1965 (11) TMI 13 - HC - Income Tax

Order u/s. 23A of Indian Income Tax Act, 1922 was not an order of assessment and the limitation prescribed in s. 34(3) cannot apply to such an order.

Issues Involved:
1. Whether the proceedings under section 23A of the Income-tax Act, 1922, are barred by time as per section 34(3).
2. The true nature and character of an order under section 23A of the Income-tax Act, 1922.

Detailed Analysis:

Issue 1: Whether the proceedings under section 23A of the Income-tax Act, 1922, are barred by time as per section 34(3).

The petitioner argued that the proceedings under section 23A for the assessment year 1956-57 are barred by time, citing the four-year limitation period prescribed by section 34(3). The petitioner's contention was that since the notice was issued on February 6, 1964, it was beyond the permissible period, and thus, the Income-tax Officer lacked jurisdiction. The petitioner relied on the decision of the Gujarat High Court in Navanagar Transport & Industries Ltd. v. M. M. Parikh, which held that penalty proceedings are not included in the expression "assessment" in section 34(3) and are hence not governed by the time-limit prescribed by it.

The court, however, held that section 23A does not involve the process of assessment properly so called. It was observed that section 23A is a penal provision designed to prevent tax evasion by penalizing the company for not distributing the statutory percentage of its income as dividends. The court concluded that an order under section 23A is not an order of assessment to which the limitation prescribed by section 34(3) may apply. Therefore, such an order can be made at any time.

Issue 2: The true nature and character of an order under section 23A of the Income-tax Act, 1922.

The court examined the nature and character of section 23A and its amendments by the Finance Act, 1955. It was noted that section 23A was enacted to prevent the exploitation of the juristic personality of a private company by its members to evade higher taxation. The section was intended to penalize companies that failed to distribute a statutory percentage of their income as dividends, thereby avoiding tax liability on the undistributed profits.

The court referred to several precedents, including Commissioner of Income-tax v. Khemchand Ramdas, C. A. Abraham v. Income-tax Officer, and Commissioner of Income-tax v. Bhikaji Dadabhai & Co., to highlight that the term "assessment" in the Income-tax Act is flexible and takes its color from the context in which it occurs. The court emphasized that section 23A is penal in nature and does not involve the computation of income or the imposition of tax liability directly. Instead, it imposes an additional super-tax on the undistributed income of the company as a punitive measure.

The court also referred to the Supreme Court's observations in Sardar Baldev Singh v. Commissioner of Income-tax and Commissioner of Income-tax v. Gangadhar Banerjee & Co. (Private) Ltd., which held that section 23A is in the nature of a penal provision aimed at preventing tax evasion by ensuring that companies distribute their profits as dividends.

The court concluded that the object of section 23A was not to collect tax that may have been avoided but to penalize the misconduct of the company in attempting to avoid tax. Therefore, section 23A is a penal provision and not a fiscal provision, and the limitation prescribed by section 34(3) does not apply to orders under section 23A.

Conclusion:

The petition was dismissed on merits, with the court holding that the proceedings under section 23A are not barred by time as per section 34(3) and that an order under section 23A is a penal provision, not an assessment provision. The court also noted that there was an adequate alternative remedy by way of statutory appeals, and therefore, relief under article 226 was not warranted. The parties were ordered to bear their own costs.

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