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PETITIONER: COMMISSIONER OF INCOME-TAX, BOMBAY

       Vs.

RESPONDENT: ROBERT J. SAS

DATE OF JUDGMENT: 16/11/1962

BENCH:

ACT: Income Tax-Notice of assessment-Limitation for-Income deemed to  be distributed as dividend-Indian Income-tax  Act,  1922 (11 of 1922), ss. 23 A (1), 34.

HEADNOTE: The  assessees  were  the three shareholders  of  a  private company.   The  company made profits in  the  calendar  year 1947,  but did not declare any dividend at the  shareholders meeting  held on December 4, 1948.  The  Income-tax  Officer passed  an  order under s. 23 A (1) of  the  Income-tax  Act whereby  the income of the company was deemed to  have  been divided  amongst the three shareholders.  He issued  notices to the assessees which were served on them on April 1, 1954. The assessees contended that the notices were served  beyond the period of four years allowed by s. 34 (1) (b). Held,  that  the notices served under s. 34 (1) of  the  Act were beyond time and the Income-tax Officer had no jurisdic- tion to assess the assessees.  Under s. 23A (1) the dividend was  to be deemed to have been distributed not on  June  30, 1949, by which date the company should have distributed  the dividend,  but  on  the date of the  general  meeting  i.e., December,  4,  1948  within the  accounting  year  1948  and assessment year 210 1949-50.   The notice was not served within four years  from the end of the assessment year.  It made no difference  that under s.  23 A (1) an order could be passed at any time.

JUDGMENT: CIVIL  APPELLATE JURISDICTION :Civil Appeals Nos.138 to  138 of 1962. Appeals  by special leave from the judgment and order  dated March  19,  1958,  of the Bombay High  Court  in  Income-tax Reference No. 74 of 1957. Gopal Singh and R. N. Sachthey, for the appellant. R.   J.  Kolah, J. B. Dadachanji, 0. C. Mathur and  Ravinder Narain,’ for the respondents. R. Gopalakrishnan, for the Intervener. 1962.   November  16.   The  judgment  of  the  Court,   was delivered by KAPUR  J.These ’three appeals by special leave are  brought against  the judgment and order of the High  Court   Bombay. The  appellant in all the three appeals is the  Commissioner of Income-Tax  but in each of the appeals the respondent  is different 1. C., one of: the three shareholders of a private limited company A.C.E.C. ’Private (India) Limited which  was

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carrying  on business in India and made profits  during  the calendar  year  1947.  The accounting year is  the  calendar year ending, December 31, 1948, and the relevant  assessment year  1949-50.   Although  the,  company  had  earned  large profits during the year 1947 it did not declare any dividend at  the shareholders’ meeting held on December 4, 1948.   On March 29; 1954, the Income-tax Officer passed an order under s.  23A(1), ’of the Income-tax Act, hereinafter  termed  the Act  Whereby the income of the ’Company. was  in  accordance with that provision, deemed to have been divided amongst the shareholders.  By that order the following dividends were  211 deemed to have been distributed amongst the three shareholders, each a respondent in one of the appeals. Mr. Paul Rouffart              :Rs. 1,09,8591- Mr. Paul Victor Hermans        :Rs. 1,00,189/- Mr. Robert J. Sas              :Rs. 1,09,859/-      The  Income-tax Officer issued notices under s.  34  of the  Act  and  the notices were  served  on  the  respective respondents  on April 1, 1954.  Thereafter the return of the income  was  submitted and the assessment was  completed  in regard  ’to the shareholders.  Appeals were taken  first  to the Appellate Assistant Commissioner and then to the  Income tax Appellate Tribunal.  One of the points taken before  the Tribunal was that the Income-tax Officer had no jurisdiction to  take  proceedings  as the notices  were  served  on  the assessee respondents beyond the period of four years allowed under s 34(1)(b) of the Act.  This plea was accepted by  the Tribunal and at the instance of the Commissioner of  Income- tax  a case was stated to the High Court under s.  66(1)  of the Act and the following two questions were referred to it:               (1)   Whether  on the facts and  circumstances               of the case it was necessary for the Incometax               Officer to initiate action under section 34 of               the Indian Income-tax Act in order to tax  the               deemed  income  distributed by virtue  of  the               order under section 23A(1) of the Act made  in               the cage of the A.C.E.C. Private (India)  Ltd.               ?               (2)   If  the answer to question No. 1  is  in               the  affirmative whether having regard to  the               observations  of  their  lordships  in  Navin-               chandra  Mafatlal v. Commissioner  of  Income-               tax,,  Bombay City 1 (1955) 27 I.T.R. 245  the               notice,  served  on April 1, 1954 was  out  of               time;?               212 The  second  question  was reframed by  the  High  Court  as follows :               If  the  answer to question No. 1  is  in  the               affirmative whether the notice served on April               1, 1954 was out of time ? Both  the  questions were answered in  the  affirmative  and against  the  Commissioner  of  Income-tax.   Against   that judgment  and order he has come in appeal to this  court  by special leave. In view of the decision of this court in Sardar Baldev Singh v.  Commissioner  of  Income-tax,  Delhi  &  Ajmer  (1)  and Commissioner  of Income-tax V. Navinchandra Mafatlal (2)  in which  it was held that an assessment cannot be  made  under s.23A  of  the  Act  because  that  section  does  not  make provision  for an assessment to’ be made and assessment  can only  be made under s. 34 of the Act, the first question  no longer  survives  for decision and was  rightly  not  argued before us.

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The  only question that remains for decision is  the  second question i. e., whether the notice served on April 1 , 1954, was out of time.  Counsel for the appellant-Commissioner  of Income-tax-argued   (1)   that  there  was   no   limitation prescribed in regard to the order to be made under s. 23A of the Act and if the period mentioned in a. 34 (1) (b) is made applicable to orders under s. 23A then that section (s. 23A) would  become unworkable; (2) that as under s. 23A(1)  there was a period of six months up to the end of which  dividends could  be  distributed  the accounting year  would,  in  the present  case, be 1949 and the assessment year  1950-51  and therefore  the notice could be served within four  years  of the  end of that year i. e.. up to March 31, 1955.   Finally it was urged that proviso (1) to sub-s. (3) of s. 34 applied and  as  the notice was issued within four  years  under  s. 34(1)(b) there was (1) [1961] 1 S.C.R. 482. (2) [1961] 42 I.T.R. 53. 213 a period of one year from the date of service of the  notice during  which the assessment or reassessment could  be  made and  the impugned order having been made within that  period it was a proper and a valid order. In  the  present  case  the  High  Court  in  its   advisory ,.jurisdiction  had  to  give its opinion  on  the  question submitted  to it and it refrained the question in  order  to bring  out the question which arises from the order  of  the Tribunal We did not allow the question of the  applicability of proviso (1) to s. 34(3) to be raised as the question does not take in the point raised about the proviso to sub-s. (3) of  s.  34.   The question as framed by the  High  Court  is whether  the service of notice under s. 34(1)(b) was out  of time.   The  proviso  to  sub-s. (3) of  s.  34  relates  to completion of assessment within a particular period when the notice is issued before the period of limitation referred to in  s.  34(1)(b).  The two are different questions  and  one does not include the other. At  the relevant date s. 23A which empowered the  Income-tax Officer  to assess individual members of  certain  companies read as under :               S.    23A.  Power to assess individual members               of  certain companies (1).  Where  the  Income               tax  Officer is satisfied that in  respect  of               any  previous  year  the  profits  and   gains               distributed as dividends by any company up  to               the end of the sixth month after its  accounts               for  that  previous year are laid  before  the               company in general meeting are less than sixty               per  cent  of  the assessable  income  of  the               company  of that previous year, as reduced  by               the amount of incometax and super-tax  payable               by  the company in respect thereof  he  shall,               unless, he is satisfied that having regard  to               losses  incurred  by the  company  in  earlier               years or to the smallness of the profit  made,               the               214               payment  of  a dividend or a  larger  dividend               than  that  declared would be  unreason  able,               make   with  the  previous  approval  of   the               Inspecting Assistant Commissioner an order  in               writing that the undistributed portion. of the               assessable  income  of’ the company   of  that               previous  year  as  computed  for   income-tax               purposes and reduced by the amount of  income-

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             tax  and super-tax payable by the  company  in               respect  thereof shall be deemed to have  been               distributed    as   dividends   amongst    the               shareholders’  as at the date of  the  general               meeting    aforesaid   and    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." The Income-tax Officer has power to make an order under this section determining the amount of undistributed balance  out of   the  profits  of  a  company  where  the  company   has distributed  by  way of dividends out of the income  of  the previous year less than 60% of the assessable income; and if it has distributed less than 60% up to the sixth month after the  holding of the general meeting then  the  undistributed assessable  income shall be deemed to have been  distributed as  dividend amongst the shareholders as at the date of  the general meeting.  Thereafter the proportionate share of each shareholder   shall  be  included  in  the  total  of   such shareholder  for the purpose of assessing his total  income. It  comes  to this  that if at the end of  the  sixth  month after  the  general  meeting of a company  to  consider  its accounts  of the previous year the income of which is  being assessed,  the Income-tax Officer finds that  the  dividends distributed are less than 60% of the assessable income  then such  undistributed  income  shall be deemed  to  have  been distributed at the general meeting or in 215 accordance with the resolution passed at the general meeting and  proportionate  share  shall be included  in  the  total income-of  each  individual  shareholder.   Thus  s.  23A(1) creates a fictional distribution of dividend which is deemed to be a receipt of dividend ’by the shareholder although  in fact the shareholders does not receive it.  It is deemed  to have  been distributed on the date on which accounts of  the previous  year were laid before the company at its  general meeting.  Thus construed the undistributed assessable income in  the present case was rightly determined  by the  Income- tax  Officer  because  60% was not  distributed  by  way  of dividends up to the end of the sixth month after the holding of  the  meeting which was on December 4,  1948.   Under  s. 23A(1)  of  the Act dividend distributed by June  30,  1949, should  not have been less than the statutory limit but  the effect  of  the  deeming provision is not  that  the  income should be deemed to have been distributed on June 30,  1949, but  on  the date of the general meeting i.e.  December  4, 1948,  and  therefore within the accounting year  1948,  the relevant  assessment  year  being  1949-50.   It  makes   no difference  that according to the wording of s.  23A(1)  the order  could  be passed at any time,  the  assessment  would still have to be ’Made under s. 34(1)(b) of the Act and if a notice  is not served in accordance with that provision  the Incometax  Officer  will have no jurisdiction  to  take  any ,action against the shareholder.  The notice under s.  34(1) is  to  be  served within four years from  the  end  of  the assessment year.  It was held by this   court    in    First Additionallncome-tax Officer,      Mysore, v. H. N.  S. lyengarthat the period of  eight or four years under s.34(1)(a) or (b) begins from the end of the assessment year.   Besides we  ,cannot  see why s. 23A(1)  ’Should,  become  unworkable merely  because  the  notice under s.  34(1)  which  is  the assessment  section.  prescribes  a time  limit  for  taking action for escaped incomes nor was any reason (1)[1962] Supp.  1 S.C.R.I.

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216 brought to our attention in support of that submission. In  this  view of the matter the answer given  by  the  High Court to the second question was correct and the  assessment made under s. 34(1)(b) of the Act after four years from  the end  of the relevant assessment year was out of time.   This is the only question which survives for decision and in  our opinion the High Court answered it correctly. These appeals, therefore fail and are dismissed with  costs. One hearing fee.                              Appeals dismissed.