1. This is a reference under sub-section (1) of section 66 of the Act and the question referred to us is in the following terms :
'Whether, on the facts and in the circumstances of the case, the 'deemed dividends' of Rs. 4,04,071 and Rs. 3,42,687 were taxable as income of the previous years relevant to assessment years 1953-54 and 1954-55 respectively ?'
2. It is necessary to state that counsel for parties agreed that a mistake has crept in the print and the mistake is that for the year 1954-55 the year 1957-58 has been wrongly printed. Obviously, this appears to be a mistake because had the assessment year been 1957-58 altogether a different nature of the order would have been made in view of the amendment of section 23A of the Act in the year 1955. Facts for both years, except the quantum of deemed dividends, are the same. The Tribunal has, therefore, stated the facts of only one assessment year 1953-54, which gives rise to an identical question for both the years. Facts for 1953-54 in brief are :
3. The assessee is a private limited company. Assessee company was a registered shareholder of another company, Messrs. Gannon Dunkerley & Co. Ltd., holding 32,360 shares in the relevant year. Messrs. Gannon Dunkerley & Co. Ltd. was not a company in which the public was substantially interested within the meaning of section 23A of the Indian Income-tax Act as it then stood, and it appears that three under section 23A were made against Messrs. Gannon Dunkerley & Co. Ltd. under which certain sums were deemed to have been declared and distributed amongst its shareholders as at the respective dates of the meetings of those three years. The first order had the effect of certain amounts being deemed to have been distributed as dividends amongst its shareholders as on December 23, 1949, the date of the respective general meetings. As a result of this order under section 23A, a sum of Rs. 4,57,612 was deemed to have been received as dividends by the assessee company. Now, the previous year opted by the assessee is one ending with the 30th November of each year. The aforesaid amount of deemed dividend of Rs. 4,57,612 was included in the income of the assessee for the accounting year ended 30th November, 1950, the relevant assessment year therefore being 1951-52. The assessee did not raise any objection to the inclusion of the said amount of Rs. 4,57,612 in that year but acquiesced in it. The second order made by the Income-tax Officer against Messrs. Gannon Dunkerley & Co. Ltd. under section 23A of the Act had the effect of certain amounts being deemed to have been distributed amongst its shareholders as the date of the relevant general meeting held on 29th December, 1951. The amount apportionable to the shareholdings of the assessee company thereof amounted to Rs. 4,04,071. The said amount of deemed dividend deemed to have been received by the assessee was sought to be included by the Income-tax Officer in the income of the assessee company for the accounting year ended on 30th November, 1952. The assessee, however, raised a contention that the said amount could not be included in the income relevant for the assessment year 1953-54 but ought to have been included in the assessment year 1952-53. Similar, except the dates and quantum, were also the facts relating to the third order made by the Income-tax Officer. The dates, however, are not stand in the statement of the case. The contention raised by the assessee before the Income-tax Officer in substance was that the year opted by the assessee was not relevant for the purpose of 'deemed dividend', it being altogether a new source of income. The relevant previous year for the purpose of deemed income, according to the assessee, was not the previous year opted by him but the financial year in which the dividend is deemed to have been distributed amongst the shareholders, as a result of the order made under section 23A of the Act. This contention of the assessee was not accepted either by the Income-tax Officer or by the Appellate Assistant Commissioner. In the appeal before the Income-tax Appellate Tribunal, the assessee raised three contentions : (1) that the deemed dividend, if at all taxable in the hands of the assessee, could only be taxed in the assessment year 1952-53 since the deemed dividends were declared on 29th December, 1951; (2) that the source of deemed dividend and that of dividend is not the same and as such when no books of account were ever made nor any option referred to in section 2(11) (i) (a) was exercised by the assessee in respect of deemed dividends, the statutory previous year, i.e., the financial year alone, could be the previous year for assessing the said deemed dividends and (3) assuming that if both the dividends and the deemed dividends were income from the same source, since the assessee had not made up its books of accounts in the relevant previous year for the sources that yielded income of deemed dividends, the statutory previous year only could be taken as the relevant previous year. The Tribunal did not accept any of these three contentions raised by the assessee before it and dismissed the appeal. On an application made by the assessee under sub-section (1) of section 66 the aforesaid question has been referred to this court.
4. Mr. Mehta appearing for the assessee has again reiterated these contentions. In support of his argument he has referred us to the definition of the expression 'previous year' contained in sub-section (11) of section 2 of the Act. Sub-section (2) of section 16 relates to the computations of income. The said provision to which our attention was drawn is in the following terms :
'16. (2) For the purposes of inclusion in the total income of an assessee, any dividend shall be deemed to be income of the previous year in which it is paid, credited or distributed or deemed to have been paid, credited or distributed to him, and shall be increased to such amount as would, if income-tax (but not super-tax) at the rate applicable to the total income of the company (without taking into account any rebate allowed or additional income-tax charged) for the financial year in which the dividend is paid, credited or distributed or deemed to have been paid, credited or distributed.....'
'Previous year' has been defined in section 2 (11) of the Act and the material part thereof is in the following terms :
'2. In this Act, unless there is anything repugnant in the subject or context :...
(11) 'Previous year' means -
(a) the twelve months ending on the 31st day of March next preceding the year for which the assessment is to be made, or if the accounts of the assessee have been made up a date within the said twelve months in respect of a year ending on any date other than the said 31st day of March, then, at the option of the assessee, the year ending on the date to which his accounts have been so made up :
Provided that where in respect of a particular source of income, profits and gains and assessee has once been assessed, or where in respect of a business, profession or vacation newly set up an assessee has exercised the option under sub-clause (c), he shall not, in respect of that source or, as the case may be, business, profession or vocation, exercise the option given by this sub-clause so as to vary the meaning of the expression 'previous year' as then applicable to him except with the consent of the Income-tax Officer and upon such conditions as the Income-tax Officer may think fit to impose.'
5. Mr. Mehta contends that the notional income from the deemed dividend, which had never been received by the assessee, is a source distinct and separate from the different sources from which the assessee received the income. No books of account have been maintained by the assessee in respect of that income : in fact the assessee could never have maintained any books of account in respect of the notional income, which he has not received. Assessee also has not exercised the option in respect of the alleged notional income. In these circumstances, the assessee could only have been assessed in respect of the deemed notional income in the statutory year, viz., the financial year ending with the 31st of March, 1952. We find it difficult to accept these contentions raised by Mr. Mehta. The first question that arises for consideration is whether the source from which this notional income is deemed to have been derived by the assessee is different from the other sources of the assessee's income. In our view, the source of this notional income is not a distinct and a separate source from the sources of dividends by Messrs. Gannon Dunkerley & Co. Ltd. The various elements that give rise to this income are the ownership of the shares held by the assessee, the earning of profits by Messrs Gannon Dunkerley & Co. and the declaration of dividends by Messrs. Gannon Dunkerley & Co. Ltd. These three very factors give rise to this notional income also. Now, under section 23A, an order is made only when the profits in a commercial sense have been made by a company. They are made under certain circumstances mentioned in the section. It is true that in fact no dividend in respect of this notional distribution has been made by the company, but the legislature by a legislature by a legal fiction created deems it to have been distributed on the making of the order. It has, therefore, to be assumed that a declaration of the dividend has been made by the company, and it is when such a legal fiction comes into existence that deemed dividend is taxable in the hands of the shareholders in proportion to their shareholding. These being the circumstances, it is difficult to hold that the source of notional income by way of deemed distribution of dividend is different from the sources from which income is derived from dividends declared in the normal way.
6. Assuming for a moment that a different view is possible and the source of such notional income is different than the sources from which income is received when dividends are declared in a normal way, in our view, the proviso to clause (a) of sub-section (11) of section 2 comes in the way of the assessee. According to the definition contained in clause (a) of sub-section (11) of section 2 'previous year' is the period of twelve months ending with 31st of March next preceding the year for which the assessment is to be made. This is, however, subject to the option given to the assessee in the latter part of clause (a) and the latter part provides that in respect of this statutory previous year the assessee could at his apportion select another period of twelve months as his previous year by making up his books of account for any other period of twelve months. It would thus be seen that the previous year contemplated by clause (a) is either the period of twelve months ending with 31st of March or any other period of twelve months opted by the assessee. To this normal method of accounting the previous year, there are two exceptions. We are here concerned with only one of them and that exception is that where in respect of a particular source of income an assessee has once been assessed on a particular footing, then he is not allowed in respect of that source of income to exercise the option given in sub-clause (a) so as to vary the meaning of the expression 'previous year', as then applicable to him except with the consent of the Income-tax Officer and upon such conditions as the Income-tax Officer thinks fit to impose. It would also be seen that the aforesaid exception provided in the proviso appears to be founded on the acquiescence on the part of the assessee in allowing himself to be taxed in respect of any particular source of income on an assumption that his previous year in respect of that income was the one on the basis of which he has been assessed.
7. Now, in the instant case the assessee has been assessed to income-tax in respect of the notional dividend income deemed to have been distributed to him in the assessment year 1951-52, and that assessment had been made on a footing that his previous year in respect of that income ended on 30th November, 1951. It is, therefore, clear that the assessee has acquiesced in that in respect of the notional dividend income deemed to have been received by him by reason of an order made under section 23A on Messrs. Gannon Dunkerley & Co. Ltd., the previous year is one ending with 30th November of the respective years, which was the year opted by him in respect of other sources of income. It has not been shown that any application was made by the assessee to the Income-tax Officer for permission to change that year. These being the facts of this case, in our opinion, the case of the assessee is taken out of the main clause and it is not open to the assessee to contend that in respect of the aforesaid sum of Rs. 4,04,071 the relevant assessment year was 1952-53 and not 1953-54. Similar also is the case in respect of the other item of income of Rs. 3,42,687.
8. For reasons stated above, our answer to the question stated is in the affirmative. The assessee shall pay the costs of the Commissioner.
9. Question answered in the affirmative.