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PETITIONER: COMMISSIONER OF INCOME TAX, WEST BENGAL

       Vs.

RESPONDENT: M/S.  ABDUL RAHIM OSMAN & CO. (INDIA) PRIVATELIMITED

DATE OF JUDGMENT19/09/1972

BENCH: REDDY, P. JAGANMOHAN BENCH: REDDY, P. JAGANMOHAN HEGDE, K.S. KHANNA, HANS RAJ

CITATION:  1972 AIR 2469            1973 SCR  (2) 372  1972 SCC  (2) 854

ACT: Indian Income Tax Act, 1922 (Act 11 of 1922)-Section 23A(1)- Scope of.

HEADNOTE: The  respondent is a private company.  The  assessment  ’was for  the years 1958-59 and 1959-60 of which  the  accounting year   ended   on  30th  June  1957  and  30th   June   1958 respectively.   The Company had declared dividend after  the 12  months  following the accounting year,  and  hence,  the Income  Tax  Officer subjected the Company to Super  Tax  in terms  of the latter part of S. 23A(1) of the Indian  Income Tax  Act, 1922 by including the dividends of Rs. 15,000  and Rs.  90,000 declared and paid by the Company in  respect  of relevant accounting years. The  respondent  contended that once  dividend  is  declared before: an order is made under S. 23-A(l), no Super-Tax  can be  levied in respect of those dividends.   This  submission was  rejected  by  the I.T.O., who  sought  to assess  the respondent  by including the dividends already declared  and paid.   An appeal to the Appellate  Assistant  Commissioner, was  unsuccessful.   The  Tribunal,  however,  referred  the following  question  to the High Court under  S.66(1)of  the Indian  Income Tax Act 1922:"whether, on the. facts  of  the case,  the Tribunal was right in holding that in the  matter of calculation of undistributed balance of the total  income of  an  assessee for the purpose of levy of  Super  Tax,  in terms  of S.23-A(1) of the income-tax Act, 1922, the  I.T.O. should  take  into consideration dividend  declared  by  the Company  after  the  period  of  twelve  months  immediately following  the expiry of the previous years relevant to  the assessment  years, 1958-59 and 1959-60, but before the  date on  which  the orders under S.23-A(1) had been made  by  the Income  Tax  Officer;".  The High Court  has  answered  that question in the affirmative and against the Department.  The question  before this Court was whether the High  Court  was right in answering the question in the affirmative referred to by the Tribunal.  Dismissing the appeal, HELD  : (i) S.23-A(1) has been enacted with a view to  deter private  Companies which do not distribute more than 60%  of their able income; otherwise their undistributed balance  of

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the  net income will by subjected to additional  Super  Tax. The object of the Section is to prevent the share-holders in adopting  device to avoid payment of Super Tax  inasmuch  as the rates of Super Tax for the Companies being lower,  there may be temptation to get the Company accumulate profits  and capitalise  them,  such  as, for instance,  to  issue  bonus shares, which were not assessee able as income in the  hands of  the shareholders., It is done to avoid these  artifices and  force such companies to declare the, minimum  statutory dividends.  in  cases  where the provisions  have  not  been complied with, the I.T.O., with the previous approval of the inspecting  Assistant Commissioner, may make an order if  at the  time of the passing of the order, it is found that  the company  has not distributed its dividends within 12  months immediately  following  the accounting year  less  than  the statutory percentage of its total income of the  accounting year  as  reduced  by the amount of  taxes  payable  by  the company.   Though  the I.T.O. has jurisdiction  to  pass  an order  under  Sub-Section  (1), he has  to  make  a  regular assessment of the company under S. 23, which be cannot do if in fact, a 373 dividend had been declared before the making of that  order, as  otherwise, the company’s undistributed balance which  is assessed by the I.T.O. would exceed its commercial profits. There  is also a likelihood of double taxation because  not- only  the company is charged Super-Tax for not  distributing the  dividends,  but  also  it.  will  be  assessed  on  the dividends it has in fact distributed, to income tax and once again, to the Super-Tax.  Such a result was not intended  as the  company can declare dividends in General Meetings  from the  profits,  earned by it and when that  is  declared  and paid,  the  I.T.O.,  though for the  nonfulfillment  of  the conditions prescribed in the Section, may seek to reopen it, he  cannot  make an assessment in cases where  the  dividend has. actually been declared and paid, before the date of his order. [375F]

JUDGMENT: CIVIL  APPELLATE JURISDICTION : C. A. Nos. 1378 and 1379  of 1969. Appeals by certificate from the judgment and order dated May 21, 1968 of the Calcutta High Court in Income-tax  Reference No. 17 of 1965. V.S. Desai, P. L. Juneja, R. N. Sachthey and S. P. Nayar, for the appellant. M.C. Setalvad, S. Roy Chowdhary and G. S. Chatterjee, for the respondent. The Judgment of the Court was delivered by JAGANMOHAN  REDDY,  J.  This appeal is  by  certificate  and though  no reasons have been given for the grant of it,  the learned advocate for the respondent does not contest that  a question  of  law  does arise and has not  objected  to  the certificate.   The  question that was referred to  the  High Court  by the Tribunal under s. 66(1) of the Indian  Income- tax Act, 1922 (hereinafter called. the ’Act’) is as follows                "Whether,   on   the   facts   and   in   the               circumstances  of the case, the  Tribunal  was               right  in  holding  that  in  the  matter   of               calculation  of undistributed balance  of  the               total income of an assessee for the purpose of               levy  of’ super-tax in terms of S. 23-A(1)  of               the  Income-tax  Act,  1922,  the   Income-tax

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             Officer  should have taken into  consideration               dividend  declared  by the company  after  the               period of 12 months immediately following  the               expiry  of the previous years relevant to  the               assessment  years  1958-59  and  1959-60   but               before  the date on which the orders under  S.               23-A(1)  had  been  made  by  the   Income-tax               Officer ? The High Court has answered that question in the affirmative and:  against the department following the  reasoning  which was  obiter in the case of Moore Avenue  Properties  Private Ltd. v. C.I.T.(1)- (1)  59 I.T.R. 466. 374 The respondent is a private company to which- it is not dis- puted,  sub-s.(1)  of  s.23-A  would  be  attracted  if   it fulfilled the conditions prescribed therein.  The assessment relating to which the Income--tax Officer sought to exercise his jurisdiction under that section was for the years  1958- 59  and 1959-60 for which the accounting year ended on  30th June 1957 and 30th June 1958 respectively.  The order of the Income-tax   Officer  was  dated  October  31,  1961.    The contention  of  the  appellant  is  that  the  company  had, declared  the  dividends after the 12 months  following  the accounting  year and hence the Income-tax Officer  had  with the  previous sanction of the Inspecting  Assistant  Commis- sioner, validly subjected the company to super-tax in  terms of  the  latter  part  of s.  23-A(1).   On  behalf  of  the respondent  it  was  submitted  that  once  dividends   were declared  before  an  order is made under  this  section  no super-tax can be levied in respect of those dividends.  This submission was rejected by the Income-tax Officer who sought to  assess  the respondent by including Rs. 15,000  and  Rs. 90,000/- declared as dividends at the general meetings  held on  December  17, 1959 and May 26, 1960 in  respect  of  the relevant  assessment  years.   An appeal  to  the  Appellate Assistant  Commissioner  was  unsuccessful.   The   Tribunal however  on a reading of the relevant parts of  the  section came  to the conclusion that in computing the  undistributed balance  of  the "total income not only the  income-tax  and super-tax  payable  by the company but also  any  other  tax levied  by the local authority ,etc. are to be deducted  but also "dividends actually distributed, if any" which are  the words used in the latter part of s. 23-A(1).  It was also of the  view that no time limit was applicable in  taking  into account  the actual distribution of dividends in passing  an order under s. 23-A(1) by the- Income-tax Officer as such it directed that the sums of Rs. 15,000 and 90,000/- were to be taken into account in arriving at the undistributed  balance of  the  total  income of the  respondent  company  for  the purpose  of  levy  of  super-tax.   Before  considering  the contention on behalf of the revenue it will be necessary  to examine the terms of the section and the object for which it was  enacted.  S.23-A(1) after it was recast by the  Finance Act of 1955 is as follows :-               "Where  the  Income-tax Officer  is  satisfied               that  in  respect  of any  previous  year  the               profits and gains distributed as dividends  by               any   company   within  the   twelve   months-               immediately following the expiry of that  pre-               vious   year  are  less  than  the   statutory               percentage of the total income of the  company               of that previous year as reduced by-               (a)the  amount of income-tax and  super-tax               payable by the company in respect of its total

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             income, but ex-               375               cluding  the amount of any  super-tax  payable               under this section;               (b)the  amount of any other tax  levied  under               any  law  for the time being in force  on  the               company  by  the  Government  or  by  a  local               authority  in  excess of the amount,  if  any,               which has been allowed in computing the  total               income; and               (c)in  the case of a banking  company,  the               amount actually transferred to a reserve  fund               under s.17 of the Banking Companies Act, 1949; the  Income-tax Officer shall, unless he is satisfied  that, having  regard  to  the losses incurred by  the  company  in earlier years or to the smallness of the profits made in the previous  year,  the  payment  of a  dividend  or  a  larger dividend  than that declared would be unreasonable, make  an order in writing that the company shall, apart from the  sum determined  as payable by it on the basis of the  assessment under section 23, be liable to pay super-tax at the rate  of fifty  per  cent  in the case of a  company  whose  business consists  wholly or mainly in the dealing in or  holding  of investments, and at the rate of thirty-seven per cent in the case  of any other company on the undistributed balance  of the  total income of the previous year, that is to  say,  on the total amount as reduced by the amounts, if any, referred to in clause (a), clause (b)  or   clause   (c)   and    the dividends actually distributed, if any." This provision is  procedural and applies only to  companies in  which the public are not substantially  interested.   It seems  to  have been enacted with a view  to  deter  private companies  which  do not distribute more than 60%  of  their assessable  income on pain of exposing them to  the  drastic consequences  of subjecting their undistributed  balance  of the  net income to additional supertax.  The object  of  the section is to prevent the shareholders in adopting a  device to  avoid  payment of super-tax inasmuch as the  rates  of super-tax  for  the  companies being lower there  may  be  a temptation  to  get the company to  accumulate  profits  and capitalise  them such as for instance to issue bonus  shares which  were  not assessable as income in the  hands  of  the shareholders.  It is to avoid these artifices and force such companies to declare the minimum statutory dividends, though in  the light of the changed definition of ’dividend’  under s.  2(6A) profits may attract tax even when they  reach  the shareholder   in  capitalised  forms,  or  where  they   are distributed to them on liquidation from accumulated  profits over  the  years they will be chargeable as  dividends.   In cases where the provisions have not been complied with,  the Income-tax Officer with the previous approval and consent of the Inspecting Assistant Commissioner will get  jurisdiction to make 376 an  order if at the time of the passing of the order  it  is found  that  the  company  has not  distributed  by  way  of dividends  within  twelve months immediately  following  the accounting  year less than the statutory percentage  of  its total  income  of  the accounting year as-  reduced  by  the amount  of taxes payable by the company and in the  case  of banking  companies the amount actually carried to a  reserve fund  under a statutory compulsion.  Though  the  Income-tax Officer has jurisdiction to pass an order under sub-s.(1) he has to make a regular assessment on the company under S.  23 which  he cannot do if in fact a dividend had been  declared

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before the making of that order, as otherwise the  company’s undistributed  balance which is assessed by  the  Income-tax Officer would exceed its commercial profits.  There is  also a likelihood of double taxation because not only the company is   charged  with  super-tax  for  not   distributing   the dividends, but also it will be assessed on the dividends  it has in fact distributed to income-tax and once again  super- tax.   Such a result was not intended.  As the  company  can only  declare dividends in general meeting from the  profits earned by it, and when that is declared and paid the Income- tax Officer though for the non-fulfilment ofthe  conditions prescribed in the section may seek to reopen ithe  cannot make an assessment in cases where the dividend has  actually been declared and paid before the date of his order.In this  view, we think the High Court was right  in  answering the question in the affirmative.  The appeal is  accordingly dismissed with costs. S.C.                                       Appeal dismissed. 377