PETITIONER: MIS. BHOR INDUSTRIES LTD. Vs. RESPONDENT: THE COMMISSIONER OF INCOME-TAX,BOMBAY CITY I.(and connected DATE OF JUDGMENT: 12/01/1961 BENCH: HIDAYATULLAH, M. BENCH: HIDAYATULLAH, M. KAPUR, J.L. SHAH, J.C. CITATION: 1961 AIR 1100 1961 SCR (3) 409 ACT: Income-tax-Assessment of dividend income-Company incorporated in Indian State subsequently merged-Extension of Indian Income-tax Act to merged State-Taxation concessions to merged State-Scope-Assessment on shareholders of non-distributed Profits Exemption from taxation- Computation of dividends deemed to be distributed-Deduction of interest-Merged States (Taxation Concessions) Order, 1949, para. 12-Indian Income-tax Act, 1922 (11 of 1922), SS. 14(2)(C), 18A(8), 23A. HEADNOTE: The appellant had been incorporated in 1944 as a private company limited by shares in the former State of Bhor with its registered office in Bhor. The shareholders of the company were at all material times resident in British India. By virtue of the States Merger (Governors' Provinces) Order, 1949, the State was merged with the Province of Bombay with effect from August 1, 1949. The provisions of the Indian Income-tax Act, 1922, were extended to the merged State with effect from April 1, 1949. Under the power given by s. 60A of the Act which enabled the Central Government to remove any difficulty in the application of the Act to merged States by making a general or special order granting exemption or other modification, the Central Government notified the Merged States (Taxation Concessions) Order, 1949. Paragraph 12 of that Order stated that " the provisions of S. 23A of tile Indian Income-tax Act shall not be applied in respect of the profits and gains of any previous year ending before 1st day of August, 1949, unless the State law contains a provision corresponding thereto. " The total world income of the company for 1946 and 1947 was Rs. 6,57,084 and 7,8o, 125 respectively and for those years the company declared dividends of Rs. 2,580 and Rs. 1140. For the assessment years 1947-48 and 52 410 1948-49, corresponding to the account years 1946 and 1947, the Income-tax Officers assessed the company as nonresident ; for the assessment year 1947-48, the Officer held that' the assessable income of the company in British India for 1946 less the taxes must be deemed to be distributed among the shareholders in the proportion of their shareholdings, under S. 23A of the Act, while for the account year 1947, the total world income less the taxes was deemed to be is tributed, the part proportionate to the income in Bhor State being excluded, except for purposes of rate. In computing the " deemed dividends " the Income-tax Officer did not deduct the interest charged to the company under s. 18A (8) from the assessable income along with the income-tax and super-tax under S. 23A(1). The company and the shareholders claimed (1) that para. 12 of the Merged States (Taxation Concessions) Order, 1949, precluded the Income-tax Officer from making an order under S. 23A of the Act in respect of the profits and gains of the account years ending December 31, 1946, and December 31, 1947, which were previous years ending before August 1, 1949, and (2) that, in any case, interest under s. 18A(8) ought to have been deducted along with the income-tax before the fictional dividends were computed. A further contention was raised that since the dividends in question would be deemed to have been declared in Bhor State and received there, unless another fiction was engrafted upon the fiction created in S. 23A that the dividends must be deemed to have been received in the taxable territories, they could not be taxed in the hands of the shareholders. The shareholders also claimed the benefit of s- 14(2)(C) in respect of the entire amount of the balance deemed to be distributed. Held: (1) that the expression "any previous year" in para. 12 of the Merged States (Taxation Concessions) Order, 1949, did not refer to all the previous years prior to and ending before August 1, 1949, but meant only one previous year, which would be a previous year for the purposes of the assessment year 194950, but which, to get the exemption, must end before the first day of August, 1949; (2) that the force of the fiction under S. 23A of the Indian Income-tax Act, 1922, which makes the dividends which ought to have been distributed to be so distributed, transcends all questions of accrual and receipt, and what is deemed to be distributed must also be deemed to have accrued and received by the person to whom it is deemed to be distributed; (3) that s. 14(2)(c) of the Act saves only that portion of the income which is not assessable in the taxable territories by reason of its accrual in the State and does not affect the operation of S. 23A on the assessable income of the company which, by reason of the application of the Indian Income-tax Act even prior to the extension of the Act to the State after merger, was assessable under the Act 411 (4) that the wording of s. 18A(8) of the Act under which interest is recoverable along with the tax, does not show that it is to be treated as tax but retains its character as interest, and since s. 23A speaks of deduction only of income-tax and supertax, no deduction could be made in respect of the interest under that section. JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 158 to 164
of 1960.
Appeals from the judgment and order dated October 8, 1958,
of the Bombay High Court in I.T.A. Nos. 7505, 7506, 5046 to
5048, 5149 and 5150 of 1956-57.
A. V. Viswanatha Sastri, S. N. Andley, J. B. Dadachanji,
Rameshwar Nath and P. L. Vohra, for the. appellants.
R. Ganapathy Iyer and D. Gupta, for the respondent.
1961. January 12. The Judgment of the Court was delivered
by
HIDAYATULLAH, J.-These seven appeals have been filed on a
certificate granted by the High Court of Bombay against the
judgment and order of the High Court dated October 8, 1958,
in a case referred by the Income-tax Appellate Tribunal,
Bombay.
The first appellant is the Bhor Industries, Ltd., a Company
incorporated in 1944 in the former Bhor State with its
registered office also situated in the town of Bhor. It did
the business of dyeing, printing and bleaching cloth, cloth
proofing, etc., in Bhor State. The remaining five
appellants are the shareholders of this Company, which,
admittedly, was a private Company limited by shares, at all
material times. We are concerned in these appeals with the
account years of the Company, 1946 and 1947. During these
years, the income of the Company was as follows:-
Assessment Total Income accruing Total World year Income or arising in the Income (Sum Indian State of of 2 & 3) Bhor.
———————————————————-
1 2 3 4
———————————————————-
1947-48 Rs. 4,32,542 Rs. 2,24,542 Rs. 6,57,084
1948-49 Rs. 4,32$709 Rs. 3,47,416 Rs. 7,80,125
412
The Company held its general meetings to declare dividends
at Bhor on August 17,1947, and August 19, 1948,
respectively. For the account years 1946 and 1947
respectively it declared a dividend of Rs. 2,580/and Rs.
1,140/-.
Bhor State merged with the Province of Bombay by virtue of
the States Merger (Governors’ Provinces) Order, 1949, which
came into force on August 1, 1949. By the Taxation Laws
(Extension to Merged States and Amendment) Act, 1949, which
received the assent of the Governor-General on December 31,
1949, the Indian Income-tax Act was extended to the merged
States with effect from April 1, 1949. That Act also
introduced s. 60A in the Income-tax Act, by which power was
given to the Central Government, if it considered necessary
or expedient so to do, to avoid any hardship or anomaly or
to remove any difficulty in the application of the Income-
tax Act to merged States, to make a general or special order
granting exemption, reduction in rate or other modification.
Under the power thus conferred, the Central Government
notified the Merged States (Taxation Concessions) Order,
1949.
For the assessment years 1947-48 and 1948-49 corresponding
to the account years of the Company, 1946 and 1947, the
Income-tax Officers assessed the Company as non-resident,
and held that the Company was not a public Company within
the meaning of s. 23A of the Indian Income-tax Act. The
Income-tax Officer who passed the order for the assessment
year 1947-48 under s. 23A, held that the assessable income
in British India of the Company in 1946 minus the taxes,
must be deemed to be distributed among the shareholders in
the proportion of their shareholdings. The Incometax
Officer calculated the amount deemed to be distributed as
follows:
413
1946 (assessment year 1947-48).
Total Income ... Rs. 4,32,542
Taxes ... Rs. 1,89,237
-------------
Amount available
for distribution ... Rs. 2,43,305
as dividend
Dividend declared ... Rs. 2,580
--------------
Balance of the amount
available and deemed
to be distributed ... Rs. 2,40,725
-------------
For the account year 1947, the Income-tax Officer took the
total world income less the taxes as the amount available
for distribution as dividend. According to him, that amount
was as follows:
1947 (assessment year 1948-49).
Total income … Rs. 4,32,709
Income in Bhor State … Rs. 3,47,416
————-
Total world income ... Rs. 7,80,125
Taxes ... Rs. 2,43,399
-------------
Amount available for
distribution as dividend …. Rs. 5,36,726
Dividend declared …. Rs.1,140
————
Balance of the amount
available for distribution …. Rs.5,35,586
————
The Income-tax Officer then apportioned it among the
shareholders as on August 19, 1948. This worked out at Rs.
539.9 per share. The Income-tax Officer then divided this
amount of Rs. 539.9 in the proportion the total income bore
to the income in Bhor State and taxed the former in the
hands of the shareholders, but the balance was included and
considered for purposes of rate only. The Tribunal in the
statement of the case illustrated this by citing the case of
one of the shareholders (Pushpakumar M. D. Thackersey) as
follows:-
414
“The portion of Rs. 5,35,586 apportionable to
his 90 shares at the rate of Rs. 539.9 per
share worked out at Rs. 50,211/-. This amount
of Rs. 50,21/was divided into two smaller
amounts in the ratio already mentioned and the
amount of Rs. 27,851/was actually brought to
tax whereas the amount of Rs. 22,360/–
attributable to Bhor State income of Rs.
3,47,416/- was merely included in the total
income for rate purposes.”
In computing these ” deemed dividends “, the two Income-tax
Officers did not deduct the interest charged to the Company
under s. 18A(8), from the assessable income along with
income-tax and super-tax under s. 23A(1).
The Company as well as the shareholders appealed to the
Appellate Assistant Commissioner, but their appeals were
unsuccessful. Their further appeals to the Tribunal were
also dismissed. They raised the contentions that s. 23A was
not applicable to the Company, that the deemed income
arising from a fictional distribution of the dividends could
not be taxed in the hands of the shareholders because s. 23A
did not apply to them, and that they were protected by the
Concessions Order in the same way in which the Company was.
They also raised the contention that in. determining the
balance of the amount available for distribution, interest
charged under s. 18A(8) ought to have been deducted. All
these contentions were not accepted by the Department and
the Tribunal.
At the instance of the Company and the shareholders, the
Tribunal drew up a statement of the case, and referred three
questions to the High Court for its decision. These
questions were as follows:
” 1. Whether paragraph 12 of the Merged States
(Taxation Concessions) Order, 1949, precluded
the Income-tax Officer from making an order
under Section 23A in the case of the assessee
company in respect of its profits and gains of
the previous year ended 31st December, 1946 ?/
31st December, 1947 ?
415
2. Whether in making an order under Section
23A in respect of the profits and gains of the
year 1946/1947 the assessable income of that
previous year is to be reduced not only by the
amount of incometax and super-tax payable by
the company in respect thereof but also by the
amount of interest charged to it in accordance
with the provisions of Section 18A ?
3. Having regard to the order passed by the
Income-tax Officer under Section 23A in
respect of the Company’s profits of the year
1947 and having apportioned the sum of Rs.
17,641/- to the shareholder, Pushpakumar, as
his proportionate share in the distribution
made by the Income-tax Officer under Section
23A and having regard to the provisions of
Section 14(2) (c), whether the said sum of Rs.
17,641/has been properly included in his total
income for the purpose of charging it to tax ?
”
The third question was a typical question, as similar
questions also arose in the case of other shareholders with
variation in the amount. The amount of Rs. 17,641/-, the
Tribunal stated, replaced Rs. 50,211/in view of certain
directions given by the Tribunal. The High Court framed one
more question as the second part of question No. 1 in
disposing of the reference, which read as follows.:
” Whether paragraph 12 of the Merged States
(Taxation Concessions) Order, 1949, precluded
the Income-tax Officer from making any order
under Section 23A so as to affect the assessee
shareholders in respect of their profits and
gains for the assessment year 1949-50 ?
The High Court answered the first and second questions and
the question framed by it in the negative, and the third
question, in the affirmative. The High Court, however,
granted a certificate under s. 66A of the Income-tax Act,
and the present appeals have been filed. The contentions
raised before the High Court have been raised before us.
The Company questions the application of s. 23A to the two
assessment years, 1947-48 and 1948-49, while the
shareholders
416
question the application of s. 23A to the Company and also
to them in the assessment year, 1949-50. Both the Company
and the shareholders contend that interest under s. 18A(8)
ought to have been deducted along with the income-tax to
find out the available surplus. The shareholders claim the
benefit of s. 14(2) (c) in respect of the entire amount of
the balance deemed to be distributed.
To begin with, one must remember that the Indian Income-tax
Act was applied to Bhor State from April 1, 1949, and that
there was no income-tax law in force in Bhor State prior to
its merger. This position also obtained in many other
Indian States, which merged with the Provinces in British
India. The fact that income-tax is charged in an assessment
year on the income, profits or gains of the previous year
would have made persons resident in merged States to pay tax
on income which, but for the extension of the Indian Income-
tax Act, was either not liable to income-tax at all or was
liable at a lesser rate. In view of the apprehended
difficulties and anomalies, the Extension Act itself gave
power to remove such anomalies and hardships. Section 60A
was added to the Income-tax Act, and it read as follows:
” If the Central Government considers it
necessary or expedient so to do for avoiding
any hardship or anomaly, or removing any
difficulty, that may arise as a result of the
extension of this Act to the merged States,
the Central Government may, by general or
special order, make an exemption, reduction in
rate or other modification in respect of
income-tax in favour of any class of income,
or in regard to the whole or any part of the
income of any person or class o
f
persons……… ”
The Concessions Order, 1949, was passed in furtherance of
this power. We are concerned only with paragraph 12 of the
Concessions Order, 1949, which has been relied upon by the
Company and the share. holders, who are appellants before
US. It is not necessary to refer to paragraphs 4, 5 and 6
to which passing reference Was made in the arguments,
because
417
they deal with income in an Indian State, which has not been
taxed in these cases at all.
Paragraph 12 provided for the application of s. 23A to a
previous year ending on or after August 1, 1949, but not to
a previous year ending before August 1, 1949. It may be
quoted here:
“The provisions of section 23A of the Indian
Income-tax Act shall not be applied in respect
of the profits and gains of any previous year
ending before 1st day of August, 1949, unless
the State law contains a provision
corresponding thereto.”
Reading the Extension Act, s. 60A and the Concessions Order,
1949, together, the following position emerges. The Indian
Income-tax Act applied to and from the assessment year 1949-
50 (April 1, 1949 to March 31, 1950) in the merged States.
Corresponding previous years were comprehended. The
difficulty which was likely to be felt was with respect to
the fact that the merger with the Province of Bombay
operated from August 1, 1949, and not from April 1, 1949.
In respect of the exemption under s. 14 (2) (c), the
position was preserved by applying paragraphs 5 and 6 to the
exempted income. These two paragraphs made the State rate
applicable to that exempted income. Similarly, previous
years ending after March 31, 1948, were to be assessed to
Indian income-tax, but the excess of the tax computed at
Indian rates over the tax computed at State rates was to be
given away as rebate, and profits and gains of companies of
any previous year ending before August 1, 1948, earned in an
Indian State were saved from s. 23A, unless there was, in
the State, a provision corresponding to s. 23A. It must be
remembered that the Income-tax Officer in the present case
did not seek by his order under s. 23A to distribute the
Bhor State income of the shareholders of the Company as
dividend; he restricted his order to the British Indian
income. There was, in fact, in the State of Bhor no law of
Income-tax, and no order taxing income which arose in Bhor
could be passed by the Income-tax Officer.
418
By the definition in s. 2(5A) of the Indian Incometax Act. a
company formed in pursuance of an Act of an Indian State was
a company for the purposes of the Act, and it was open to
the Income-tax Officer exercising powers under s. 23A to
declare the income of such a company accruing or arising
within the taxable territory as distributed among the
shareholders. The right of the Department to pass an order
under s. 23A(1) of the Indian Income-tax Act was not chal-
lenged before the Tribunal, and it was not the subject of a
decision in the High Court. The argument still has been, on
behalf of the Company as well as the shareholders, that
paragraph 12 of the Concessions Order saved the profits and
gains, whether made in Bhor State or in British India, from
the application of s. 23A, and that indirectly the
shareholders were entitled to the same benefit.
Paragraph 12 of the Concessions Order depends on whether a
company was being assessed under the Indian Income-tax Act
in respect of its profits and gains in an Indian State for
any previous year ending before the first day of August,
1949. By the application of the Indian Act to an Indian
State, the income of a company in an Indian State was likely
to be taxed to Indian income-tax from the assessment year,
1949-50. For the earlier assessment years a company’s
income in the Indian State was exempt without the assistance
of the Concessions Order. The exemption granted by the
Concessions Order was to operate in respect of those profits
and gains which, but for the exemption, would have been
included in the assessment year, 1949-50 and subsequent
years. In so far as paragraph 12 of the Concessions Order
was concerned, it gave exemption in respect of action under
s. 23A to income of ” any previous year ” ending before the
first day of August, 1949. The date, August 1, 1949, was
chosen because the merger with the Provinces took place on
that date. The word ” any ” does not refer to all the
previous years prior to and ending before August 1, 1949,
but to a previous year in relation to the assessment year,
1949-50 and ending before the first day of August, 1949.
The words
419
any previous year mean, therefore, only one previous year,
which would be a previous year for the purposes of the
assessment year, 1949-50 but which, to get the exemption,
must end before the first day of August, 1949. The
exemption, therefore, did not apply to previous years other
than the one described, and in respect of the earlier
previous years, paragraph 12 of the Concessions Order was
hardly needed. Otherwise, there would be no need to mention
in the paragraph the date on which the previous year must
end.
It is thus quite clear that paragraph 12 provided for
income, profits and gains of those previous years which were
specially mentioned and in respect of which anomalies were
likely to arise by reason of the fact that the merger took
place on August 1, 1949, while the Income-tax Act was
applied from April 1, 1949. In view of the fact that
specific terminii of previous years are expressly mentioned
in the Concessions Order, it is not possible to accept the
argument on behalf of the appellants that ” all ” previous
years before the date mentioned were comprehended in
paragraph 12. The application of that paragraph must be
limited to one previous year only which ended prior to
August 1, 1949.
The previous years, with which we are concerned, ended on
December 31, 1946, and December 31, 1947, respectively. In
the case of this Company, the previous year which would
answer the description in paragraph 12 would be the previous
year ending December 31, 1947. To that previous year, the
provisions of s. 23A were not applicable, and the profits
and gains made in Bhor State would be protected. The
position which obtained in the assessment year 194748 would
thus obtain also in the assessment year 1948-49 in so far as
the Company was concerned, and its profits and gains in Bhor
State could not be considered for purposes of application of
s. 23A.
The position was, however, different in regard to the income
in British India which formed the total income of the
Company in the taxable territory. It was not contended that
the assessable income of the Company in the taxable
territories would not attract
420
s.23A, if the distribution of dividends from that income was
below the mark set in s. 23A. There is thus no difference
between the assessment years 194748 and 1948-49, and the
method of calculation adopted in the first year is also
applicable to the second. To this extent, the answer to the
first question (first part) must be deemed to be modified in
respect of the previous year ending December 31, 1947.
It is next contended that interest that was charged to the
Company under s. 18A(8) ought to have been deducted along
with the income-tax before the fictional dividends were
computed. Section 18A(8) reads as follows:
” Where, on making a regular assessment, the
Income-tax Officer finds that no payment of
tax has been made in accordance with the
foregoing provisions of the section, interest
calculated in the manner laid down in sub-
section (6) shall be added to the tax as determined on the basis of regular assessment."
The words of the sub-section are clear to show that interest
as interest is added to the tax as determined. There is
nothing to show that it is to be treated as tax, and it thus
retains its character of interest but is recoverable along
with the tax. Indeed, s. 29 of the Income-tax Act makes a
distinction between tax, penalty and interest. Since s. 23A
speaks of deduction only of income-tax and super-tax, no
deduction could be made in respect of this interest.
Question No. 2 was thus correctly answered by the High
Court.
In so far as the shareholders who were all resident in the
taxable territories were concerned, paragraph 12 of the
Concessions Order did not, in terms, protect them. Section
23A enjoins that dividends to the extent of 60 per cent. of
the assessable income of the Company after deduction of
income-tax and super-tax must be paid. When the assessable
income of the Company has been determined and after the
necessary deductions have been made, if dividends are not
distributed in accordance with s. 23A, the fiction applies
to that portion of the profits and gains which were taxable
as assessable income of the Company in the
421
taxable territories and which ought to have been so dis-
tributed. Section 23A, as it was before the amendment in
1955, mentioned 60 per cent. of the assessable income of a
company as reduced by the amount of income-tax and super-tax
payable by a company, and provided further that the
undistributed portion of the assessable income of a company
as computed and reduced shall, subject to certain
conditions, be deemed to have been distributed as dividends
amongst the shareholders.
We have already shown that the benefit of paragraph 12 is
not available in respect of these fictional dividends, in so
far as the assessable income of the Company was concerned.
It is, however, contended that these dividends would be
deemed to be declared in Bhor State and to have been
received there, and that unless another fiction is engrafted
upon the fiction created by s. 23A, these deemed dividends
cannot be taxed in the hands of the shareholders. No doubt,
the section implies a fiction; but if the fiction is given
effect to, such income must be deemed to be distributed to
the shareholders, and the fiction thus transcends all
questions of accrual or receipt in the taxable territories.
What is deemed to be distributed must be deemed to have
accrued and also received by the person to whom it is deemed
to be distributed [See ss. 4(1)(a) and 4(1)(b)(i) and (ii)].
Paragraph 12 of the Concessions Order saved the Company in
respect of income in Bhor State for the assessment year
194849 for the corresponding previous year ending before
August 1, 1949, but it did not save the operation of a. 23A
in respect of the assessable income of the Company in the
taxable territories and the distribution of dividends to the
shareholders from that income.
In our opinion, the High Court was right in holding that the
dividends deemed to have been distributed out of the
Assessable income of the Company in the taxable territories
were’ rightly assessable in the total income of the
shareholders resident in the taxable territories. No
question has been referred on the method of calculation of
the dividends deemed to
422
have been distributed, and we need, therefore, express no
opinion on that part of the case.
The shareholders (appellants 2 to 6) claim the benefit of a
14(2)(o) of the Act, which provides:
” 14(2). The tax shall not be payable by an
assessee-
(c) in respect of any income, profits or
gains accruing or arising to him within an
Indian State, unless such income, profits or
gains are received or deemed to be received in
or are brought into British India in the
previous year by or on behalf of the assessee,
or are assessable under Section 12-B or
Section 42. ”
We have already shown that the force of the fiction makes
the dividends which ought to have been distributed, to be so
distributed. We have also said that this fiction transcends
all questions of accrual and receipt. The effect of s. 23A
is to make dividends payable out of the British Indian
income to the shareholders. Paragraph 4 of the Concessions
Order and s. 14(2)(c) saved for the shareholders the income
of the Company outside the taxable territories only, that is
to say, the income earned in Bhor State. They do not affect
the operation of s. 23A on the assessable income of the
Company which, by reason of the application of the Indian
Income-tax Act even prior to the Extension Act, was
assessable under the Indian Income-tax Act. Dividends
payable out of that portion of the income will attract s.
23A, and s. 14(2)(c) does not apply. Section 14(2)(c) saves
only that portion of the income which was not assessable in
the taxable territories by reason of its accrual in the
State. The Income-tax Officer in assessing the income of
the shareholders for the assessment year, 1949-50, ought to
have deducted the income which accrued in Bhor State, while
applying s. 23A to them. This he, in effect, did, but he
adopted a method on which no question has been raised, and
the correctness of the method cannot be examined.
The answer to question No. 1 is thus in the negative, with
the modification that s. 23A applied only to that
423
portion of the income which was earned in British India and
not in Bhor State. The answer to the second question is in
the negative. The answer to the third question is in the
affirmative. The question posed and answered by the High
Court hardly arises, in view of the answer to the first
questions That question and the answer to it are set aside
as being not necessary.
The appeals thus fail except for a slight modification in
the answer to the first question, and subject to that
modification, are dismissed. The appellants must bear the
costs of these appeals. There shall be one hearing fee.
Appeals dismissed.