1949 (3) TMI 39 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the Appellate Assistant Commissioner's appointment.
2. Effect of the agreement between the Phaltan State and the assessee company on tax liability.
3. Applicability of Section 23A of the Income Tax Act.
4. Liability of the company under Sections 18(3A), 18(3C), and 18(7) of the Income Tax Act.
5. Procedural defect in the Income Tax Officer's order.
6. Whether the agreement can be considered as a notification under Section 60 of the Act.

Issue-wise Detailed Analysis:

1. Validity of the Appellate Assistant Commissioner's Appointment:
The contention was that Mr. R. R. Kaulgud was not appointed by the Central Government as required under Section 5(3) of the Act. However, it was clarified that under the Phaltan Act, the term "Central Government" was to be construed as the Phaltan State. Since Mr. Kaulgud was appointed by the Phaltan Durbar, his appointment was deemed valid.

2. Effect of the Agreement Between the Phaltan State and the Assessee Company on Tax Liability:
The agreement exempted the company from paying tax for ten years. The court noted that its jurisdiction in income tax references is advisory and strictly limited. The agreement between the Phaltan State and the company could not be considered in this advisory jurisdiction. The court emphasized that the agreement was an executive act and could not override statutory provisions. The income earned by the company was assessable to income tax, despite the agreement exempting the company from liability to pay tax.

3. Applicability of Section 23A of the Income Tax Act:
Section 23A applies when there is no distribution of profits or the distribution is less than sixty percent of the assessable income. The court found that the income earned by the company was assessable, and the lack of profit distribution triggered Section 23A. The argument that the company did not have assessable income was rejected, as the income was assessable despite the tax exemption agreement.

4. Liability of the Company Under Sections 18(3A), 18(3C), and 18(7) of the Income Tax Act:
The Income Tax Officer acted under Sections 18(3A) and 18(3C) to hold the company liable for not deducting income tax and super-tax from dividends paid to non-resident shareholders. Section 18(7) made the company an assessee in respect of the tax it should have deducted. The court upheld the officer's actions, noting that the income transferred to shareholders as dividends retained its taxable character.

5. Procedural Defect in the Income Tax Officer's Order:
The court acknowledged a procedural defect where the Income Tax Officer cited Sections 18(3A) and 18(3C) instead of Section 18(3D) for super-tax. However, this was deemed a procedural error that did not invalidate the order.

6. Whether the Agreement Can Be Considered as a Notification Under Section 60 of the Act:
Section 60 requires a notification by the Central Government published in the Gazette to exempt income from tax. The court found it impossible to treat the agreement as such a notification, as the agreement was not published in the official Gazette and did not meet the statutory requirements.

Conclusion:
The court concluded that both orders by the Income Tax Officer were valid and proper. The answers to the questions raised in References Nos. 24, 25, and 26 were affirmative. For References Nos. 27 and 28, the court held it was not competent to consider the agreement, but if it were, the question would be answered in the negative. The assessee was ordered to pay the costs of all references.

TENDOLKAR, J. concurred with the judgment.