1966 (11) TMI 19 - SC - Income Tax

Whether the company was one in which the public were not substantially interested, and after the order was made, each individual shareholder had to be separately assessed in respect of the deemed income? Held that - Under sub-section (3) of section 23A before it was amended by the Finance Act of 1955, tax payable on the proportionate share of any member of a company in the undistributed profits was liable to be recovered from the company if it could not be recovered from the shareholder. By the Finance Act, 1955, this clause was deleted and another clause which had nothing to do with recovery of tax was substituted as sub-section (3). By the Finance Act, 1957, that new sub-section (3) has been deleted. Section 45 deals with recovery of tax and, in the context in which it occurs, reference in section 45 to sub-section (3) of section 23A can only mean reference to that sub-section as it stood prior to the Finance Act of 1955. But that cannot be a ground for inferring that by section 23A which is referred to in sections 30 and 31 only intended to refer to the section as it stood before the Finance Act, 1955. Appeal allowed.

Issues Involved:
1. Determination of whether an order under section 23A of the Indian Income-tax Act, 1922, as amended, constitutes an "order of assessment."
2. Applicability of the period of limitation prescribed by section 34(3) to an order under section 23A.
3. Legislative changes to section 23A and their implications on tax liability and procedural requirements.

Issue-wise Detailed Analysis:

1. Determination of whether an order under section 23A constitutes an "order of assessment":
The High Court held that an order under section 23A of the Income-tax Act, 1922, as amended by the Finance Act, 1955, is an "order of assessment." This was because such an order determines the tax liability of the company for not distributing the statutory percentage of its income as dividends. However, the Supreme Court refuted this, stating that section 23A does not use the term "assessment" in its body. The court emphasized that "every order which contemplates computation of income for determination of the amount of tax payable is not an order of assessment within the meaning of the Act." The court further explained that the liability to pay additional super-tax under section 23A arises from the order of the Income-tax Officer and not from the statutory charge created by sections 3 and 4 of the Act. The process under section 23A involves determining whether the company has distributed the required percentage of its income and whether it is reasonable to expect a larger dividend, but this does not constitute an assessment of tax liability.

2. Applicability of the period of limitation prescribed by section 34(3) to an order under section 23A:
The High Court ruled that the period of limitation prescribed by section 34(3) applies to an order under section 23A, meaning such an order cannot be made after four years from the end of the relevant assessment year. The Supreme Court disagreed, clarifying that section 23A, as amended, does not implicitly include a period of limitation for making an order. The court noted that the legislature had not specified a limitation period for section 23A in the Income-tax Act, 1922, unlike in the Income-tax Act, 1961, where section 106 prescribes a limitation period for making an order under section 104. The court concluded that the absence of an explicit limitation period in the earlier Act indicates that such a period was not intended to apply to orders under section 23A.

3. Legislative changes to section 23A and their implications on tax liability and procedural requirements:
The Supreme Court reviewed the legislative changes to section 23A, noting that before the amendment by the Finance Act, 1955, the section required two steps: declaring the undistributed income as deemed dividends and including this deemed income in the shareholders' total income. The amendment by the Finance Act, 1955, rationalized the procedure by making the company, rather than the shareholders, liable for the additional super-tax. The Finance Act, 1957, further modified the section, maintaining the scheme of imposing tax liability on the company. The court highlighted that these amendments aimed to streamline the process and impose the tax liability directly on the company, rather than through individual shareholder assessments. The court also noted that the right to appeal against an order under section 23A was preserved, indicating that such orders were not considered assessments in the traditional sense.

Conclusion:
The Supreme Court allowed the appeal, overturning the High Court's decision. The court concluded that an order under section 23A, as amended, is not an "order of assessment" and is not subject to the limitation period prescribed by section 34(3). The court emphasized that the legislative changes to section 23A were intended to rationalize the procedure and impose tax liability directly on the company, without converting the process into an assessment of tax liability. The petition filed by the assessee was dismissed with costs.

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