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Income‑tax Miscellaneous Case No. 304 of 1960, decided on 10th July 1962.
Re‑assessment‑Receipts entered in capital account‑Entries disclosed to Income‑tax Officer‑Omission to consider whether they were capital or revenue receipt‑Escape of income‑Subsequent assessment as revenue receipt‑Legality‑"Change of opinion" Scope of S. 34‑Dividends‑Grossing up‑"Rate applicable to total income of company"‑Meaning of " rate applicable " Indian Income‑tax Act, 1922, Ss. 2 (6‑‑A) (c), 16 (2) & 34 (1).
For the assessment year 1954‑55, the assesee was assessed on a total income of Rs. 19,517. The Income‑tax Officer during his examination of the accounts found two entries, vii., of Rs. 26,834 and Rs. 24,425, dated December 1, 1953, but, as they were entered in the "capital account", he merely initialled them and did not include them in the assessment. It was discovered later that they were distributions of the assets of two companies in liquidation in respect of shares held by the assessee and were liable to be assessed as dividends as they were paid out of accumu lated profits, and a fresh assessment was made under section 34 of the Act for 1954‑55 including these two sums
Held, (i) that the case was not one of mere change of opinion, but receipt of further information and the Income‑tax Officer had in-jurisdiction to make a fresh assessment under section 34 of the Act;
(ii) the amounts were clearly assessable as dividends under section 2 (6‑A) (c) even though the companies were companies incorporated in a Part B State before the Part B States Act of 1951
Held also, that the words "rate applicable to the total income of the company" which appears in section 16 (2) of the Act relating to the grossing up of dividends, means the "rate actually applied" and if the company had no total income in the relevant year there is no occasion for grossing up the dividends.
M. M. Aishoe v. Income‑tax Officer Alwaye (1957) 32 I T R 306 fol.
(Scope and meaning of section 34 discussed).
Per Desai, C. J., Obiter.‑There may be justification for entering into the question whether the initiation of the proceed ings under section 34 was legal or not while the proceedings are pending, but after the proceedings have terminated, income has peen proved to have escaped assessment earlier, and had been assessed under section 34 and the initiation of the proceedings bas been justified by the result, the question loses all importance and an order of assessment under section 34, of income, which under the law was assessable but had escaped assessment should not be quashed, simply on the ground that there was some defect in the initiation of the proceedings under section 34. What the Legislature obviously contemplated by saying that the reopening of assessment proceedings should be done when the Income‑tax Officer on the basis of information believes that income has escaped assessment is that he should act not on mere suspicion or surmise that income might have escaped assessment or simply with a view to re‑examine the matter and to find whether it had escaped assessment or not.
Chatturam Horilram Ltd. v. Commissioner of Income‑tax (1955) 27 I T R 709 ; Maharal Kumar Kamal Singh v. Commissioner of Income‑tax (1959) 35 I T R 1 : R. G. S. Naidu & Co. v. Com missioner of Income‑tax (1951) 41 I T R 693 ; Rajputana Agencies Ltd v. Commissioner of Income‑tax (19'59) 35I T R 169 and Salem Provident Fund Society v. Commissioner of Income‑tax (1961) 42 I T R 547 ref.
Saran Behari Lal and V. B. Upadhya for Applicant.
Gopal Behari for Respondent.
I agree with the answers proposed by my learned brother whose judgment I had the privilege to read.
As regards the first question not only do I see no defect in the initiation of the proceedings under section 34(1) (b) but also I do not see why the question should be allowed to be raised at all after an assessment order is passed under section 34.
There may be justification for entering into the question whether the initiation of the proceedings was legal or not while the proceedings are pending, but after the proceedings have termi nated, income has been proved to have escaped assessment earlier and had been assessed under section 34 and the initiation of the proceedings has been justified by the result, the question loses all importance. I would oppose the quashing of an order of assessment under section 34, of income, which under the law was assessable, but had escaped assessment, simply on the ground that there was some defect in the initiation of the proceedings under section 34. As I said the provision that assessment proceedings may be reopened under section 34 (1) (b) when the Income‑tax Officer on the basis of information believes that income has escaped assessment, is only a caution provision and not one going to the root of the Income‑tax Officer's jurisdic tion. It is the object behind the Act that income which could legally be assessed to tax must be assessed and it could never have been within the contemplation of the Legislature that if income by mistake of the Income‑tax Officer escaped assessment and the mistake was discovered later, the assessment was re opened under section 34 by the issue of a notice contemplated by the section and the income was assessed to tax, still the assess ment order should be quashed because of some imaginary defect such as that the reopening was not done on the basis of any information. What the Legislature obviously contemplated by saying that the reopening of assessment proceedings should be done when the Income‑tax Officer on the basis of infor mation believes that income has escaped assessment is that he should act not on mere suspicion or surmise that income might have escaped assessment or simply with a view to re- examine the matter and to find whether it had escaped assessment or not.
The argument that has been frequently advanced that a change of opinion cannot sustain the reopening of the assessment proceedings under section 34 (1) (b) is hardly intelligible. If even after income has been proved to have escaped assessment it was necessary to consider whether the reopening of the assessment proceedings was legal or not, the question that will be considered by the Court is whether there was infor mation in the possession of the Income‑tax Officer who reopened the proceedings. The question is of his jurisdiction and the Court will consider why he reopened the proceedings, rather, how he reopened the proceedings. It is, in my opinion, a mistake, to proceed first by finding what had happened in the earlier assessment proceedings resulting in the escape of income from assessment. What is required for the validity of the re opening of the proceedings is: (1) escape of income from assess ment, (2) belief that it has escaped assessment, and (3) inform ation resulting in the belief. In considering none of the three requirements, is it relevant to see what had happened in the earlier proceedings. It is enough that the earlier proceedings resulted in escape of income from assessment, how and why it escaped is wholly irrelevant and an inquiry into it a waste of time and labour. In every case there is escape of income; otherwise the question of the applicability of section 34 (1) (b) will not arise. If income had not escaped assessment, even if the assessment proceedings are reopened under section 34 they will end in nothing and if they wrongly end in an assessment order it will be set aside on merits. So in every case one starts with the fundamental facts that income has escaped assessment and that the assessment proceedings are reopened. The very fact that the reopening is justified by the result will normally show that the reopening was done on account of belief that income had escaped assessment. It is a question of fact why the proceedings are reopened and the fact is within the exclusive knowledge of the Income‑tax Officer, who reopens them. An inquiry into the reason for the reopening should be addressed to him and there should not be any occasion for inference. But since it is the assessee who generally challenges the order of assessment or reassessment passed under section 34, it is for him to show, at least prima facie, that the reopening of the proceedings was illegal. It cannot be assumed that the reopening was done without any belief formed in the mind of the Income‑tax Officer that income had escaped assessment; if any presumption is to be made it must be, as I said above, that the reopening was done on the oasis of the belief. Then there remains the last and troublesome question of how the belief was formed, This again is a question of fact, to be answered by the Income‑tax Officer, who alone knows how be believed that income had escaped assessment. No question of fact can be dealt with by this Court in a reference under section 66. No question of fact can be referred at all by the Appellate Tribunal to this Court and even if some question of fact is illegally referred, it would be entitled to refuse to answer it. Therefore, this Court should not go into the question how the Income‑tax Officer formed the belief. If it appears from the record that he formed the belief on the basis of a certain thing, a question of law arises whether it amounts to the forming of the belief on the basis of information in his possession or not But no such question will arise if the record does not disclose how or why he formed the belief. The record before us does not disclose how or why the Income‑tax Officer formed the belief and, therefore, no question whether he had formed the belief on the basis of information in his pos session or not arises before, or can be answered by us. It will not be possible for us to assume that he had no information in his possession at that, consequently, he did not form the belief in the only manner contemplated by the law. For all we know he might have received some information on the basis of which he formed the belief and reopened the proceedings by issuing a notice to the assessee. If the assessee challenged his jurisdiction to do so she should have done so at the earliest opportunity when she appeared before him in response to the notice and asked him how he had formed the belief. It is too late for her now to seek to have the assessment order made under section 34 quashed on the assumed ground that he had no information to justify the belief. If she had challenged his jurisdiction while the assessment proceedings were going on, he might have been under an obligation to explain how he had assumed jurisdiction but once he was allowed to complete the assessment on her without protest and she filed an appeal from the assessment order, he ceased to be under any onus and the onus lay upon her to satisfy the Appellate Assistant Commissioner that the assessment order was vitiated by lack of jurisdiction on his part. It is well known that an appel lant has the onus of satisfying the appellate authority that the order of the inferior authority was wrong. For discharging this onus he must rely only upon the record and he cannot assume facts though he may resort to presumptions which can reasonably be drawn from the facts on the record.
It is a mistake to say that change of opinion does not justify reopening of proceedings under section 34. There must be a change of opinion when the Income‑tax Officer himself had failed to assess the income now believed by him to have es caped assessment. The fact that he himself had not assessed it and that he now believes it to be assessable means nothing else than that he has changed his opinion. I do not understand how else he can form the belief required by section 34 (1) (b) and reopen the assessment proceedings. If he had assessed the income but the assessment was quashed by an appellate authority, he may reopen the proceedings in respect of the income with out change of opinion but when he had himself refrained from assessing it initially there must be a change of opinion on his part if he is to act under section 34 (i1 (b). Thus change of opinion, instead of being a bar, is a requisite condition in such circumstances.
If a change of opinion is brought about by information not only is it not a bar but also it is exactly what the Legislature expects in such cases. Information which makes the Income-tax officer change his opinion does not cease to be information because of this result; if it is there, all that is required by section 34 (1) (b) is there and he has jurisdiction to reopen the proceedings. The word "information" means "knowledge" communicated concerning some particular fact, subject or event; that of which one is apprised or told; intelligence, news (see Murray's Dictionary). It should be noticed that neither the source nor the manner of acquisition enters into the mean ing of information. Whether what one has is information or not does not depend upon either the source or the manner. If one has learnt or has been told about something, one is informed, no matter how or by whom. The source may be another person standing in any or no relationship or an inanimate thing such as a book or a paper and manner of acquisition may be hearing or reading or seeing. If an Income‑tax Officer hears or reads some thing which he had not heard or seen previously, he is informed. He cannot be informed by his own self ; he must be informed by somebody else or something such as a book or a judgment. So, saying that a mere change of opinion will not justify the reopening of proceedings may be true only when an Income-tax Officer without any extraneous aid and simply by giving a second thought, forms the view that income was assessable but had not been assessed by him. If without reading anything and without hearing from any person he himself on recon sidering the .facts finds that income has escaped assessment, it may be said to be a case of his forming the belief without information in his possession. If, on the other hand, he forms the belief on reading some book or document it is a case of his forming the belief or information. It is immaterial that the book or document existed when he had passed the assessment order initially or had an opportunity of reading it or had even read it. Information, it has been held by the Supreme Court, can be in respect of law also. If there can be information in respect of law, even though it existed when the assessment order was initially passed, there is no justification for saying that an information on a matter of fact must be on a fact which did not exist previously. Existence of a fact must not be confused with knowledge of the existence ; a fact may exist but without its existence being known. If an Income‑tax Officer did not know of a fact at the time when he passed an assessment order initially, even though it existed, then, his receiving inform ation about its existence later on is information within the meaning of section 34 (1) (b) if it leads to the belief that income has escaped assessment. The assessee had mentioned in her ledger the receipt of the two items of income and they were even seen and initialled by the Income‑tax Officer when he passed the assessment order initially. He had also seen the corresponding entries in the cash book. Yet he did not include the income in the total income because he thought that it was capital income and not revenue income. The assessee did not expressly write in the entries that the receipts were of dividends or of revenue income ; on the other hand, the entries were so worded as to suggest that the receipts were of capital income. Any how the Income‑tax Officer thought that the receipts were not assessable income and did not include them in the total income. Later he learnt that they were dividend income and, therefore, assessable and reopened the proceedings under sec tion 34. It has not been disclosed on the record from whom or how he learnt this, but there is no doubt that he learnt it because otherwise it is not understood how he reopened the assess ment. His learning that the receipts were dividend income amounted to his having information in his possession within the meaning of section 34 (1) (b). In R. G. S. Naidu & Co. V. Commissioner of Income‑tax ((1961) 41 I T R 1963), an assessment or reassessment made under section 34 was upheld even though there was no evidence of any information having been received by the Income- tax Officer to justify the reopening of assessment.
The scope of section 34 (1) (b) has been made wider now; previously the requirement was that the Income‑tax Officer roust have definite information in his possession; now any information which makes him believe that income has escaped assessment is enough.
The stock argument, which did not fail to be advanced before us also, that there was no fresh information in the Income‑tax Officer' possession has three replies, each one of which is sufficient. One is that it is a question of fact. Another is that it is not supported by any material that there is generally no evidence that the Income‑tax Officer did not receive any fresh information. The assessee usually assumes that he had no fresh information. I have not come across any case in which he was ever questioned either by the assessee during the pro ceedings under section 34 or by the Appellate Assistant Commissioner or the Appellate Tribunal hearing an appeal from his assessment order about the information in his possession. Lastly, the argument proceeds on the fallacy that existence of a fact is the same thing as knowledge of its existence and the fallacy that information that a certain view either of facts or of law taken previously was erroneous is no information within the meaning of section 34 (1) (b).
Question No. 1, therefore, must be answered in the affir mative.
I have nothing to add to what my learned brother has said in respect of questions Nos. 2 and 3 ; question No. 2 must be answered in the affirmative. The first part of question No. 3 should be answered in the affirmative and the second part in the negative. I agree with the proposed order in respect of the costs of the reference.
-- This is a reference under section 66 (1) of the Income-tax Act. The questions which have been referred for opinion to this Court are
(1) Whether, on the facts and circumstances of the case, the proceedings initiated under section 34 of the Income‑tax Act were valid in law
(2) Whether Messrs Rama Investment Corporation Ltd. and
Messrs Rama Commercial Co. Ltd. having their registered offices in erstwhile Rajasthan were Indian companies as contemplated under the Indian Income‑tax Act
(3) Whether the two sums of Rs. 26,834 and Rs. 24,424 constituted dividends within the meaning of section 2 (6‑A) (c) of the Income‑tax Act If so, whether they were liable to be 'grossed' under section 16 (2) of the income‑tax Act
The reference relates to the assessment year 1954‑55, corres ponding to the previous year which was the financial year ending March 31, 1954. By order dated March 19, 1955, the assessee was assessed to income‑tax in the status of an individual on a total income of Rs. 19,517. In this total income, the income from property was Rs. 200 and interest income was Rs. 19,317.
During the course of examination of the account books of the assessee the Income‑tax Officer looked into the "capital account" and initialled it. In this capital account there were two entries of two sums of monk s, vfz., Rs. 26,834 and Rs. 24,425. the narration against these entries was as follows:
Received towards final payment at eleven per cent. on 24,395 shares of Rama Commercial Co." and "Received towards final payment at nine per cent on 25,715 shares from Rama Invest ment Corporation Ltd.
Having regard to the account in which the entries occurred, namely, the capital account, and having regard to the narration in those entries, prima facie the two sums of monies represented receipt of capital as the words "dividend" nowhere occurred in the narration. Actually, however, these two sums re presented distribution by the two companies of the accumu lated profits and were received by the assessee on December 1, 1953, in the accounting period relevant to the assessment year in question.
The two companies had their head offices at Charu, Rajasthan, and were incorporated in Bikaner State. Both the companies went into liquidation on September 20, 1951. The accumulated profits of the two companies up to March 31, 1951, amounted to Rs. 35,784 and Rs. 29,163 respectively. The two amounts mentioned above received by the assessee out of these accumulated profits were not included m her original assessment. Subsequ ently, proceedings under section 34 were initiated by the same Income‑tax Officer to assess the said two sums of monies and the assessment was completed on January 30, 1956, in which the two sums were included.
Against the assessment under section 34 the assessee went up in appeal to the Appellate Assistant Commissioner. The assess ment was challenged on the ground that the Income‑tax Officer who had made the original assessment had knowledge of all the facts and in particular of the fact that the two sums of monies had been received by the assessee during the previous year. This was borne out by the fact that the Income‑tax Officer had initialled the capital account in which the entries occurred and also the corresponding entries in the cash book. It was argued that therefore it should be "assumed" that the Income‑tax Officer had "applied his mind" to the facts and had "come to the conclusion" that the sums were not taxable. As such the proceeding under section 34 was based upon a mere "change of opinion" and not on "information" with regard to any facts, on the basis of which alone an assessment under section 34 could, if at all, be justified. The argument was overrules by the Appellate Assistant Commissioner. It was also argued before the Appellate Assistant Commissioner that the Income-tax Officer should have "grossed" the amount of dividend which the two sums included in the assessment represented and credit should have been given for the difference between the grossed amount and the amount of dividend received. Lastly, it was contended that the two amounts represented capital receipts and not revenue receipts liable to income‑tax. These other grounds were also overruled by the Appellate Assistant Commissioner.
It may be stated that two certificates were filed by the assessee before the Appellate Assistant Commissioner from the liquidators of the two companies. The certificates were in similar terms and may be reproduced by giving alternative figures for the two years in question respectively:
It is hereby certified that this company has already paid income‑tax at full Indian rates on the disbursement of surplus funds of the company made at the time of final winding up to shareholders on December 1, 1953, at 11% / 9% of the face value of their shareholding which in the case of Smt. Saraswati Devi Lohia, Banaras (the assessee) amounted to Rs. 26,834/ Rs. 24,425 in respect of 24,395/ 25,710 shares of Rs. 10 each.
After the dismissal of her appeals by the Appellate Assistant Commissioner the assessee went up in further appeal to the income tax Appellate Tribunal. Before the Tribunal also the validity of the proceedings under section 34 was challenged on the same ground on which it was challenged before the Appellate Assis tant Commissioner. The Tribunal overruled the objection in the following words:
The information in consequence of which the Income‑tax officer initiated the present proceedings was that, although the assessee had received the aforesaid two amounts as dividend income, and although they were duly noted in the books of account, the two items had escaped assessment. The escapement of the income might as well be due to the mistakes or error or negligence of the Income‑tax Officer. That, how ever, would not invalidate the assessment made under section 34 of the Income‑tax Act.
It may be observed that this is a confused statement of the legal position under section 34 (1) (b) and has given learned counsel for the assessee a handle to address a long argument before us on the point. To proceed with the narrative : The Tribunal next considered the question of the taxability of the two sums. It was admitted by counsel for the assessee before the Tribunal that the sums represented dividend income but the Tribunal took the view that unless this dividend income fell within the definition of dividend under section 2 (6‑A) (c) it could not be taxed and as according to the Tribunal the Appellate Assistant Commissioner had not gone "deeper into the matter" it remanded the case to the Appellate Assistant Commissioner with liberty to the parties to adduce any evidence which they might like to pro duce in support of their respective contentions. In due course the Appellate Assistant Commissioner submitted a remand report, on receipt of which the appeal was again heard and the Tribunal held that the two amounts were dividends within the meaning of section 2 (6‑A) (c) and overruled the assessee's conten tion that the amounts were capital receipts. It also overruled the assessee's contention that the two amounts should have been grossed in accordance with the provisions of section 16 (2) on the ground that the payment were made out of accumulated profits and not out of the profits of the current year as the companies had by them gone into liquidation and further on the ground that tile "rate applicable" under section to (2) meant "the rate at which tax was actually borne" in the year of distribu tion and as admittedly the companies had not been assessed to tax in the year in question, the amounts could not be grossed under section 16(2).
One other contention was raised before the Tribunal. This was that the two companies were not "Indian companies" as defined in section 2 (6). Presumably the point of this con tention was that, if the companies were not Indian companies, receipt of even dividend income from such companies would not be taxable. This contention was overruled by the Tribunal with the following observation:
This contention has not been raised at any time before and is being raised for the first time before us. The Indian Companies Act, it is stated was extended to the area in 1951 by virtue of the provisions of the part B States Laws Act. Both the commencement of the liquidation and the distribution of these dividends are subsequent to the extension of the Income‑tax Act to this area. Therefore, it cannot be said that these are not Indian companies within the meaning of section 2 (6) of the Act.
It may be stated that neither the Appellate Assistant Commissioner nor the Tribunal referred to their orders to the certifi cates from the liquidator filed by the assessee before the Appellate Assistant Commissioner when he heard the appeal.
After the dismissal of her appeal by the Tribunal the assessee asked for the statement of a case to this Court and the case has been stated to us.
Some further facts on the question of the validity of action under section 34 which are recorded in the order of the Appellate Assistant Commissioner dated January 31, 1957, and which is Annexure "A" to the statement of the case may be stated. In the original assessment order while the Income‑tax Officer had considered and discussed other items of income, he had neither considered nor discussed the two amounts in ques tion. The counsel for the assessee had argued before the Appel late assistant Commissioner that from the fact that the Income-tax Officer had signed the entries in regard to these two amounts in the account books of the assessee it should be presum ed that the Income‑tax Officer had considered these two amounts from the point of view of their tax liability or otherwise and had come to the conclusion that they were not taxable, even though he did not discuss the two amounts specifically in his order. As such when the Income‑tax Officer initiated proceedings under section 34 he was merely trying to correct a mistake of law made by himself and this could not be allowed to be done by a proceeding under that section. The Appellate Assistant Commissioner overruled the contention on the ground that "there was no evidence to show that the Income‑tax Officer had in fact considered the two amounts or that he had come to any conclusion regarding them." With regard to the argument that the signature of the Income‑tax Officer against the entry of the two amounts "was proof that the Income‑tax Officer had consi dered every item therein," the Appellate Assistant Commissioner observed as follows:
Here again the appellant's admission that the Income‑tax Officer had discussed some items, and not others, shows that the Income‑tax Officer was making only a test check and was not investigating each and every item.
Thus there was no evidence to the case that the Income‑tax Officer had applied his mind to the taxability‑ of the two items or that he had discussed these two items with the assessee or had come to any conclusion with regard to their taxability. From this the conclusion seems to be irresistible that the Income‑tax Officer had signed the entry mechanically without bringing his mind to play upon that entry with a view to consider the ques tion of its taxability or he may have been misled by the amounts being recorded by the assessee in her "capital account" and may have assumed on the basis of that fact that the amounts did not represent revenue receipts but capital receipts not liable to tax. He may also have been misled by the narration in the entry. The narration did not at all show that what was received was dividend out of accumulated profits. The companies had gone into liquidation. The narration recorded payment at a certain percentage on the number of shares. Thus it may have been assumed by the Income‑tax Officer to be the amount paid by the liquidator out of the total amount invested in the shares in which case it would undoubtedly be capital. Admittedly, the amounts were not discussed between the assessee and the Income-tax Officer. There was no mention of the amounts in the assessment order and no finding in respect of them. One other fact may be mentioned in this connection. That fact is that there is nothing on the record to show that the Income‑tax Officer when he made the original assessment was alive to or conscious of the provision of section 2 (6‑A) (c) which was the relevant provision for the consideration of the question of the taxability of the two amounts. If, therefore, as it appears, the Income‑tax Officer either did not consider the question of tax ability of the two amounts at all or was not alive to the relevant provision of law with regard to the taxability, the case is one where the Income‑tax Officer who made the assessment originally was guilty of an omission and that omission was sought to be sup plied by the subsequent assessment under section 34. The case does not appear to be one where an opinion on a question of fact or law had been arrived at in the original assessment and is sought to be corrected in the assessment under section 34. As already pointed out the Tribunal dealt with the question in a confused manner but it did hold that the scope of section 34 after the amendment in 1948 had become wider and the escapement of income whether "due to mistake or error or negligence of the Income‑tax Officer was within the section." In view of what has been stated above it appears that the case is one of negligence of the Income‑tax Officer who omitted to consider the question of taxability of the two amounts and who lost sight of the relevant provision of the Act, namely, section 2 (6‑A) (c). A case of the correction of a "mistake or error" is generally speaking a case where a particular conclusion has been reached but a mistake or error has been made in reaching the conclusion. This does not appear to be so in the present case as here no conclusion at all had been reached by the Income‑tax Officer who made the original assessment. There may, however, be cases where a "mistake or error" may have been made due to omission or neglect but not due to an erroneous conclusion having been reached. If the present case is treated to be a case of mistake or error it is rather a case of mistake or error of the former class than of the class mentioned later. Thus in this sense whether it is a case of negligence or omission on the part of the Income‑tax Officer when he made the original assessment or of mistake or error in the first mentioned sense, it was not a case of change of opinion which led to the initiation of proceed ings under section 34. It has now heen held by the Supreme Court in Maharaj Kumar Kamal Singh v. Commissioner of Income-tax ((1959) 35 I T R 1) that, even where income has escaped assessment due to a lacuna on the part of the Income‑tax Authorities them selves, the case can be properly dealt with under section 34. It follows that the proceedings in this case under section 34 were valid and the first question referred to this Court must be answered in the affirmative.
Before proceeding to the next question it may; how ever, be observed that even if the present case is treated to be one of a change of opinion on the part of the Income-tax Officer, the above Supreme Court case seems to have gone the length of approving of action under section 34 on that ground even though in the last paragraph it has been specifically stated that their Lordships did not propose to express an opinion on that point. That a case of change of opinion might be within the section has been laid down in a decision of the Madras High Court in Salem Provident Fund Society v. Commissioner of Income‑tax ((1961) 42 I T R 547), but it is not necessary to deal with this matter further as it has already been shown above that this is not a case of change of opinion but of an omission on the part of the Income‑tax Officer making the original assessment. In the end it may only be mentioned that it is now well settled that information under section 34(1)(b) may as well be on a question of law as on a question of fact: vide Chatturam Horilram Ltd. v. Commissioner of Income‑tax ((1955) 27 I T R 709 (S C)) and Maharaj Kumar Kamal Singh's case.
The next question is whether the two companies are Indian companies under the Indian Income‑tax Act, 1922. As already stated above this question was raised only when the appeal was argued finally before the Tribunal after It had made a remand order. The question does not appear to have been argued in detail and the Tribunal has dealt with the same rather per functorily. It has referred to the Part B States Laws Act, 1951, by reason of which the companies came to be treated as Indian companies within the meaning of section 2(6) of the Income‑tax Act. All the enactments and the notification in consequence of which companies registered in the quondam Indian States came to be considered as Indian companies have been dealt within detail in Sampath Iyengar's book on the Indian Income‑tax Act, 1952 edition, volume 11, at pages 96‑97, and the conclusion is stated at page 97 in the following words :‑
Thus all Indian companies at whatever time registered whether in a merged Indian State or in a Part B State are recognised as companies for the purposes of the Indian Income-tax Act.
The conclusion reached by the learned author is borne out by the enactments and the notification and is correct. It is not necessary to encumber this judgment by setting out all the enact ments and the notification referred to there. The curious can easily turn to that book. Thus the second question must also be answered in the affirmative.
So far as the third question is concerned, it consists of two parts: --‑
(1) Whether the two sums of monies constituted dividends within the meaning of section 2(6‑A)(c) of the Income‑tax Act and
(2) If they were dividends, whether they were liable to be grossed under section 16(2) "
So far as the first part of this question is concerned it is very easily answered. The language of section 2(6‑A)(c) is very clear' and at the material time it was as follows :‑
Dividend' includes any distribution made to the share‑holders of a company out of accumulated profits of the company on the liquidation of the company Provided that only the accumulated profits so distributed which arose during the six previous years of the company preceding the date of liquidation shall be so included.
On the admitted facts of the case and on the basis of the certificates from the liquidators the Tribunal found that the two amounts were dividends. Nothing has been shown to us by Sri Saran Behari, learned counsel for the assessee, that the finding of the Tribunal on this point is erroneous or is in any way vitiated. It is, therefore, held that the two sums of monies, namely, Rs.26,834 and Rs. 24,424 constituted dividends within the meaning of section 2(6‑A)(c).
The only question which now remains to be answered is whether these dividends were liable to be "grossed" under section 16(2). The grossing up of dividends under this section only requires that the dividends "shall be increased" by the amount of income‑tax payable thereon "at the rate applicable to the total income of the company . . . . . , . . for the financial year in which the dividend is paid". It has already been seen that both the companies went into liquidation on September 20, 1951. The liquidator does not appear to have carried on any business after the companies went into liquidation. It is also clear from the information contained in the remand report that the company had no income from business after March 31, 1951. The dividends were paid to the assessee on December 1, 1953, out of the accumulated profits of the company up to March 31, 1951. It follows from these facts that the rate at which the amount of increase in the dividends will have to be worked out under section 16(2), if at all, will be the rate applicable to the income of the company for the accounting period ending March 31, 1954, relevant to the assessment year 1954‑55. In this year the company had no income at all. "Total income" is defined in section 2(15) as follows: --‑
Total income means total amount of income, profits and gains referred to in subsection (I) of section 4 computed in the manner laid down in this Act . . . . . .
Computation of income is only for purposes of assessment. When in the absence of any income at all there is no question of computation of the income under the Act, there can be no total income. If there is no total income there can be no, ques tion of a "rate applicable" to such non‑existent "total income" for "the financial year". Section 3 which is the charging section under the Act provides that income‑tax for any year shall be charged at the rate or rates provided by any Central Act. The rates are provided by the Finance Act for any year. In the financial year in which the dividend was paid the rates were provided by the Finance Act of 1951 which was made applicable for that year. Subsection (7) of section 2 of that Act laid down as follows :‑
For the purposes of this section and of the rates of tax imposed thereby the expression total income' means total income as determined for the purposes of income‑tax . . . . . . . in accordance witb the provisions of the Income‑tax Act . .
It follows that there can be a rate of tax" only where there is a "total income" determined in accordance with the provisions of the Income‑tax Act. If there is no income there can be no determination under the Income‑tax Act and, consequently, there can be no rate of tax. Therefore the "rate applicable" must mean the "rate actually applied". Where no occasion arises of the actual application of a rate, there can be no rate applicable. This was so held in a slightly different context by the Supreme Court in Rajputana Agencies Ltd. v. Commissioner of Income‑tax ((1959) 35 I T R 169). On the actual point which is up for decision before this Court regarding the right to grossing up under section 16(2) the Kerala High Court in M. M. Aishoe v. Income‑tax Officer ((1957) 32 I T R 306) negatived the right. With respect I incline to share that view. I am aware that the learned author of Kanga on Income‑tax at pages 498‑499 of the fourth edition of that book has not approved of the view of the Kerala High Court. A similar view of Sampath lyenear has already been noted and disapproved by that High Court in that decision. For the reasons stated above this part of the third question referred to this Court should be answered in the negative and against the assessee.
The reference shall be returned to the Income‑tax Appellate Tribunal, Allahabad, with the above answers under the seal of the Court and the signature of the Registrar. The Department shall be entitled to the costs of this reference which we assess at Rs. 200.
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