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Issues Involved:
1. Applicability of paragraph 12 of the Merged States (Taxation Concessions) Order, 1949, on the assessee company in respect of its profits and gains for the years 1946 and 1947. 2. Inclusion of interest charged under section 18A in the assessable income of the company for the purpose of section 23A. 3. Inclusion of deemed dividend in the total income of the shareholders for the assessment year 1949-50, considering the provisions of section 14(2)(c). Issue-wise Detailed Analysis: 1. Applicability of Paragraph 12 of the Merged States (Taxation Concessions) Order, 1949: The primary contention was whether paragraph 12 of the Merged States (Taxation Concessions) Order, 1949, precluded the Income-tax Officer from making any order under section 23A for the assessee company for the years 1946 and 1947. The argument was that the company was exempt from the operation of section 23A because the profits and gains were from years ending before 1st August 1949, and there was no corresponding provision in the Bhor State law. However, it was held that paragraph 12 must be read in conjunction with section 60A of the Taxation Laws (Extension to Merged States and Amendment) Act, 1949. Section 60A authorized the Central Government to grant exemptions to avoid hardships resulting from the extension of the Income-tax Act to merged territories. The exemption was intended for income assessable for the year 1949-50 and subsequent years, not for earlier years. Therefore, the company's income for the years 1946 and 1947 was not covered by the exemption under paragraph 12. For the shareholders, it was argued that they were taxed for the assessment year 1949-50 and should benefit from paragraph 12. However, the court held that paragraph 12 and section 60A must be read together, and the exemption applied only to undistributed profits of the company for the year 1949-50 and subsequent years. Answer to Question 1 (Reframed): - First part: Negative. - Second part: Negative. 2. Inclusion of Interest Charged under Section 18A: The second issue was whether the assessable income for section 23A should be reduced by the amount of interest charged under section 18A. The argument was that interest, being added to the tax as per section 18A(8), should be considered part of the tax for computation under section 23A. The court held that section 23A did not permit treating penalty interest as equivalent to tax and super-tax. Section 29 of the Income-tax Act treated tax, penalty, and interest as separate concepts. Therefore, interest charged under section 18A could not be included in the assessable income for section 23A purposes. Answer to Question 2: - Negative. 3. Inclusion of Deemed Dividend in Total Income of Shareholders: The third issue was whether the deemed dividend included in the total income of the shareholders for the assessment year 1949-50 was properly charged to tax, considering section 14(2)(c). The shareholders argued that the income deemed to be distributed was exempt under section 14(2)(c) as it accrued in the Bhor State. The court held that the extension of the Income-tax Act to merged states was retroactive from 1st April 1949. Therefore, the income was taxable as it accrued in taxable territories (British India) from that date. Section 14(2)(c) did not apply as the Bhor State had become part of taxable territories from 1st April 1949. Answer to Question 3: - Affirmative. Conclusion: The court concluded that the assessee company and shareholders were not exempt under paragraph 12 for the years 1946 and 1947. Interest charged under section 18A could not be included in the assessable income for section 23A, and the deemed dividend was properly included in the total income of the shareholders for the assessment year 1949-50. The assessee was ordered to pay the costs.
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