1. This is a reference under s. 256(1) of the I.T. Act, 1961, made at the instance of the Commissioner. The question referred to us for our determination in this reference is as follows :
'Whether, on the facts and in the circumstances of the case, the order made by the Income-tax Officer under section 154 of the Income-tax Act, 1961, has been rightly vacated ?'
2. The facts giving rise to this reference are as follows : The assessee is a company in which the public are not substantially interested within the meaning of s. 23A of the Indian I.T. Act, 1922 (referred to hereinafter as 'the said Act'). The relevant assessment year is 1960-61. The total income of the assessee for the said assessment year was determined at Rs. 2,47,777 by the ITO's order dated May 8, 1963, giving effect to the AAC's order in appeal against the original assessment. The taxes payable by the assessee amounted to Rs. 1,11,500. The distributable surplus thus left was Rs. 1,36,277. The statutory percentage for declaration of dividend was 50 per cent. and on this basis the assessee-company should have distributed dividends amounting to Rs. 68,138. However, the actual amount distributed as dividend was Rs. 60,278 resulting in a shortfall of Rs. 7,860 in the dividend distribution according to the ITO. We may mention here that, although there is no specific statement to that effect in the statement of the case made by the Tribunal, the order of the ITO shows that a sum of Rs. 10,000 was added to the income of the assessee by the ITO as income from undisclosed sources. This amount of Rs. 10,000 represented the amount claimed by the assessee to be a loan taken on hundi by the assessee. The assessee failed to prove the correctness of this entry in its books of account nor did the alleged creditor come forward to give evidence and hence the amount was treated as the assessee's income from undisclosed sources. The ITO determined the total income of the assessee at Rs. 2,90,000 by his order dated 31st March, 1962. On an appeal by the assessee, certain additional educations were allowed by the AAC, but the addition of Rs. 10,000 by way of income from undisclosed sources was not disturbed. The order of the ITO, giving effect to the AAC's order shows that the total income of the assessee was determined at Rs. 2,47,777 as stated earlier. The ITO passed an order under s. 23A(1) of the said Act on March 30, 1963, holding that the case of the assessee was not covered by any of the exceptions provided under the said Act and, in particular, under s. 23A of the said Act and hence he passed the order levying additional super-tax at 37 per cent. on the shortfall of Rs. 7,860 in the distribution of the dividend under the provisions of s. 23A(1) of the said Act. He levied additional super-tax in the sum of Rs. 2,907 on the assessee. This order was dated 30th March, 1965. Thereafter, the ITO found that he had made a mistake in his said order dated March 30, 1965, in restricting the levy of additional super-tax to the said shortfall of Rs. 7,860 instead of the entire undistributed balance of Rs. 75,000 being the distributable surplus out of the total income. The ITO thereupon passed an order under s. 154 of the I.T. Act, 1961, on August 25, 1967, rectifying the original order and raising the demand of additional super-tax from Rs. 2,907 to Rs. 28,119. The assessee preferred an appeal against this order before the AAC, contending, inter alia, that as the original order passed under s. 23A(1) on March 30, 1965, was itself void ab initio and was invalid, the ITO had no jurisdiction to rectify the same under s. 154 of the I.T. Act, 1961. It was contended by the assessee that under the provisions of s. 23A of the said Act, as it stood at the material time, where a company had distributed the statutory percentage of dividend on the basis of the income shown in the returns, the ITO had to give the company an opportunity to declare a further dividend before taking further action under s. 23A(1) of the said Act. The AAC accepted this contention and held that undisputedly, no such opportunity was given to the assessee in this case, and, therefore, he accepted the contention of the assessee that the original order of the ITO under s. 23A(1) of the said Act suffered from a vital infirmity and was not liable to be rectified in the manner in which the ITO had sought to do. This conclusion of the AAC was upheld by the Income-tax Appellate Tribunal in an appeal preferred to it by the Revenue and it is from this decision of the Tribunal that the aforesaid question has been referred to us.
3. Before considering the submission advance before us, we propose to take note of the relevant provisions of law at this stage. Section 23 of the said Act deals with assessment. Section 23A deals with the power to assess companies to super-tax on the undistributed income in certain cases. The relevant portion of s. 23A(1) reads 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 previous 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 income, but excluding 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;....
the Income-tax Officer shall, unless he is satisfied - ....
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 income as reduced by the amounts, if any, referred to in clause (a), clause (b) or clause (c) and the dividends actually distributed, if any.
(2) No order under sub-section (1) shall be made, - .....
(iii) in any case where according to the return made by a company under section 22 it has distributed not less than the statutory percentage of its total income as reduced by the amounts, if any, aforesaid, but in the assessment made by the Income-tax Officer under section 23 a higher total income is arrived at and the difference in the total income does not arise out of the application of the proviso to section 13 or sub-section (4) of section 23 or the omission by the company to disclose its income fully and truly;
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 the statutory percentage of the total income of the company as reduced by the amounts, if any, aforesaid.'
4. Section 154 of the I.T. Act, 1961, deals with the power regarding rectification of mistakes and it corresponds to s. 35 of the said Act, namely, the Indian I.T. Act, 1922. It may be mentioned here that the assessee is not a company whose business consists wholly or mainly in the dealing in or holding of investments. It is again clear from the record, and the undisputed position is, that before passing the order under s. 23A of the said Act, the ITO did not issue any notice to the assessee that he proposed to make such an order as contemplated by s. 23A of the said Act.
5. Mr. Joshi, the learned counsel for the Commissioner, made a two-fold submission before us. His first submission was that, in the present case, the order of the ITO under s. 23A(1) made on March 30, 1965, levying additional super-tax in respect of the shortfall of Rs. 7,860 by way of dividend distribution, had not been appealed against by the assessee and the said order had become final. It was submitted by him that in view of this, it must be assumed that the said order is a valid order and the ITO was perfectly entitled to rectify the same under s. 154 of the I.T. Act 1961, as, according to him, the said order disclosed the errors on the face of it. The second submission of Mr. Joshi was that, in the present case, the assessee was not entitled to a notice as contemplated by sub-s. (2) of s. 23A of the said Act, as the assessee had omitted to disclose its income fully and truly in the returns filed by it. It was submitted by him that as the amount of Rs. 10,000 had been added to the income of the assessee by the ITO as income from undisclosed sources, in the circumstances set out hereinbefore and the said addition had not been disturbed by the AAC, the only conclusion could be that the assessee had not disclosed the true income in the return; and hence the assessee was not entitled to the notice contemplated under sub-s. (2) of s. 23A of the said Act.
6. As far as the first submission of Mr. Joshi is concerned, we find that the same stands negatived by the decision of the Supreme Court in ITO v. Arvind N. Mafatlal : 45ITR271(SC) . In that case, a private company was assessed to income-tax and super-tax, but as it has not distributed any part of its income as dividend, the ITO took action under s. 23A of the said Act and sought to assessee A, B & C who were the shareholders in respect of the undistributed income of the company. The real owner of the shares held by A, B & C was a registered firm of which A, B & C and D were partners. The ITO treated the dividend attributable to the shares held by A, B and C as the dividend income of the firm and proceeded to apportion the said income among the four partners of the firm after giving credit for the tax paid by the company and added this to their individual incomes. In doing so, he failed to gross up the dividend and he proceeded subsequently in exercise of his power to rectify the error under s. 35 of the Indian I.T. Act, 1922, and to readjust the dividends to be added to the income of A, B and C after grossing up. This order was quashed by this court under s. 35. On an appeal to the Supreme Court, it was held that, (i) the procedure adopted by the ITO was erroneous as only the registered shareholders were entitled to the benefit of the credit for the tax paid by the company; (ii) the power of the ITO under s. 35 could be exercised only to rectify errors and not to make readjustments in the errors committed which he intends to perpetuate and the proceedings under s. 35 were rightly quashed by the High Court. We find that the ratio of this decision in applicable to the case before us. If a notice as contemplated under sub-s. (2) of s. 23A was required to be given to the assessee, before passing the order for the levy of additional super-tax on the undistributed amount, it is clear that the order of March 30, 1965, passed by the ITO, levying additional super-tax on the said sum of Rs. 7,860, was bad in law and the result of allowing the ITO to rectify the said order by increasing the amount on which super-tax was to be levied, would allow him to perpetuate the error. In fact, such an order would aggravate the effect of the error by causing greater prejudice to the assessee. In view of this, the first submission of Mr. Joshi must stand rejected.
7. We come next to the question as to whether the assessee was entitled to a notice as contemplated under sub-s. (2) of s. 23A of the said Act. In this regard, we have already pointed out that the order of assessment made by the ITO clearly shows that the case of the assessee that the he had taken a hundi loan of Rs. 10,000 from one Kanhaiyalal Hirachand has been disbelieved as the assessee failed to prove the correctness of the entry made in its books in respect of this loan and the said amount was treated by the ITO as the assessee's income from undisclosed sources. This addition has not been disturbed by the AAC on an appeal preferred by the assessee. It will, therefore, have to be considered as to whether, in these circumstances, it could be said that the assessee had omitted to disclose its income fully and truly, as contemplated under cl. (iii) of sub-s. (2) of s. 23A of the said Act. If that was the case, the assessee would not be entitled to the benefit of the notice contemplated under the said sub-section. Now, we find that this question, although it clearly arose on the records, has not been considered by the Tribunal at all. It appears that both the AAC and the Tribunal proceeded on the assumption that the assessee was entitled to the notice contemplated under sub-s. (2) of s. 23A of the said Act, it being the admitted position that no such notice had been given by the ITO to the assessee. It was clearly erroneous on the part of the Tribunal as well as by the AAC to have assumed this. The question as to whether the assessee was entitled to such a notice, in view of the allegation of non-disclosure of its total income, clearly arose on the record of the case. In fact, the Tribunal had decided the case in favour of the assessee, on the ground that the assessee was not given notices as aforesaid and, in view of this it was the duty of the Tribunal to investigate whether, on the facts of the case, the assessee was entitled to such a notice and whether, on the facts and in the circumstances of the case, it could be said that the assessee had omitted to disclose its income fully and truly. It was submitted by Mr. Dastur, the learned counsel for the assessee, that it is not open to the Revenue to raise this contention at this stage at all because this contention does not arise from the order of the Tribunal as it does not appear to have been specifically raised before it. It was further urged by him that at the stage of the drawing of the statement of the case, the Commissioner had specifically sought to raise the question as to whether, on the facts and in the circumstances of the case, the assessee was entitled to a further opportunity under s. 23A(2)(ii) and (iii) of the said Act and the Tribunal had declined to raise this question, holding that only the question referred arose for consideration on the facts found by the Tribunal. It was pointed out by Mr. Dastur that the Commissioner had even sought to raise this question by way of a notice of motion taken out in this court, which was dismissed by a Division Bench of this court, comprising Desai and Rege JJ., on the ground that neither the said motion nor the reference had been served on the assessee. This submission of Mr. Dastur cannot be accepted. In the first place, as pointed out above, the question as to whether the assessee was entitled to a notice or an opportunity by way thereof under s. 23A(2) of the said Act, clearly arose on the record of the case and the question referred to us is wide enough to cover this controversy. In view of this, we fail to see how the Revenue can be precluded from raising this contention. In our view, it will be for the Tribunal to determine this question when the matter goes back to the Tribunal.
8. In the result, we answer the question referred to us as follows :
In the event of the Tribunal that the assessee was entitled to a notice as contemplated under sub-s. (2) of s. 23A of the said Act, the order made by the ITO under s. 154 of the said Act, namely, the I.T. Act, 1961, has been rightly vacated. If however, the Tribunal finds that the assessee was not entitled to such notice as set out earlier, then the order made by the ITO under s. 154 of the said Act was not properly vacated.
9. Looking to all the facts and circumstances of the case, there will be no orders as to costs of this reference.