1964 (6) TMI 54 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of section 23A(1) of the Income-tax Act.
2. Consideration of advances to shareholders as dividends under section 2(6A)(e).
3. Credit for dividends distributed after the statutory period.

Detailed Analysis:

1. Applicability of section 23A(1):

The primary issue is whether the provisions of section 23A(1) could be applied to the company for the assessment years 1955-56 and 1956-57. The Income-tax Officer invoked section 23A(1) and levied extra super-tax on the distributable surplus, as no dividends were declared within the 12 months immediately following the expiry of the previous year. The Appellate Assistant Commissioner upheld this view, stating that declarations of dividends after the statutory period could not save the company from the application of section 23A(1). The Tribunal agreed, emphasizing that the time-limit in section 23A(1) had to be strictly adhered to avoid action under section 23A(1).

2. Consideration of advances to shareholders as dividends under section 2(6A)(e):

The assessee contended that advances made by the company to its controlling Hindu undivided family should be treated as dividends under section 2(6A)(e). The Tribunal dismissed this argument, stating that section 23A(1) is concerned with dividends distributed within the 12 months immediately following the expiry of the previous year. Since the advances were made during the accounting years concerned and not within the specified period, they did not satisfy the requirements of section 23A(1). The Court, however, opined that advances or loans to shareholders must be deemed to be dividends for purposes of section 23A, regardless of the timing. The Court concluded that the provisions of section 23A became inapplicable due to the advances made to shareholders.

3. Credit for dividends distributed after the statutory period:

The assessee argued that even if section 23A was applicable, it should only apply to the undistributed balance of the total income, reduced by the amount of tax payable and dividends actually distributed, even if distributed after the statutory period. The Court agreed, stating that the Income-tax Officer should deduct dividends actually distributed from the total income, as failing to do so would result in an assessment exceeding the company's commercial profits. The Court emphasized that dividends must be deducted regardless of when they were distributed, as long as they were distributed before the Income-tax Officer made his order.

Conclusion:

The Court answered the question in the negative, indicating that section 23A(1) could not be applied to the company for the respective assessment years. The Court held that advances made to shareholders should be considered dividends under section 2(6A)(e), making section 23A inapplicable. Additionally, the Court concluded that dividends distributed after the statutory period should be credited when applying section 23A. The respondent was ordered to pay the costs of the reference to the applicant.