9911796707
TMI Blog1954 (3) TMI 61X X X X Extracts X X X X X X X X Extracts X X X X ..... 46, assessed the assessee on the total income of Rs. 4,42,693. The said assessment was confirmed by the Appellate Assistant Commissioner and by the Appellate Tribunal, in appeal. 4. In the calendar year 1941, accounting year for the assessment year 1942-43, the late Mafatlal Gagalbhai was the registered holder of 12,435 ordinary shares and 2,500 preference shares and in the calendar year 1942, accounting year for the assessment year 1943-44, he was the registered holder of 12,185 ordinary shares and 2,500 preference shares in the Gagalbhai Jute Mills Ltd., Calcutta. For the years ending 31st March, 1941 and 1942, the said company did not declare any dividend either on the ordinary or on the preference shares. Accordingly, the late Mafatlal Gagalbhai did not show in his returns for the assessment years 1942-43 and 1943-44 any income from dividend on the said ordinary and preference shares held by him nor was he assessed by the Income-tax Officer on such dividend income for the said assessment years. 5. In the case of the Gagalbhai Jute Mills Ltd., the Income-tax Officer, Companies District II, Calcutta, applying section 23A of the Act for the assessment years 1941-42 and 1942- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te Mills Ltd., appealed to the Appellate Tribunal against the Appellate Assistant Commissioner's order and the grounds of decision. The Tribunal by its order dated 29th July, 1948, confirmed the orders of the Income-tax Officer and the Appellate Assistant Commissioner so far as the application of section 23A to the said company's case was concerned, but varied the order as to the distribution as follows : Under the section the proportionate share of the dividends of each shareholder has to be counted for the purpose of the assessment. We notice that in the present case the amounts of the dividends paid to the ordinary shareholders and the preference shareholders have not been separately determined for the purpose of assessment. We, therefore, direct that such shares should be separately determined in arriving at the assessment. In other words, there should be firstly a distribution of Rs. 1,75,000 amongst the preference shareholders and the balance of the profits must then be distributed amongst the ordinary shareholders. 10. The assessee had also appealed to the Appellate Tribunal against the Appellate Assistant Commissioner's order. At the hearin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer reduced the amount deemed to have been distributed to the late Mafatlal Gagalbhai under section 23A as holder of ordinary shares and added the amounts deemed to have been distributed to the late Mafatlal Gagalbhai under section 23A as holder of preference shares. At the foot of the said notices of demand the Income-tax Officer stated that the assessment orders dated 23rd January, 1950, had been made to give effect to the Tribunal's decision in the case of the Gagalbhai Jute Mills Ltd. 14. The assessee appealed to the Appellate Assistant Commissioner, ' B ', Range, Bombay, against the orders of the Income-tax Officer. The Appellate Assistant Commissioner by his order dated 17th April, 1952, dismissed the assessee's appeals stating that the orders appealed against were not orders passed under any section of the Act, which were appealable under section 30. 15. The assessee appealed to the Appellate Tribunal against the said order of the Appellate Assistant Commissioner. The Tribunal by its order dated 23rd March, 1953, dismissed the appeals stating that where an order was passed under section 23A(1) of the Act in the case of a company it was not necessary tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the year 1943-44 a sum of Rs. 7,96,082 as attributable to the dividends which had been distributed under the order made under section 23A. Against the order made by the Income-tax Officer under section 23A Gagalbhai Jute Mills Ltd., preferred an appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. The company then went in appeal to the Appellate Tribunal and the Appellate Tribunal took the view that the undistributed dividends had not been properly distributed among the various class of shareholders. Under the order of the Income-tax Officer the dividend had only been distributed among the ordinary shareholders. Therefore, the Appellate Tribunal directed that the undistributed profits should first be distributed amongst the preference shareholders and the balance should then be distributed amongst the ordinary shareholders. The assessee also appealed against the order made by the Income-tax Officer reopening the assessment for the years 1942-43 and 1943-44, which order had been made under section 34 of the Act. The Appellate Assistant Commissioner dismissed his appeal and he then appealed to the App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hareholder shall be included in the total income of such shareholder for the purpose of assessing his total income. It will be noticed that this section creates a notional income, which income comes into existence when the order is made by the Income-tax Officer and the income consists of the undistributed profits of a company and those undistributed profits are deemed to be dividends having been distributed at the date of the general meeting referred to in that section, and the section provides that the proportionate share of each shareholder in these dividends shall be included in his total income for the purpose of assessing his total income. The view taken by the Tribunal is that the expression thereupon the proportionate share thereof of each shareholder shall be included in the total income of such shareholder for the purpose of assessing his total income casts an obligation upon the Income-tax Officer not only to include this amount in the total income of the assessee, but also to assess it to tax and that no formal order of assessment is necessary. In other words, according to the Tribunal the expression thereupon emphasises the fact that the inclusion in the total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to pay tax in respect of the proportionate dividend which comes to his share and yet such an order could be made without the Legislature requiring any notice to be served upon the assessee. In this connection reference might be made to section 35 which gives power to the Commissioner and the other Income-tax Officers to rectify mistakes which are apparent on the face of the record, and even in a section which does not involve any assessment or re-assessment and which is confined to mere rectification of mistakes, the section provides that no such rectification shall be made having the effect of enhancing an assessment or reducing a refund unless the Commissioner, the Appellate Assistant Commissioner or the Income-tax Officer, as the case may be, has given notice to the assessee of his intention so to do and has allowed him a reasonable opportunity of being heard. The other important consideration is the question of appeal. An order under section 23A may be made while the assessment of the shareholder for the relevant year is still pending under section 23 or it may be made after the assessment is closed. If the order is made while the assessment under section 23 is pending, the sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was made under section 23A. Now, it is only the shareholder who is a shareholder on the register of the company at the date when the general meeting is held who is liable to pay tax on this notional income, and what the Department did in that case was that although the share register showed Mr. and Mrs. Cambatta as the shareholders the Department proceeded to assess Cambatta as the shareholder holding that Cambatta was the beneficial owner of the shares. Mr. Cambatta came to this Court on a reference challenging that decision and we upheld the challenge and held that it was not Cambatta who was assessable under section 23A but Cambatta and his wife as an association of persons, they being the persons recognised as shareholders in the register of the company. In that case Cambatta was not challenging the order on its merits, but he was challenging his own liability to pay tax determined by section 23A. The other conceivable case where a shareholder may challenge the order under section 23A would be the basis of taxation on the total income of the assessee when these dividends would be included in his total income. Ordinarily, dividends are put under the head other sources , but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is sub-section (3) (ii) which makes the company liable to pay tax if the Department fails to recover the tax from the shareholder. Therefore, this sub-section makes it clear that the primary liability to pay tax under section 23A is upon the shareholder and a secondary liability is cast upon the company on the failure of the shareholder to pay tax. Then clause (iii) of sub-section (3) provides for a notice of demand where tax is recoverable from a company. If it has any significance at all, what may be noted is that no provision is made for a notice of demand to be served upon the shareholder if tax has to be recovered from him under section 23A, although the answer may well be, as given by Mr. Joshi, that section 29 provides for notice of demand and it was unnecessary to provide for any such notice under section 23A, although it may again be pointed out that in section 35 there is a specific provision for notice of demand by sub-section (4). Sub-section (4) of section 23A gives exemption to the shareholder from paying tax in respect of the undistributed profits when they are actually distributed by the company, and what is relied upon is the expression when tax has been paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to bring the escaped income to tax he proceeds to act under section 34. If we do not place this interpretation upon section 34, one of two results must follow, either of which would be most unfortunate. One would be to take the view which has already been suggested and rejected that under section 23A the order itself is an assessment order and no further assessment is necessary although such an order, as pointed out, could be made without notice to the assessee and in certain cases depriving the assessee of a right of appeal. The other result would be even more unfortunate from the point of view of the Department that if section 34 did not apply there would be no machinery provided by the Act itself for assessment in cases where notional income created by section 23A had to be assessed in the hands of a shareholder. It is open to an assessee to contend that the Court must not uphold an assessment if the Court is satisfied that the Legislature has overlooked to provide the necessary machinery for assessment. But I would be reluctant to take that view especially as section 34 is capable of the interpretation I have put upon it and it is supported by the past practice on the part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment or re-assessment in cases falling within clause (a) of sub-section (1) of this section shall be made after the expiry of eight years, and no order of assessment or reassessment in any other case shall be made after the expiry of four years, from the end of the year in which the income, profits or gains were first assessable. The last part of sub-section (3) refers to all orders of assessment or re-assessment which do not fall within the category first enumerated and the period of limitation laid down is four years and the point from which limitation begins to run is the end of the year in which the income, profits or gains were first assessable. Mr. Palkhivala's contention is that by reason of section 23A the dividends were made notional income in the assessment years 1942-43 and 1943-44 and for the purpose of limitation those are the relevant years and limitation would begin to run in one case from the end of the assessment year 1942-43 and in the other case from the end of 1943-44. Therefore, according to Mr. Palkhivala the efficacy of an order under section 23A would depend upon when that order was made. If it was made at a time when the assessment would have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the year in which the order under section 23A is made. Therefore applying that test to the present case, the position is that as the order was made on 20th February, 1947, limitation would begin to run from 31st March, 1947, and it would be open to the Income-tax Officer to make an order of assessment in time till 31st March, 1951. Mr. Palkhivala says that section 23A creates a legal fiction and the legal fiction is that a certain income should be deemed to be in existence at a particular time and we must give full effect to the legal fiction, and according to Mr. Palkhivala we are not giving full effect to the legal fiction when we are construing section 34(3) in relation to section 23A by holding that first assessable means not in the year when the income is deemed to have been earned, but first assessable means when the income was brought into existence by an order under section 23A. We fully agree with Mr. Palkhivala that when a statute creates a legal fiction and declares something to be in existence when in reality it is not, the legal fiction must be worked out in all its implications, but in my opinion we are in no way impairing the legal fiction created by sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the following effect : Provided further that nothing contained in this section limiting the time within which any action may be taken or any order, assessment or re-assessment may be made shall apply to a re-assessment made under section 27 or to an assessment or re-assessment made on the assessee or any person in consequence of or to give effect to any finding or direction contained in an order under section 31, section 33, section 33A, section 33B, section 66 or section 66A. Mr. Joshi says that the case would fall directly within this proviso because in giving effect to a direction given by the Tribunal an order of assessment or re-assessment has to be made on a shareholder, and according to Mr. Joshi even though the shareholder may not be the assessee who appealed to the Tribunal the re-assessment may be made not only on the assessee but on any person. Mr. Palkhivala is not prepared to accept this interpretation of the proviso placed by Mr. Joshi. Now, inasmuch as I have held that the order of 23rd January, 1950, was not a proper order of assessment under section 34, this question can only arise if the Income-tax Officer passes a fresh order of assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er should be obtained from the Tribunal after we have held that the order is appealable, it would be open to the parties to ask the Tribunal to pass the proper order on the appeal against the order of the Income-tax Officer preferred by the assessee. The second question referred to us is : Whether it was incumbent upon the Income-tax Officer to take action under section 34 of the Indian-Income-tax Act before he revised the assessments on 23rd January, 1950 ? That question I must answer in the affirmative for the reasons given by me in my judgment. The third question is : If the answer to question No. 2 is in the affirmative, whether the bar of limitation specified in section 34 of the Indian Income-tax Act would apply to the inclusion in the total income of a shareholder the dividend which is deemed to have been distributed under section 23A(1) of the Act ? The answer to that question would be in the affirmative to the extent and in the manner indicated in my judgment. Commissioner to pay the costs. TENDOLKAR, J.-I agree and would like to add a few observations. The arguments as to whether section 23A is a self-contained section for assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assess in this section Mr. Joshi further relies on sub-section (4) of the section which is in these terms ; Where tax has been paid in respect of any undistributed profits and gains of a company under this section, and such profits and gains are subsequently distributed in any year the proportionate share therein of any member of the company shall be excluded in computing his total income of that year. This sub-section refers to tax payable under this section and not to tax payable on income computed under this section , and this undoubtedly strengthens the argument of Mr. Joshi that the Legislature did not appear to contemplate a seperate assessment outside the scope of section 23A. Mr. Joshi further points out that there is no period of limitation prescribed for an order under section 23A as was held by a Division Bench of this Court in Sir Kasturchand Ltd. v. Commissioner of Income-tax, Bombay ([1949] 17 I. T. R. 493). Therefore, an order could be made under section 23A at any time and the consequence of that order is that a proportionate share of the profits deemed to have been distributed as dividend shall be included in the total income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... self-contained section for assessment, the assessee would have to go without a right of appeal. Now, the answer of Mr. Joshi to this contention is that even assuming there was a right of appeal, such right cannot confer upon the assessee any tangible benefit because proviso (3) to section 30 enacts that a shareholder in a company in respect of which an order under section 23A has been passed by an Income-tax Officer, may not in respect of matters determined by such order appeal against the assessment of his own total income. Incidentally, this proviso appears to enact that the Legislature contemplated that there could be appeals against orders which included the liability to pay tax in respect of dividends deemed to be distributed under section 23A. The proviso undoubtedly makes it clear that even if an appeal lay, the only thing that could be agitated in the appeal is questions not determined under the provisions of section 23A, and Mr. Joshi's contention is that when a consequential order is made on the shareholder under section 23A, all that is done is to add to his income the proportionate share of the dividends deemed to have been distributed. That, however, does not appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Palkhivala next urges that if section 23A is taken to be a selfcontained section, there is in it no provision for notice to the assessee before an assessment is actually made. It is an elementary principle of natural justice that nothing should be done to the prejudice of a person without his being given an opportunity to show cause against what is sought to be done ; and no doubt when action is taken to the prejudice of an assessee there are several sections in the Income-tax Act which provide for notice being given to the assessee before such action is taken. But Mr. Joshi's contention is that the giving of such notice would serve no purpose at all because it is not open to the assessee to challenge any matter determined under section 23A which can only be challenged by the company, and not by the shareholder. No doubt Mr. Joshi's contention that the shareholder cannot challenge the quantum fixed under section 23A is well founded, but he could in the cases to which I have drawn attention in reference to the right of appeal raise the same points before the Income-tax Officer if a notice was given to him to show cause why an assessment should not be made on the basis of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich they became assessable under section 23A ? The effect of an order under section 23A no doubt is that the undistributed profits which are deemed to have been distributed as dividends are assessable as income of the year in which the general meeting of the company was held. But it is one thing to say that they are assessable as the income of a particular year and quite another to say that they were first assessable in that year. They became first assessable when they became part of the income of the shareholder as a result of an order under section 23A. Up to that time the income, profits or gains had no existence in fact and they had a notional existence only after an order under section 23A is made. Therefore, although they are assessable as of a previous assessment year, they did not become assessable in that year, but they were first assessable in the year in which an order under section 23A was first passed. The result, therefore, is that there never can be any question of an order made under section 23A becoming infructuous by reason of the fact that at the date when the order is made the period of four years from the end of the year as of which the dividend is to be taxed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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