was an adjunct of the grossing-up regime and of the special position of plantation-company dividends. The authorities below are cognate: the first fixes the character of a dividend (and addresses the agricultural-income question that gave section 235 its occasion); the others explain the grossing-up fiction the section supplemented.

Cluster 1 - Character of a dividend and the agricultural-income question

Bacha F. Guzdar v. Commissioner of Income-tax, Bombay - [1955] 27 ITR 1 (SC); AIR 1955 SC 74

Statute: Meaning of "dividend"; the character of a shareholder's income; section 2(1) ("agricultural income") read with rule 24 under the Indian Income-tax Act, 1922.

Facts: The assessee held shares in two tea companies. Under the then rule 24, sixty per cent of a tea company's income was treated as agricultural income (exempt) and forty per cent as business income. She contended that sixty per cent of her dividends should likewise be agricultural income in her hands and exempt.

Held: A shareholder has no interest in the assets or in the income of the company as such; the company is a distinct juristic person and its profits are its own. A dividend is income arising to the shareholder by virtue of his shares - not a distribution of the company's profits retaining their original character. The dividend therefore did not bear the stamp of agricultural income, and the whole of it was chargeable to tax.

Relevance: The foundational pronouncement on the legal character of a "dividend" - the very subject-matter of the reliefs in Chapter XVIII. It establishes the separation between tax borne at the company level and tax borne at the shareholder level, the gap which sections 235, 236 and 236A were designed to bridge or mitigate.

Cluster 2 - The grossing-up / tax-credit fiction the section supplemented

Purshottamdas Thakurdas v. Commissioner of Income-tax, Bombay - [1963] 48 ITR 206 (SC)

Statute: Sections 18, 18A, 16(2), 18(5) and 49B of the Indian Income-tax Act, 1922 - advance tax, deduction of tax from dividend, and the legal fiction that tax on a dividend is deemed paid by the shareholder.

Facts: In his estimate of income for advance-tax purposes under section 18A, the assessee did not include dividends on his shares. The Revenue treated the dividends as income on which advance tax was payable and charged penal interest for the shortfall.

Held: By the combined operation of sections 16(2), 18(5) and 49B a dividend is income from which tax is deemed to have been deducted at source - the income-tax paid by the company is, by legal fiction, treated as paid by the shareholder. Dividend was accordingly not income on which advance tax under section 18A was payable, and penal interest could not be sustained.

Relevance: The clearest exposition of the section 49B legal fiction that tax paid by the company on a dividend is tax paid by the shareholder. That fiction is the mechanism which the Chapter XVIII reliefs (especially section 236) adjust where the underlying profits were charged in pre-1-4-1960 assessment years.

Messrs. Howrah Trading Co. Ltd. v. Commissioner of Income-tax, Calcutta - [1959] 36 ITR 215 (SC)

Statute: Sections 16(2) and 18(5) of the Indian Income-tax Act, 1922 - "grossing up" of dividend and credit to the shareholder for income-tax deemed paid by the company; meaning of "shareholder".

Facts: The assessee purchased shares under blank transfers not registered in the companies' books. Though it received the dividends, it was not the registered holder. It claimed the benefit of grossing up and of credit for the tax deemed paid by the company.

Held: "Shareholder" in section 18(5) means the shareholder registered in the books of the company - the "member" in the company-law sense. A transferee under a blank transfer, although clothed with an equitable right to the dividend against the transferor, is not the shareholder qua the company and cannot claim the grossing-up benefit or the credit for tax deemed paid by the company.

Relevance: Fixes the identity of the person who may claim the dividend tax credit. The registered-shareholder concept marks the outer boundary of the credit fiction that the Chapter XVIII reliefs operate upon, and shows the relief follows legal, not merely beneficial, title.

Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text reproduced verbatim from the Income-tax Act, 1961 (as amended up to the Finance Act, 2025); the Finance Act, 2026 makes no amendment to Chapter XVIII. Citations have been web-verified; readers should consult the official reports before relying on any authority.