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TMI Blog1958 (10) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... ts total world income. The general meetings of the company were held in respect of those years at Bhor and the only dividends that were declared at those meetings aggregated to ₹ 2,580 and ₹ 1,140 for the two years respectively. In this judgment we shall refer to some facts only to serve as an illustration in appreciating the legal contentions raised before us. In 1946, the total income of the company was ₹ 4,32,542. The income arising in the Indian State of Bhor was ₹ 2,24,542 and its total world income which would be the sum of those two items was ₹ 6,57,084 and the only amount that it paid out as dividend was ₹ 2,580. In substance and in effect the profits were kept undistributed and the shareholders of the private limited company were content with that position. The company was one in which the public were not substantially interested within the meaning of the Explanation to section 23A. The Income-tax Officer, therefore, invoked and brought into operation the provisions of section 23A and made an order under section 23A in respect of both the years. The dispute before the Income-tax Officer related to the contents of the order including prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1949, were brought into force in that State some months earlier, that is on 1st April, 1949. Section 60A was added to the Indian Income-tax Act to bring the law in harmony and by section 6 of the Taxation Laws (Extension to Merged States and Amendment) Act, 1949, the Central Government was empowered to make any exemption, reduction in rate or other modification in respect of income-tax in certain cases to avoid hardship and difficulties. We shall presently state the relevant provisions of the enactments of which we have made some mention. In exercise of the powers conferred by section 60A, the Central Government made an order intituled The Merged States (Taxation Concessions) Order, 1949, and it is on the applicability, scope and the effect of paragraph 12 of that Order that the principal arguments before us have evolved. It is not necessary to set out in this judgment the relevant provisions of the States Merger (Governors' Provinces) Order, 1949, or the Taxation Laws (Extension to Merged States and Amendment) Act, 1949, or any provision of the Indian Finance Act. The relevant part of section 60A is as under: If the Central Government considers it necessary or expedie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year 1949-50, shall be assessed under the Indian Income-tax Act, 1922, if and only if, such income, profits and gains have not, before the 1st day of August, 1949, been assessed under the State law. (2) Where the income, profits and gains referred to in sub-paragraph (1) have not been assessed under the State law, they shall be assessed under the Indian Income-tax Act, 1922, and the tax payable thereon shall be determined as hereunder- (i)the tax on the amount of such income, profits and gains included in the total income shall be computed at the Indian rate of tax; (ii)the amount of such income, profits and gains shall be computed under the State law and the tax thereon computed at the merged States rate of tax ; (iii)the amount, if any, by which the tax computed under clause (i) exceeds the tax computed under clause (ii) shall be allowed as rebate from the first mentioned tax, and the amount of the first mentioned tax as so reduced shall be the tax payable...... 6. (i) The income, profits and gains of any previous year ending after the 31st day of March, 1948, which does not fall within paragraph 5 of this Order or of any previous year commencing after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich have not been the subject of an order under this sub-section exceed the paid up capital of the company, together with any loan capital which is the property of the shareholders, or the actual cost of the fixed assets of the company whichever of these is greater, this section shall apply as if instead of the words 'sixty per cent.' the words 'one hundred per cent.' were substituted : Provided further that no order under this sub-section shall be made where the company has distributed not less than fifty-five per cent, of the assessable income of the company as reduced by the amount of income-tax and super-tax payable by the company in respect thereof unless the company, on receipt of a notice from the Income-tax Officer that he proposes to make such an order, fails to make within three months of the receipt of such notice a further distribution of its profits and gains so that the total distribution made is not less than sixty per cent, of the assessable income of the company of the previous year concerned as reduced by the amount of income-tax and super-tax payable by the company in respect thereof: Provided further that this sub-section shall not app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e also of the application of that sub-section to distribution of profits by that company. The assessees carried the matter in appeal to the Tribunal and the Tribunal decided against them practically on all the points. The primary contention of the assessee company before the departmental authorities and the Tribunal was that it was entitled to claim benefit of the exemptions granted by paragraph 12 and the Income-tax Officer was not entitled to make any order against the company under section 23A in respect of any of the two years. Another contention related to interest which the company was compelled to pay by reason of the fact that no advance payment of income-tax had been made as required by section 18A of the Indian Income-tax Act. Here, the submission was that the company was not bound to pay any advance tax and not being bound to pay any advance tax, there could be no question of penalty. The argument was that in any event the interest which it had been compelled to pay would, by the language of section 18A, be equated with tax and that the amount of that interest had to be taken into consideration in computing the assessable income of the company under section 23A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attractive, but paragraph 12 cannot be read in isolation. It has to be read in its proper setting and particularly bearing in mind the provisions of section 60A of the Extension Act. The argument founded on the phrasing of paragraph 12 needs to be stated very briefly and it is that the provisions of section 23A could not be applied by the Income-tax Officer to the income of this company for the assessment year 1947-48 and 1948-49 (accounting years 1946 and 1947) because those were profits and gains of previous years ending before the 1st of August, 1949, and there was nothing in the law of the Bhor State which contained any provision corresponding to the provision enacted in section 23A whereby a fiction of law was raised and income which was not distributed amongst shareholders was to be deemed to have been actually distributed amongst them. The object of section 23A and the sound principle underlying it are obvious and it is not necessary for us to discuss the same. But the question is not of the object of that enactment or the principle underlying it but of its applicability or otherwise to the assessee company before us. Now, the argument of counsel touches every element menti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uched by the British Indian Act, became taxable and what is essential to note is that it became taxable for and/or after the assessment years 1949-50. The exemption was to be for the benefit and relief of those who were hit by the Extension Act. Its object was that incomes which were otherwise not liable to tax, but by the Extension Act made so liable, were to be given partial relief or even exemption. But, says Mr. Palkhivala, that is not the object of the Extension Act and that is not the effect of section 60A. Now, it will be seen from the facts which we have already stated that even before the enactment of section 60A the assessee company was liable to pay tax in respect of its income in British India (taxable territories). The inevitable starting point must be-Is the exemption claimed in respect of income for the assessment year 1949-50 or any subsequent year? If not, section 60A has not legislated for it and no question can arise of considering the operation of the Order. In our judgment, this must be so because the Order cannot embrace incomes which were not within the ambit of section 60A itself. To put it differently incomes which were not touched by the Extension Act were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this premise is that section 23A could not be applied to the case of these assessees. The primary liability under section 23A, it is said, was of the shareholders. The profit was the profit of the company and the State law did not contain any provisions analogous to that contained in section 23A and it stood to reason, so the argument has run, that the shareholders in any event should have the benefit of the exemption. Here also at first blush, the argument sounds somewhat attractive but in substance it amounts to this that we must look only at the Order and read paragraph 12 in the context of the relevant provisions of the Order but not in the light of section 60A of the Extension Act and the meaning and scope of section 23A of the Income-tax Act. Section 60A, as we have already observed, is the very foundation of the Order of 1949 including paragraph 12 of the same and before we look at paragraph 12, we have to remember that the scope and admit of the exemption granted by paragraph 12 has already been determined by section 60A. Therefore, even when applying paragraph 12 to the case of an assessee-shareholder in respect of any income of any person or class of persons taxed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or any relief are the profits and gains for the year 1949-50 and subsequent years. This is not to suggest that paragraph 12 has no applicability to the case of any assessee-shareholder. We are merely pointing out that this is another fact of the same question. Of course, paragraph 12 does apply to an assessee-shareholder but it can only apply to an assessee-shareholder within the ambit and scope of section 60A and not outside it. The result, as we see, is that the assessee-shareholder, although he became entitled to claim any relief or exemption by operation of the Order made under section 60A in respect of the assessment year 1949-50, the effect of paragraph 12 read with section 60A and section 23A of the Income-tax Act is that it was the undistributed profit of a company for the year 1949-50 and subsequent years only to which the exemption can relate. The second question before us on this reference raises a very short contention and we have already indicated what that contention is. The argument is founded on the language of section 18A(8) which is as under: Where on making the regular assessment, the Income-tax Officer finds that no payment of tax has been made in accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted could only be at the office of the company in Bhor State and since the income was to be deemed to have been distributed in the Bhor State, it was exempt from tax under section 14(2)(c), even though the assessee-shareholders were residents within British India. Though included in their total income, it was to be exempt from taxation and the shareholders would not have to pay tax on it by operation of section 14(2)(c). It has been urged that the shareholder would be justified in saying that he should be put in the same position in which he would have been if 60% of the profits of the company had been declared as dividend. The shareholders would not have to pay tax in respect of the income in British India by operation of section 14(2)(c). Reference has also been made to section 16(1)(a) and it is said that it relates only to rates and not to assessments. The argument here has centered round one point and that point is that what was to be regarded was not the law in force on 1st August, 1949, but the law in force in Bhor State on 1st April, 1949, and if that was the position the application of section 14(2)(c) survived. Now, we have already pointed out that although the extension ..... X X X X Extracts X X X X X X X X Extracts X X X X
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