1967 (4) TMI 24 - HC - Income Tax

ITO initiated proceedings u/s 23A and before order u/s 23A passed, he initiated proceedings u/s 34(1)(b) - held that action u/s 34(1)(b) could not be initiated

Summary

Issues:
Validity of notices issued under section 34(1)(b) before an order under section 23A(1) was made.

Analysis:
The case involved references under section 66(1) of the Indian Income-tax Act, 1922, where the common question was whether action under section 34(1)(b) could be initiated against shareholders before an order under section 23A(1) was passed in the assessment of the company. The assessees were shareholders in a company, and proceedings were initiated against them under section 34(1)(b) before an order under section 23A(1) was made. The key issue was the validity of the notices issued under section 34(1)(b) in this scenario.

Section 23A(1) of the Act deals with the distribution of profits as dividends by a company, and it was contended that once an order is made under this section, the dividends are deemed to have been distributed among shareholders. However, until such an order is made, no income can be said to have accrued in fact or law. Section 34(1)(b) allows the Income-tax Officer to initiate proceedings if there is reason to believe that income has escaped assessment. In this case, the Income-tax Officer issued notices under section 34(1)(b) before an order under section 23A(1) was made, raising questions about the basis for believing income had escaped assessment.

The court referred to previous judgments emphasizing that the fictional income created by section 23A(1) only comes into existence after an order is made under that section. The income must be deemed to have existed for the purpose of assessment only after such an order. The court highlighted that the requirements of section 34(1)(b) must be strictly construed, as it is a penal provision. As the conditions of section 34(1)(b) were not met in this case, the action against the assessees was deemed barred by time once the order under section 23A(1) was made.

In conclusion, the court answered the question in the negative, stating that no action under section 34(1)(b) could have been taken against the assessees based on the notices issued before the order under section 23A(1). The department was directed to pay the costs of the references, with the advocate's fee specified.