1961 (1) TMI 10 - SC - Income Tax

Whether paragraph 12 of the Merged States (Taxation Concessions) Order, 1949, precluded the Income-tax Officer from making an order under section 23A in the case of the assessee company in respect of its profits and gains of the previous year ended 31st December, 1946, and 31st December, 1947 ? Whether in making an order under section 23A in respect of the profits and gains of the year 1946-47 the assessable income of that previous year is to be reduced not only by the amount of income-tax and super-tax payable by the company in respect thereof but also by the amount of interest charged to it in accordance with the provisions of section 18A ? Having regard to the order passed by the Income-tax Officer under section 23A in respect of the company s profits of the year 1947 and having apportioned the sum of ₹ 17,641 to the shareholder, Pushpakumar, as his proportionate share in the distribution made by the Income-tax Officer under section 23A and having regard to the provisions of section 14(2)(c), whether the said sum of ₹ 17,641 has been properly included in his total income for the purpose of charging it to tax ? Held that - The answer to question No. 1 is thus in the negative, with the modification that section 23A applied only to that portion of the income which was earned in British India and not in Bhor State. The answer to the second question is in the negative. The answer to the third question is in the affirmative. Appeal dismissed.

Summary

Issues Involved
1. Applicability of Paragraph 12 of the Merged States (Taxation Concessions) Order, 1949, regarding Section 23A of the Indian Income-tax Act.
2. Deduction of interest charged under Section 18A(8) in computing deemed dividends.
3. Inclusion of deemed dividends in the total income of shareholders for tax purposes under Section 14(2)(c).

Detailed Analysis

1. Applicability of Paragraph 12 of the Merged States (Taxation Concessions) Order, 1949, regarding Section 23A of the Indian Income-tax Act
The core issue was whether Paragraph 12 of the Merged States (Taxation Concessions) Order, 1949, precluded the Income-tax Officer from applying Section 23A to the company's profits and gains for the previous years ending December 31, 1946, and December 31, 1947. The court examined the extension of the Indian Income-tax Act to the Bhor State from April 1, 1949, and noted that there was no income-tax law in Bhor State prior to its merger. Paragraph 12 of the Concessions Order stated that Section 23A should not apply to profits and gains of any previous year ending before August 1, 1949, unless the State law contained a corresponding provision. The court clarified that "any previous year" referred specifically to the previous year ending before August 1, 1949, in relation to the assessment year 1949-50. Consequently, the profits and gains of the company for the previous years ending December 31, 1946, and December 31, 1947, were not protected by Paragraph 12, and Section 23A could be applied to the income earned in British India.

2. Deduction of Interest Charged under Section 18A(8) in Computing Deemed Dividends
The second issue was whether interest charged to the company under Section 18A(8) should be deducted along with income-tax and super-tax before computing deemed dividends under Section 23A. The court referred to Section 18A(8), which specifies that interest is added to the tax as determined on making a regular assessment but does not classify it as tax. The court noted that Section 23A only allows for the deduction of income-tax and super-tax, not interest. Therefore, the interest charged under Section 18A(8) could not be deducted in computing the balance available for distribution as deemed dividends. The High Court's answer to this question was upheld as correct.

3. Inclusion of Deemed Dividends in the Total Income of Shareholders for Tax Purposes under Section 14(2)(c)
The third issue involved whether the deemed dividends apportioned to shareholders should be included in their total income for tax purposes, considering the provisions of Section 14(2)(c). The court discussed the fiction created by Section 23A, which deems dividends to be distributed from the assessable income of the company in the taxable territories. This fiction transcends the questions of accrual or receipt, making the deemed dividends taxable in the hands of the shareholders. Paragraph 12 of the Concessions Order did not protect shareholders from the application of Section 23A. The court concluded that the dividends deemed to have been distributed out of the assessable income of the company in the taxable territories were rightly included in the total income of the shareholders resident in those territories. The shareholders' claim for exemption under Section 14(2)(c) was not applicable to the fictional dividends arising from the assessable income in the taxable territories.

Conclusion
The appeals were dismissed with a slight modification in the answer to the first question. The court held that Section 23A applied only to the income earned in British India and not in Bhor State. The answers to the second and third questions were upheld as provided by the High Court. The appellants were directed to bear the costs of the appeals, with one hearing fee.