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Civil Appeals Nos. 136 to 138 of 1962, decided can 16th November 1962.
Distribution order‑inclusion of dividend deemed to be distributed in total income of shareholder by way of reassessment‑Limitation‑Indian Income‑tax Act, 1922, Ss. 23‑A & 34(1)(b).
The assessees were shareholders of a private company. Although the company had earned large profits during the calendar year 1947 it did not declare any dividend at the relevant shareholders meeting held on December 4th, 1948. On March 29, 1954, the Income‑tax Officer passed an order under section 23‑A(1) of the Income‑tax Act, 1922, deeming the undistributed profits of the company for the calendar year 1947 to be distributed amongst its shareholders. Notices under section 34(1)(6) of the Act were served on the assessee on April 1, 1954, for the purpose of including the dividends so deemed to be distributed in their total income of the calendar year 1948, which was the previous year relevant for the purposes of the assessment year 1949‑50:
Held, (i) that the dividends deemed to be distributed by the order under section 23‑A (1) were deemed to have been distributed on the date of the general meeting, namely, December 4, 1948, and, therefore, within the calendar year 1948 relevant to the assessment year 1949‑50;
(ii) that as the notices were not served, in accordance with section 34 (1) (b), within four years from the end of the assessment year 1949‑50 (within the previous year of which the date of the general meeting of the company fell) the Income‑tax Officer had no jurisdiction to take any action against the assessees. It made no difference that the order under section 23‑A could be passed at any time.
There is no reason why section 23‑A (1) should become unworkable merely because the notice under section 34(1), which is the assessment section, prescribes a time limit for taking action for the purpose of bringing to tax escaped incomes.
Commissioner of Income‑tax v. Robert J. Sas (1958) 34 I T R 222 affirmed.
[Cases‑Law referred:]
Gopal Singh and R. N. Sachthey for Appellant.
R. J. Kolah and J. B. Dadachanji, O. C. Mathur and Ravinder Narain of J. B. Dadachanji & Co. for Respondents.
Gopalakrishnan for the Intervener.
‑These three appeals by special leave are brought against the judgment and order of the High Court of Bombay. The appellant in all the three appeals is the Commissioner of Income‑tax, but in each of the appeals the respondent is different, i.e., 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 Decem ber 4, 1948. On March 29, 1954, the Income‑tax Officer passed an order under section 23‑A (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 deemed to have been distributed amongst the three shareholders, each a respondent in one of the appeals.
| Mr. Paul Rouffart | Rs. 1,09,859 |
| Mr. Paul Victor Hermans | Rs. 1,00,189 |
| Mr. Robert J. Sas | Rs. 1,09,859 |
The Income‑tax Officer issued notices under section 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 proceeding as the notices were served on the asses see‑respondents beyond the period of four years allowed under section 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 section 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 Income‑tax 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 23‑A (1) of the Act made in the case 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 Navinchandra Mafatlal v. Commissioner of Income‑tax ((1955) 27 I T R 245) the notice served on 1st April 1954, was out of time "
The second question was refrained by the High Court as follows:
"If the answer to question No. 1 is in the affirmative whether the notice served on 1st April 1954, was out of time "
Both the questions were answered in the affirmative and against the Commissioner of Income‑tax. Against the 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 ((1960) 40 I T R 605) and Commissioner of Income-tax v. Navinchandra Mafatlal ((1961) 42 I T R 53 (S C)) in which it was held that an assessment cannot be made under section 23‑A of the Act because that section does not make provisions for an assessment to be made and assessment can only be made under section 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 section 23‑A of the Act and if the period mentioned in section 34 (1) (b) is made applicable to orders under section 23‑A then that section (section 23‑A) would become unworkable ; (2) that as under section 23‑A (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 31st March 1955. Finally it was urged that proviso (1) to subsection (3) of section 34 applied and as the notice was issued within four years under section 34 (1) (b) there was 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 section 34 (3) to be raised as the question does not take in the point raised about the proviso to subsection (3) of section 34. The question as framed by the High Court is whether the service of notice under section 34 (1) (b) was out of time. The proviso to subsection (3) of section 34 relates to completion of assessment within a particular period when the notice is issued before the period of limitation referred to in section 34 (1) (b). The two are different questions and one does not include the other.
At the relevant date section 23‑A which empowered the Income‑tax Officer to assess individual members of certain companies read as under:
"23‑A. 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 percent. of the assessable income of the company of that previous year, as reduced by the amount of income‑tax 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 payment of a dividend or a larger dividend than that declared would be unreasonable, make with the previous approval of the Inspecting Assistant Commissioner an order in writing that the un distributed 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 than 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 income 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 accordance with the resolution passed at the general meeting and the proportionate share shall be included in the total Income of each individual shareholder. Thus section 23‑A (1) creates a fictional distribution of dividend which is deemed to be a receipt of dividend by the shareholder although in fact the shareholder 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 holding of the meeting which was on December 4, 1948. Under section 23‑A (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 section 23‑A (1) the order could be passed at any time, the assessment would still have to be made under section 34 (1) (b) of the Act and if a notice is not served in accordance with that provision the Income‑tax Officer will have no jurisdiction to take any action against the shareholder. The notice under section 34 (1) is to be served within four years from the end of the assessment year. It was held by this court in First Additional Income‑tax Officer, Mysore v. H. N. S. Iyengar ((1962) 44 I T R 437) that the period of eight or four years under section 34 (1) (a) or b) begins from the end of the‑assessment year. Besides, we cannot see why section 23‑A (1) should become unworkable merely because the notice under section 34 (1) which is the assessment section prescribes a time limit for taking action for escaped incomes nor was any reason 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 section 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.
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