PETITIONER: COMMISSIONER OF INCOME-TAX, BOMBAY Vs. RESPONDENT: ROBERT J. SAS DATE OF JUDGMENT: 16/11/1962 BENCH: ACT: Income Tax-Notice of assessment-Limitation for-Income deemed to be distributed as dividend-Indian Income-tax Act, 1922 (11 of 1922), ss. 23 A (1), 34. HEADNOTE: The assessees were the three shareholders of a private company. The company made profits in the calendar year 1947, but did not declare any dividend at the shareholders meeting held on December 4, 1948. The Income-tax Officer passed an order under s. 23 A (1) of the Income-tax Act whereby the income of the company was deemed to have been divided amongst the three shareholders. He issued notices to the assessees which were served on them on April 1, 1954. The assessees contended that the notices were served beyond the period of four years allowed by s. 34 (1) (b). Held, that the notices served under s. 34 (1) of the Act were beyond time and the Income-tax Officer had no jurisdic- tion to assess the assessees. Under s. 23A (1) the dividend was to be deemed to have been distributed not on June 30, 1949, by which date the company should have distributed the dividend, but on the date of the general meeting i.e., December, 4, 1948 within the accounting year 1948 and assessment year 210 1949-50. The notice was not served within four years from the end of the assessment year. It made no difference that under s. 23 A (1) an order could be passed at any time. JUDGMENT:
CIVIL APPELLATE JURISDICTION :Civil Appeals Nos.138 to 138
of 1962.
Appeals by special leave from the judgment and order dated
March 19, 1958, of the Bombay High Court in Income-tax
Reference No. 74 of 1957.
Gopal Singh and R. N. Sachthey, for the appellant.
R. J. Kolah, J. B. Dadachanji, 0. C. Mathur and Ravinder
Narain,’ for the respondents.
R. Gopalakrishnan, for the Intervener.
1962. November 16. The judgment of the Court, was
delivered by
KAPUR J.These ‘three appeals by special leave are brought
against the judgment and order of the High Court Bombay.
The appellant in all the three appeals is the Commissioner
of Income-Tax but in each of the appeals the respondent is
different 1. C., one of: the three shareholders of a private
limited company A.C.E.C. ‘Private (India) Limited which was
carrying on business in India and made profits during the
calendar year 1947. The accounting year is the calendar
year ending, December 31, 1948, and the relevant assessment
year 1949-50. Although the, company had earned large
profits during the year 1947 it did not declare any dividend
at the shareholders’ meeting held on December 4, 1948. On
March 29; 1954, the Income-tax Officer passed an order under
s. 23A(1), ‘of the Income-tax Act, hereinafter termed the
Act Whereby the income of the ‘Company. was in accordance
with that provision, deemed to have been divided amongst the
shareholders. By that order the following dividends were
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deemed to have been distributed amongst the three shareholders,
each a respondent in one of the appeals.
Mr. Paul Rouffart :Rs. 1,09,8591- Mr. Paul Victor Hermans :Rs. 1,00,189/- Mr. Robert J. Sas :Rs. 1,09,859/-
The Income-tax Officer issued notices under s. 34 of
the Act and the notices were served on the respective
respondents on April 1, 1954. Thereafter the return of the
income was submitted and the assessment was completed in
regard ‘to the shareholders. Appeals were taken first to
the Appellate Assistant Commissioner and then to the Income
tax Appellate Tribunal. One of the points taken before the
Tribunal was that the Income-tax Officer had no jurisdiction
to take proceedings as the notices were served on the
assessee respondents beyond the period of four years allowed
under s 34(1)(b) of the Act. This plea was accepted by the
Tribunal and at the instance of the Commissioner of Income-
tax a case was stated to the High Court under s. 66(1) of
the Act and the following two questions were referred to it:
(1) Whether on the facts and circumstances
of the case it was necessary for the Incometax
Officer to initiate action under section 34 of
the Indian Income-tax Act in order to tax the
deemed income distributed by virtue of the
order under section 23A(1) of the Act made in
the cage of the A.C.E.C. Private (India) Ltd.
?
(2) If the answer to question No. 1 is in
the affirmative whether having regard to the
observations of their lordships in Navin-
chandra Mafatlal v. Commissioner of Income-
tax,, Bombay City 1 (1955) 27 I.T.R. 245 the
notice, served on April 1, 1954 was out of
time;?
212
The second question was reframed by the High Court as
follows :
If the answer to question No. 1 is in the
affirmative whether the notice served on April
1, 1954 was out of time ?
Both the questions were answered in the affirmative and
against the Commissioner of Income-tax. Against that
judgment and order he has come in appeal to this court by
special leave.
In view of the decision of this court in Sardar Baldev Singh
v. Commissioner of Income-tax, Delhi & Ajmer (1) and
Commissioner of Income-tax V. Navinchandra Mafatlal (2) in
which it was held that an assessment cannot be made under
s.23A of the Act because that section does not make
provision for an assessment to’ be made and assessment can
only be made under s. 34 of the Act, the first question no
longer survives for decision and was rightly not argued
before us.
The only question that remains for decision is the second
question i. e., whether the notice served on April 1 , 1954,
was out of time. Counsel for the appellant-Commissioner of
Income-tax-argued (1) that there was no limitation
prescribed in regard to the order to be made under s. 23A of
the Act and if the period mentioned in a. 34 (1) (b) is made
applicable to orders under s. 23A then that section (s. 23A)
would become unworkable; (2) that as under s. 23A(1) there
was a period of six months up to the end of which dividends
could be distributed the accounting year would, in the
present case, be 1949 and the assessment year 1950-51 and
therefore the notice could be served within four years of
the end of that year i. e.. up to March 31, 1955. Finally
it was urged that proviso (1) to sub-s. (3) of s. 34 applied
and as the notice was issued within four years under s.
34(1)(b) there was
(1) [1961] 1 S.C.R. 482.
(2) [1961] 42 I.T.R. 53.
213
a period of one year from the date of service of the notice
during which the assessment or reassessment could be made
and the impugned order having been made within that period
it was a proper and a valid order.
In the present case the High Court in its advisory
,.jurisdiction had to give its opinion on the question
submitted to it and it refrained the question in order to
bring out the question which arises from the order of the
Tribunal We did not allow the question of the applicability
of proviso (1) to s. 34(3) to be raised as the question does
not take in the point raised about the proviso to sub-s. (3)
of s. 34. The question as framed by the High Court is
whether the service of notice under s. 34(1)(b) was out of
time. The proviso to sub-s. (3) of s. 34 relates to
completion of assessment within a particular period when the
notice is issued before the period of limitation referred to
in s. 34(1)(b). The two are different questions and one
does not include the other.
At the relevant date s. 23A which empowered the Income-tax
Officer to assess individual members of certain companies
read as under :
S. 23A. Power to assess individual members
of certain companies (1). Where the Income
tax Officer is satisfied that in respect of
any previous year the profits and gains
distributed as dividends by any company up to
the end of the sixth month after its accounts
for that previous year are laid before the
company in general meeting are less than sixty
per cent of the assessable income of the
company of that previous year, as reduced by
the amount of incometax and super-tax payable
by the company in respect thereof he shall,
unless, he is satisfied that having regard to
losses incurred by the company in earlier
years or to the smallness of the profit made,
the
214
payment of a dividend or a larger dividend
than that declared would be unreason able,
make with the previous approval of the
Inspecting Assistant Commissioner an order in
writing that the undistributed portion. of the
assessable income of’ the company of that
previous year as computed for income-tax
purposes and reduced by the amount of income-
tax and super-tax payable by the company in
respect thereof shall be deemed to have been
distributed as dividends amongst the
shareholders’ as at the date of the general
meeting aforesaid and thereupon the
proportionate share thereof of each
shareholder shall be included in the total
income of such shareholder for the purpose of
assessing his total income.”
The Income-tax Officer has power to make an order under this
section determining the amount of undistributed balance out
of the profits of a company where the company has
distributed by way of dividends out of the income of the
previous year less than 60% of the assessable income; and if
it has distributed less than 60% up to the sixth month after
the holding of the general meeting then the undistributed
assessable income shall be deemed to have been distributed
as dividend amongst the shareholders as at the date of the
general meeting. Thereafter the proportionate share of each
shareholder shall be included in the total of such
shareholder for the purpose of assessing his total income.
It comes to this that if at the end of the sixth month
after the general meeting of a company to consider its
accounts of the previous year the income of which is being
assessed, the Income-tax Officer finds that the dividends
distributed are less than 60% of the assessable income then
such undistributed income shall be deemed to have been
distributed at the general meeting or in
215
accordance with the resolution passed at the general meeting
and proportionate share shall be included in the total
income-of each individual shareholder. Thus s. 23A(1)
creates a fictional distribution of dividend which is deemed
to be a receipt of dividend ‘by the shareholder although in
fact the shareholders does not receive it. It is deemed to
have been distributed on the date on which accounts of the
previous year were laid before the company at its general
meeting. Thus construed the undistributed assessable income
in the present case was rightly determined by the Income-
tax Officer because 60% was not distributed by way of
dividends up to the end of the sixth month after the holding
of the meeting which was on December 4, 1948. Under s.
23A(1) of the Act dividend distributed by June 30, 1949,
should not have been less than the statutory limit but the
effect of the deeming provision is not that the income
should be deemed to have been distributed on June 30, 1949,
but on the date of the general meeting i.e. December 4,
1948, and therefore within the accounting year 1948, the
relevant assessment year being 1949-50. It makes no
difference that according to the wording of s. 23A(1) the
order could be passed at any time, the assessment would
still have to be ‘Made under s. 34(1)(b) of the Act and if a
notice is not served in accordance with that provision the
Incometax Officer will have no jurisdiction to take any
,action against the shareholder. The notice under s. 34(1)
is to be served within four years from the end of the
assessment year. It was held by this court in First
Additionallncome-tax Officer, Mysore, v. H. N. S.
lyengarthat the period of eight or four years under s.34(1)(a)
or (b) begins from the end of the assessment year. Besides
we ,cannot see why s. 23A(1) ‘Should, become unworkable
merely because the notice under s. 34(1) which is the
assessment section. prescribes a time limit for taking
action for escaped incomes nor was any reason
(1)[1962] Supp. 1 S.C.R.I.
216
brought to our attention in support of that submission.
In this view of the matter the answer given by the High
Court to the second question was correct and the assessment
made under s. 34(1)(b) of the Act after four years from the
end of the relevant assessment year was out of time. This
is the only question which survives for decision and in our
opinion the High Court answered it correctly.
These appeals, therefore fail and are dismissed with costs.
One hearing fee.
Appeals dismissed.