1963 (11) TMI 98 - HC - Income Tax

Summary

Issues Involved
1. Invocation of Section 35 for rectifying an order under Section 23A(1) pursuant to an assessment under Section 34.
2. Agreement between parties regarding no penal action under Section 28(1)(c) and Section 23A.
3. Classification of the sum of Rs. 2,78,953 as commercial profits.
4. Requirement of sanction from the Inspecting Assistant Commissioner under Section 23A(8).
5. Deprivation of the right of appeal due to the Section 35 order.
6. Entitlement to a further period of three months for dividend distribution under Section 23A(2)(iii).

Detailed Analysis
1. Invocation of Section 35
The court examined whether Section 35 could be invoked to rectify an order under Section 23A(1) following an assessment under Section 34. The petitioner argued that the mistake was not apparent from the record. The court found that the rectification under Section 35 was inappropriate as the mistake was not evident and required a detailed examination.

2. Agreement on No Penal Action
The petitioner contended that the assessment under Section 34 was based on an agreement that no penal action under Section 28(1)(c) or Section 23A would be taken. The court noted that the assessment order did not initiate penal action under Section 28(1)(c) and accepted the petitioner's assertion that the liability was still due. The court highlighted that the agreement was just and reasonable, thus no penal action was contemplated.

3. Classification of Rs. 2,78,953 as Commercial Profits
The petitioner argued that the sum of Rs. 2,78,953 could not be considered commercial profits, and thus, no dividend distribution could be expected from it. The court observed that the Income-tax Officer had treated the amount as reserve, which could not be excluded in determining the capital profits. However, the court emphasized that the liability was still outstanding and should not be considered for dividend distribution.

4. Requirement of Sanction under Section 23A(8)
The petitioner claimed that the Income-tax Officer did not obtain the necessary sanction from the Inspecting Assistant Commissioner before issuing the notice under Section 35. The court agreed, noting that the lack of sanction rendered the notice invalid.

5. Deprivation of Right of Appeal
The petitioner argued that the Section 35 order deprived them of the right to appeal against the inclusion of Rs. 2,78,953 in the profits for Section 23A purposes. The court found merit in this argument, stating that the petitioner should have been given an opportunity to challenge the inclusion.

6. Entitlement to Further Period for Dividend Distribution
The court focused on whether the petitioner was entitled to a further period of three months for dividend distribution under Section 23A(2)(iii). The court found that the petitioner had distributed Rs. 1,20,000 as dividends, which was more than 60% of the total income as returned. The court held that the petitioner should be given three months to make a further distribution of profits to comply with Section 23A(2)(iii).

Conclusion
The court quashed the Section 35 order and the demand notice dated 24th May 1963. The petitioner was granted three months to distribute further profits to meet the 60% requirement. If no distribution is made within this period, the Income-tax Officer's order under Section 35 will be revived, subject to the petitioner's rights under Sections 23A(3) and 23A(4). The petition was allowed with no order as to costs.