http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 10  

PETITIONER: MIS.  BHOR INDUSTRIES LTD.

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME-TAX,BOMBAY CITY I.(and connected

DATE OF JUDGMENT: 12/01/1961

BENCH: HIDAYATULLAH, M. BENCH: HIDAYATULLAH, M. KAPUR, J.L. SHAH, J.C.

CITATION:  1961 AIR 1100            1961 SCR  (3) 409

ACT: Income-tax-Assessment     of     dividend     income-Company incorporated  in Indian State subsequently  merged-Extension of   Indian   Income-tax  Act   to   merged   State-Taxation concessions to merged State-Scope-Assessment on shareholders of   non-distributed  Profits Exemption   from   taxation- Computation of dividends deemed to be  distributed-Deduction of  interest-Merged  States  (Taxation  Concessions)  Order, 1949,  para.  12-Indian Income-tax Act, 1922 (11  of  1922), SS. 14(2)(C), 18A(8), 23A.

HEADNOTE: The  appellant  had been incorporated in 1944 as  a  private company  limited by shares in the former State of Bhor  with its  registered  office in Bhor.  The  shareholders  of  the company  were  at  all material times  resident  in  British India.    By  virtue  of  the  States   Merger   (Governors’ Provinces)  Order,  1949,  the State  was  merged  with  the Province  of  Bombay with effect from August 1,  1949.   The provisions of the Indian Income-tax Act, 1922, were extended to  the merged State with effect from April 1, 1949.   Under the  power  given  by s. 60A of the Act  which  enabled  the Central   Government  to  remove  any  difficulty   in   the application of the Act to merged States by making a  general or  special order granting exemption or other  modification, the Central Government notified the Merged States  (Taxation Concessions) Order, 1949.  Paragraph 12 of that Order stated that  " the provisions of S. 23A of tile  Indian  Income-tax Act shall not be applied in respect of the profits and gains of any previous year ending before 1st day of August,  1949, unless  the  State law contains  a  provision  corresponding thereto.   " The total world income of the company for  1946 and 1947 was Rs. 6,57,084 and 7,8o, 125 respectively and for those years the company declared dividends of Rs. 2,580  and Rs. 1140.  For the assessment years 1947-48 and 52 410 1948-49,  corresponding to the account years 1946 and  1947, the Income-tax Officers assessed the company as  nonresident ;  for the assessment year 1947-48, the Officer  held  that’ the  assessable income of the company in British  India  for

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 10  

1946  less the taxes must be deemed to be distributed  among the  shareholders in the proportion of their  shareholdings, under  S. 23A of the Act, while for the account  year  1947, the  total world income less the taxes was deemed to  be  is tributed, the part proportionate to the income in Bhor State being  excluded, except for purposes of rate.  In  computing the  "  deemed dividends " the Income-tax  Officer  did  not deduct the interest charged to the company under s. 18A  (8) from  the  assessable income along with the  income-tax  and super-tax under S. 23A(1).  The company and the shareholders claimed  (1)  that para. 12 of the Merged  States  (Taxation Concessions)  Order, 1949, precluded the Income-tax  Officer from  making an order under S. 23A of the Act in respect  of the  profits and gains of the account years ending  December 31,  1946, and December 31, 1947, which were previous  years ending  before  August 1, 1949, and (2) that, in  any  case, interest  under s. 18A(8) ought to have been deducted  along with  the  income-tax before the  fictional  dividends  were computed.   A further contention was raised that  since  the dividends in question would be deemed to have been  declared in Bhor State and received there, unless another fiction was engrafted  upon  the  fiction created in  S.  23A  that  the dividends  must  be  deemed to have  been  received  in  the taxable territories, they could not be taxed in the hands of the shareholders.  The shareholders also claimed the benefit of  s-  14(2)(C)  in respect of the  entire  amount  of  the balance deemed to be distributed. Held:     (1)  that  the expression "any previous  year"  in para. 12 of the Merged States (Taxation Concessions)  Order, 1949,  did not refer to all the previous years prior to  and ending  before August 1, 1949, but meant only  one  previous year, which would be a previous year for the purposes of the assessment  year  194950, but which, to get  the  exemption, must end before the first day of August, 1949; (2)  that  the  force  of the fiction under S.  23A  of  the Indian Income-tax Act, 1922, which makes the dividends which ought  to  have  been  distributed  to  be  so  distributed, transcends all questions of accrual and receipt, and what is deemed to be distributed must also be deemed to have accrued and  received  by  the person to whom it  is  deemed  to  be distributed; (3)  that s. 14(2)(c) of the Act saves only that portion  of the   income  which  is  not  assessable  in   the   taxable territories by reason of its  accrual in the State and  does not affect the operation of S.     23A  on  the   assessable income of the company which, by reason of    the application of the Indian Income-tax Act even prior to the extension  of the Act to the State after merger, was assessable under  the Act 411 (4)  that  the wording of s. 18A(8) of the Act  under  which interest  is  recoverable along with the tax, does not  show that it is to be    treated as tax but retains its character as  interest, and since s. 23A speaks of deduction  only  of income-tax  and  supertax,  no deduction could  be  made  in respect of the interest under that section.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 158 to  164 of 1960. Appeals  from the judgment and order dated October 8,  1958, of the Bombay High Court in I.T.A. Nos. 7505, 7506, 5046  to 5048, 5149 and 5150 of 1956-57.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 10  

A.   V.  Viswanatha Sastri, S. N. Andley, J. B.  Dadachanji, Rameshwar Nath and P. L. Vohra, for the. appellants. R. Ganapathy Iyer and D. Gupta, for the respondent. 1961.  January 12.  The Judgment of the Court was  delivered by HIDAYATULLAH,  J.-These seven appeals have been filed  on  a certificate granted by the High Court of Bombay against  the judgment and order of the High Court dated October 8,  1958, in  a  case referred by the Income-tax  Appellate  Tribunal, Bombay. The first appellant is the Bhor Industries, Ltd., a  Company incorporated  in  1944  in the former Bhor  State  with  its registered office also situated in the town of Bhor.  It did the business of dyeing, printing and bleaching cloth,  cloth proofing,   etc.,  in  Bhor  State.   The   remaining   five appellants  are  the shareholders of  this  Company,  which, admittedly, was a private Company limited by shares, at  all material times.  We are concerned in these appeals with  the account  years of the Company, 1946 and 1947.  During  these years, the income of the Company was as follows:- Assessment     Total      Income accruing     Total World year           Income     or arising in the   Income (Sum                           Indian State of     of  2 & 3)                           Bhor. ---------------------------------------------------------- 1             2                 3                  4 ---------------------------------------------------------- 1947-48 Rs. 4,32,542      Rs. 2,24,542         Rs. 6,57,084 1948-49 Rs. 4,32$709      Rs. 3,47,416         Rs. 7,80,125 412 The  Company held its general meetings to declare  dividends at   Bhor   on  August  17,1947,  and   August   19,   1948, respectively.    For  the  account  years  1946   and   1947 respectively  it  declared a dividend of Rs.  2,580/and  Rs. 1,140/-. Bhor  State merged with the Province of Bombay by virtue  of the States Merger (Governors’ Provinces) Order, 1949,  which came  into  force on August 1, 1949.  By the  Taxation  Laws (Extension to Merged States and Amendment) Act, 1949,  which received the assent of the Governor-General on December  31, 1949,  the Indian Income-tax Act was extended to the  merged States  with  effect  from April 1,  1949.   That  Act  also introduced s. 60A in the Income-tax Act, by which power  was given to the Central Government, if it considered  necessary or  expedient so to do, to avoid any hardship or anomaly  or to  remove any difficulty in the application of the  Income- tax Act to merged States, to make a general or special order granting exemption, reduction in rate or other modification. Under  the  power  thus conferred,  the  Central  Government notified  the  Merged States (Taxation  Concessions)  Order, 1949. For  the assessment years 1947-48 and 1948-49  corresponding to  the  account years of the Company, 1946  and  1947,  the Income-tax  Officers assessed the Company  as  non-resident, and  held that the Company was not a public  Company  within the  meaning  of s. 23A of the Indian Income-tax  Act.   The Income-tax  Officer who passed the order for the  assessment year  1947-48 under s. 23A, held that the assessable  income in  British  India of the Company in 1946 minus  the  taxes, must  be deemed to be distributed among the shareholders  in the  proportion  of  their  shareholdings.   The   Incometax Officer  calculated the amount deemed to be  distributed  as follows: 413 1946 (assessment year 1947-48).

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 10  

    Total Income                  ...     Rs. 4,32,542      Taxes                         ...     Rs. 1,89,237                                            -------------      Amount available      for distribution                 ...  Rs. 2,43,305      as dividend      Dividend declared                 ... Rs.     2,580                                            --------------      Balance of the amount      available and deemed      to be distributed                ...   Rs. 2,40,725                                             ------------- For  the account year 1947, the Income-tax Officer took  the total  world income less the taxes as the  amount  available for distribution as dividend.  According to him, that amount was as follows: 1947 (assessment year 1948-49).      Total income                       ...  Rs. 4,32,709      Income in Bhor State               ...  Rs. 3,47,416                                              -------------   Total world income                     ...  Rs. 7,80,125      Taxes                               ...  Rs. 2,43,399                                               -------------      Amount available for      distribution as dividend            .... Rs. 5,36,726      Dividend declared                   .... Rs.1,140                                               ------------      Balance of the amount      available for distribution     ....  Rs.5,35,586                                               ------------ The  Income-tax  Officer  then  apportioned  it  among   the shareholders as on August 19, 1948.  This worked out at  Rs. 539.9  per share.  The Income-tax Officer then divided  this amount of Rs. 539.9 in the proportion the total income  bore to  the  income in Bhor State and taxed the  former  in  the hands of the shareholders, but the balance was included  and considered  for purposes of rate only.  The Tribunal in  the statement of the case illustrated this by citing the case of one  of the shareholders (Pushpakumar M. D.  Thackersey)  as follows:- 414               "The portion of Rs. 5,35,586 apportionable  to               his  90  shares at the rate of Rs.  539.9  per               share worked out at Rs. 50,211/-.  This amount               of  Rs.  50,21/was divided  into  two  smaller               amounts in the ratio already mentioned and the               amount  of Rs. 27,851/was actually brought  to                             tax   whereas  the  amount  of   Rs.   22,360/ -               attributable  to  Bhor  State  income  of  Rs.               3,47,416/-  was merely included in  the  total               income for rate purposes." In computing these " deemed dividends ", the two  Income-tax Officers did not deduct the interest charged to the  Company under  s.  18A(8),  from the assessable  income  along  with income-tax and super-tax under s. 23A(1). The  Company  as well as the shareholders  appealed  to  the Appellate  Assistant  Commissioner, but their  appeals  were unsuccessful.   Their further appeals to the  Tribunal  were also dismissed.  They raised the contentions that s. 23A was not  applicable  to  the Company,  that  the  deemed  income arising from a fictional distribution of the dividends could not be taxed in the hands of the shareholders because s. 23A did  not apply to them, and that they were protected by  the Concessions Order in the same way in which the Company  was.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 10  

They  also  raised the contention that in.  determining  the balance  of the amount available for distribution,  interest charged  under s. 18A(8) ought to have been  deducted.   All these  contentions were not accepted by the  Department  and the Tribunal. At  the  instance of the Company and the  shareholders,  the Tribunal drew up a statement of the case, and referred three questions  to  the  High  Court  for  its  decision.   These questions were as follows:               " 1. Whether paragraph 12 of the Merged States               (Taxation Concessions) Order, 1949,  precluded               the  Income-tax Officer from making  an  order               under Section 23A in the case of the  assessee               company in respect of its profits and gains of               the previous year ended 31st December, 1946 ?/                31st December, 1947 ?               415               2.    Whether in making an order under Section               23A in respect of the profits and gains of the               year  1946/1947 the assessable income of  that               previous year is to be reduced not only by the               amount  of incometax and super-tax payable  by               the company in respect thereof but also by the               amount of interest charged to it in accordance               with the provisions of Section 18A ?               3.    Having regard to the order passed by the               Income-tax   Officer  under  Section  23A   in               respect  of the Company’s profits of the  year               1947  and  having apportioned the sum  of  Rs.               17,641/-  to the shareholder, Pushpakumar,  as               his  proportionate share in  the  distribution               made  by the Income-tax Officer under  Section               23A  and  having regard to the  provisions  of               Section 14(2) (c), whether the said sum of Rs.               17,641/has been properly included in his total               income for the purpose of charging it to tax ?               " The  third  question  was a  typical  question,  as  similar questions also arose in the case of other shareholders  with variation  in the amount.  The amount of Rs.  17,641/-,  the Tribunal  stated,  replaced Rs. 50,211/in  view  of  certain directions given by the Tribunal.  The High Court framed one more  question  as  the second part of  question  No.  1  in disposing of the reference, which read as follows.:               "  Whether paragraph 12 of the  Merged  States               (Taxation Concessions) Order, 1949,  precluded               the  Income-tax Officer from making any  order               under Section 23A so as to affect the assessee               shareholders  in respect of their profits  and               gains for the assessment year 1949-50 ? The  High Court answered the first and second questions  and the  question  framed by it in the negative, and  the  third question,  in  the affirmative.  The  High  Court,  however, granted  a certificate under s. 66A of the  Income-tax  Act, and  the present appeals have been filed.   The  contentions raised  before  the High Court have been raised  before  us. The  Company questions the application of s. 23A to the  two assessment   years,   1947-48   and   1948-49,   while   the shareholders 416 question  the application of s. 23A to the Company and  also to  them in the assessment year, 1949-50.  Both the  Company and  the shareholders contend that interest under s.  18A(8) ought  to  have been deducted along with the  income-tax  to find out the available surplus.  The shareholders claim  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 10  

benefit  of s. 14(2) (c) in respect of the entire amount  of the balance deemed to be distributed. To begin with, one must remember that the Indian  Income-tax Act  was applied to Bhor State from April 1, 1949, and  that there was no income-tax law in force in Bhor State prior  to its  merger.   This  position also obtained  in  many  other Indian  States, which merged with the Provinces  in  British India.  The fact that income-tax is charged in an assessment year  on the income, profits or gains of the  previous  year would have made persons resident in merged States to pay tax on income which, but for the extension of the Indian Income- tax  Act, was either not liable to income-tax at all or  was liable  at  a  lesser  rate.  In  view  of  the  apprehended difficulties  and anomalies, the Extension Act  itself  gave power  to remove such anomalies and hardships.  Section  60A was added to the Income-tax Act, and it read as follows:               "  If  the  Central  Government  considers  it               necessary  or expedient so to do for  avoiding               any  hardship  or  anomaly,  or  removing  any               difficulty, that may arise as a result of  the               extension  of this Act to the  merged  States,               the  Central  Government may,  by  general  or               special order, make an exemption, reduction in               rate  or  other  modification  in  respect  of               income-tax  in favour of any class of  income,               or  in regard to the whole or any part of  the                             income    of   any   person   or    class    o f               persons......... " The  Concessions Order, 1949, was passed in  furtherance  of this power.  We are concerned only with paragraph 12 of  the Concessions  Order, 1949, which has been relied upon by  the Company  and the share. holders, who are  appellants  before US.   It is not necessary to refer to paragraphs 4, 5 and  6 to  which  passing  reference Was  made  in  the  arguments, because 417 they deal with income in an Indian State, which has not been taxed in these cases at all. Paragraph  12  provided for the application of s. 23A  to  a previous year ending on or after August 1, 1949, but not  to a  previous  year ending before August 1, 1949.  It  may  be quoted here:               "The  provisions of section 23A of the  Indian               Income-tax Act shall not be applied in respect               of the profits and gains of any previous  year               ending before 1st day of August, 1949,  unless               the    State   law   contains   a    provision               corresponding thereto." Reading the Extension Act, s. 60A and the Concessions Order, 1949, together, the following position emerges.  The  Indian Income-tax Act applied to and from the assessment year 1949- 50  (April 1, 1949 to March 31, 1950) in the merged  States. Corresponding   previous  years  were   comprehended.    The difficulty  which was likely to be felt was with respect  to the  fact  that  the  merger with  the  Province  of  Bombay operated  from August 1, 1949, and not from April  1,  1949. In  respect  of  the  exemption under s.  14  (2)  (c),  the position was preserved by applying paragraphs 5 and 6 to the exempted  income.  These two paragraphs made the State  rate applicable to that exempted income.     Similarly,  previous years ending after March 31,  1948,  were to be assessed  to Indian income-tax, but   the  excess of the tax computed  at Indian rates over the tax computed at State rates was to  be given away as rebate, and profits and gains of companies  of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 10  

any previous year ending before August 1, 1948, earned in an Indian  State were saved from s. 23A, unless there  was,  in the State, a provision corresponding to s. 23A.  It must  be remembered  that the Income-tax Officer in the present  case did  not  seek by his order under s. 23A to  distribute  the Bhor  State  income of the shareholders of  the  Company  as dividend;  he  restricted his order to  the  British  Indian income.  There was, in fact, in the State of Bhor no law  of Income-tax,  and no order taxing income which arose in  Bhor could be passed by the Income-tax Officer. 418 By the definition in s. 2(5A) of the Indian Incometax Act. a company formed in pursuance of an Act of an Indian State was a  company for the purposes of the Act, and it was  open  to the  Income-tax  Officer exercising powers under s.  23A  to declare  the  income of such a company accruing  or  arising within  the  taxable  territory  as  distributed  among  the shareholders.  The right of the Department to pass an  order under  s. 23A(1) of the Indian Income-tax Act was not  chal- lenged before the Tribunal, and it was not the subject of  a decision in the High Court.  The argument still has been, on behalf  of  the Company as well as  the  shareholders,  that paragraph 12 of the Concessions Order saved the profits  and gains, whether made in Bhor State or in British India,  from the   application  of  s.  23A,  and  that  indirectly   the shareholders were entitled to the same benefit. Paragraph  12 of the Concessions Order depends on whether  a company  was being assessed under the Indian Income-tax  Act in  respect of its profits and gains in an Indian State  for any  previous  year ending before the first day  of  August, 1949.   By  the application of the Indian Act to  an  Indian State, the income of a company in an Indian State was likely to  be taxed to Indian income-tax from the assessment  year, 1949-50.   For  the  earlier assessment  years  a  company’s income in the Indian State was exempt without the assistance of  the  Concessions Order.  The exemption  granted  by  the Concessions Order was to operate in respect of those profits and  gains  which, but for the exemption,  would  have  been included  in  the assessment year,  1949-50  and  subsequent years.   In so far as paragraph 12 of the Concessions  Order was concerned, it gave exemption in respect of action  under s. 23A to income of " any previous year " ending before  the first  day of August, 1949.  The date, August 1,  1949,  was chosen  because the merger with the Provinces took place  on that  date.   The  word " any " does not refer  to  all  the previous  years prior to and ending before August  1,  1949, but  to a previous year in relation to the assessment  year, 1949-50  and  ending before the first day of  August,  1949. The words 419 any  previous year mean, therefore, only one previous  year, which  would  be  a previous year for the  purposes  of  the assessment  year, 1949-50 but which, to get  the  exemption, must  end  before  the  first  day  of  August,  1949.   The exemption, therefore, did not apply to previous years  other than  the  one  described, and in  respect  of  the  earlier previous  years, paragraph 12 of the Concessions  Order  was hardly needed.  Otherwise, there would be no need to mention in  the paragraph the date on which the previous  year  must end. It  is  thus  quite clear that  paragraph  12  provided  for income, profits and gains of those previous years which were specially  mentioned and in respect of which anomalies  were likely  to arise by reason of the fact that the merger  took place  on  August  1, 1949, while  the  Income-tax  Act  was

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 10  

applied  from  April  1, 1949.  In view  of  the  fact  that specific terminii of previous years are expressly  mentioned in  the Concessions Order, it is not possible to accept  the argument  on behalf of the appellants that " all "  previous years  before  the  date  mentioned  were  comprehended   in paragraph  12.   The application of that paragraph  must  be limited  to  one  previous year only which  ended  prior  to August 1, 1949. The  previous years, with which we are concerned,  ended  on December 31, 1946, and December 31, 1947, respectively.   In the  case  of this Company, the previous  year  which  would answer the description in paragraph 12 would be the previous year  ending December 31, 1947.  To that previous year,  the provisions  of s. 23A were not applicable, and  the  profits and  gains  made  in Bhor State  would  be  protected.   The position which obtained in the assessment year 194748  would thus obtain also in the assessment year 1948-49 in so far as the Company was concerned, and its profits and gains in Bhor State could not be considered for purposes of application of s. 23A. The position was, however, different in regard to the income in  British  India  which formed the  total  income  of  the Company in the taxable territory.  It was not contended that the  assessable  income  of  the  Company  in  the   taxable territories would not attract 420 s.23A, if the distribution of dividends from that income was below  the mark set in s. 23A.  There is thus no  difference between  the  assessment years 194748 and 1948-49,  and  the method  of  calculation adopted in the first  year  is  also applicable to the second.  To this extent, the answer to the first question (first part) must be deemed to be modified in respect of the previous year ending December 31, 1947. It  is next contended that interest that was charged to  the Company  under s. 18A(8) ought to have been  deducted  along with  the  income-tax before the  fictional  dividends  were computed.  Section 18A(8) reads as follows:               "  Where, on making a regular assessment,  the               Income-tax  Officer finds that no  payment  of               tax  has  been  made in  accordance  with  the               foregoing provisions of the section,  interest               calculated  in  the manner laid down  in  sub-               section  (6)  shall  be added to  the  tax  as               determined    on   the   basis   of    regular               assessment." The words of the sub-section are clear to show that interest as  interest  is added to the tax as determined.   There  is nothing to show that it is to be treated as tax, and it thus retains  its character of interest but is recoverable  along with  the tax.  Indeed, s. 29 of the Income-tax Act makes  a distinction between tax, penalty and interest.  Since s. 23A speaks  of  deduction only of income-tax and  super-tax,  no deduction  could  be  made  in  respect  of  this  interest. Question  No.  2  was thus correctly answered  by  the  High Court. In  so far as the shareholders who were all resident in  the taxable  territories  were concerned, paragraph  12  of  the Concessions Order did not, in terms, protect them.   Section 23A enjoins that dividends to the extent of 60 per cent.  of the  assessable  income of the Company  after  deduction  of income-tax and super-tax must be paid.  When the  assessable income  of  the Company has been determined  and  after  the necessary  deductions have been made, if dividends  are  not distributed  in accordance with s. 23A, the fiction  applies to that portion of the profits and gains which were  taxable

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 10  

as assessable income of the Company in the 421 taxable  territories  and which ought to have been  so  dis- tributed.   Section 23A, as it was before the  amendment  in 1955,  mentioned 60 per cent. of the assessable income of  a company as reduced by the amount of income-tax and super-tax payable  by  a  company,  and  provided  further  that   the undistributed portion of the assessable income of a  company as   computed   and  reduced  shall,  subject   to   certain conditions, be deemed to have been distributed as  dividends amongst the shareholders. We  have already shown that the benefit of paragraph  12  is not available in respect of these fictional dividends, in so far  as the assessable income of the Company was  concerned. It  is,  however, contended that these  dividends  would  be deemed  to  be  declared  in Bhor State  and  to  have  been received there, and that unless another fiction is engrafted upon  the fiction created by s. 23A, these deemed  dividends cannot be taxed in the hands of the shareholders.  No doubt, the  section implies a fiction; but if the fiction is  given effect  to, such income must be deemed to be distributed  to the  shareholders,  and  the  fiction  thus  transcends  all questions of accrual or receipt in the taxable  territories. What  is  deemed to be distributed must be  deemed  to  have accrued and also received by the person to whom it is deemed to be distributed [See ss. 4(1)(a) and 4(1)(b)(i) and (ii)]. Paragraph  12 of the Concessions Order saved the Company  in respect  of  income in Bhor State for  the  assessment  year 194849  for  the corresponding previous year  ending  before August 1, 1949, but it did not save the operation of a.  23A in  respect of the assessable income of the Company  in  the taxable territories and the distribution of dividends to the shareholders from that income. In our opinion, the High Court was right in holding that the dividends  deemed  to  have  been  distributed  out  of  the Assessable income of the Company in the taxable  territories were’  rightly  assessable  in  the  total  income  of   the shareholders  resident  in  the  taxable  territories.    No question  has been referred on the method of calculation  of the dividends deemed to 422 have  been distributed, and we need, therefore,  express  no opinion on that part of the case. The shareholders (appellants 2 to 6) claim the benefit of  a 14(2)(o) of the Act, which provides:               "  14(2).  The tax shall not be payable by  an               assessee-               (c)   in  respect  of any income,  profits  or               gains  accruing  or arising to him  within  an               Indian  State, unless such income, profits  or               gains are received or deemed to be received in               or  are  brought  into British  India  in  the               previous year by or on behalf of the assessee,               or  are  assessable  under  Section  12-B   or               Section 42.  " We  have already shown that the force of the  fiction  makes the dividends which ought to have been distributed, to be so distributed.  We have also said that this fiction transcends all questions of accrual and receipt.  The effect of s.  23A is  to  make  dividends payable out of  the  British  Indian income to the shareholders.  Paragraph 4 of the  Concessions Order and s. 14(2)(c) saved for the shareholders the  income of the Company outside the taxable territories only, that is to say, the income earned in Bhor State.  They do not affect the  operation  of s. 23A on the assessable  income  of  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 10  

Company  which, by reason of the application of  the  Indian Income-tax  Act  even  prior  to  the  Extension  Act,   was assessable  under  the  Indian  Income-tax  Act.   Dividends payable  out of that portion of the income will  attract  s. 23A, and s. 14(2)(c) does not apply.  Section 14(2)(c) saves only that portion of the income which was not assessable  in the  taxable  territories by reason of its  accrual  in  the State.   The Income-tax Officer in assessing the  income  of the shareholders for the assessment year, 1949-50, ought  to have deducted the income which accrued in Bhor State,  while applying  s. 23A to them.  This he, in effect, did,  but  he adopted  a method on which no question has been raised,  and the correctness of the method cannot be examined. The  answer to question No. 1 is thus in the negative,  with the modification that s. 23A applied only to that 423 portion of the income which was earned in British India  and not in Bhor State.  The answer to the second question is  in the  negative.  The answer to the third question is  in  the affirmative.   The question posed and answered by  the  High Court  hardly  arises, in view of the answer  to  the  first questions  That question and the answer to it are set  aside as being not necessary. The  appeals thus fail except for a slight  modification  in the  answer  to  the first question,  and  subject  to  that modification,  are dismissed.  The appellants must bear  the costs of these appeals.  There shall be one hearing fee. Appeals dismissed.