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Commissioner of Income-tax Bombay, City Ii Vs. Homi Mehta and Sons Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 49 of 1959
Judge
Reported in[1962]46ITR1135(Bom)
ActsIncome Tax Act, 1922 - Sections 23A and 23A(1)
AppellantCommissioner of Income-tax Bombay, City Ii
RespondentHomi Mehta and Sons Ltd.
Appellant AdvocateG.N. Joshi, Adv.
Respondent AdvocateR.J. Kolah, Adv.
Excerpt:
direct taxation - assessable income - sections 14 (2) (c) and 23a of income tax act, 1922 - assessee was company having registered office in bombay - whether income received from baroda state assessable income under section 23a - in terms of section 23a income on which tax is payable to be regarded as assessable income - impugned income exempt by virtue of section 14 (2) (c) - impugned income not assessable. - - the material part of sub-section (1) of section 23a 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......head office in bombay and a branch office at billimora, a place in the then state of baroda. the total income of the company for the year 1947-48 amounted to rs. 18,77,245. this sum included the income of the company from its branch at billimora, which amounted to a sum of rs. 9,81,234. this income from its branch at billimora was not brought by the company to british india. consequently, no tax was payable by the company in respect of the said income of the billimora branch in view of the provisions of clause (c) of sub section (2) of section 14 of the act as it then stood. the total dividends distributed by the company in that year amounted to rs. 3,90,000. 2. the income-tax officer issued a notice under sub section (1) of section 23a calling upon the assessee company to show cause.....
Judgment:

Tambe, J.

1. This is a reference under sub-section (1) of section 66 of the Indian Income-tax Act (hereinafter referred to as the Act). We are here concerned with the assessment years 1947-48 and 1948-49, the accounting years being the calendar years 1946 and 1947. The facts in relation to the cases of assessments of both these years are identical, the only difference being the difference in amounts. The question involved also is identical. It would, therefore, be sufficient to give the figures of one year and we propose to give the figures for the assessment year 1947-48 in order to appreciate the contentions raised. The assessee is a company in which the public are substantially not interested within the meaning of the Explanation to section 23A(1) of the Act. The company has its head office in Bombay and a branch office at Billimora, a place in the then State of Baroda. The total income of the company for the year 1947-48 amounted to Rs. 18,77,245. This sum included the income of the company from its branch at Billimora, which amounted to a sum of Rs. 9,81,234. This income from its branch at Billimora was not brought by the company to British India. Consequently, no tax was payable by the company in respect of the said income of the Billimora branch in view of the provisions of clause (c) of sub section (2) of section 14 of the Act as it then stood. The total dividends distributed by the company in that year amounted to Rs. 3,90,000.

2. The Income-tax Officer issued a notice under sub section (1) of section 23A calling upon the assessee company to show cause why those provisions should not be made applicable to the company. According to the Income-tax Officer, 60 per cent. of the total income as reduced by taxes payable for that year amounted to Rs. 9,19,797. The dividends distributed amounted only to Rs. 3,90,000, which was less than 60 per cent. of its assessable income and, therefore, the provisions of subsection (1) of section 23A of the Act were attracted. On receipt of the notice the assessee contended that sub section (1) of section 23A had no application to his case. According to the assessee, the assessable income within the meaning of that sub-section was only Rs. 8,95,921 (total income Rs. 18,77,245 minus Rs. 9,81,324, income from the branch at Billimora, in respect of which no tax was payable). On the said assessable income of Rs. 8,95,921 the amount of income-tax and super tax payable amounted to Rs. 3,44,350 and the resulting balance was Rs. 5,55,671. Sixty per cent, of the said amount came to Rs. 3,31,002; the dividends declared and paid by the assessee amounted to Rs. 3,90,000. The assessee thus contended that it had distributed more than 60 per cent. of its assessable income by way of dividends and, therefore, it had committed no breach of the provisions of sub-section (1) of section 23A of the Act. The contentions raised by the assessee were not accepted by the Income-tax Officer. In his opinion, the expression 'assessable income' used in section 23A(1) cannot be taken to mean, 'income liable to tax'. It simply means income which is within the ambit of the Income-tax Act. The assessable income means 'all income within the ambit of the Income-tax Act, including a portion thereof, which may be exempt from payment of tax under section 14(2)(c) of the Act. This view of the Income-tax Officer was affirmed by the Appellate Assistant Commissioner in appeal. The assessee took a second appeal to the Tribunal and the Tribunal accepted the contentions of the assessee and allowed the appeal. The Tribunal held that the words 'assessable income' can only mean income of the company, which is chargeable to tax under the Act. The expression 'assessable income' cannot be equated with the expression 'total income'. In this view of the matter, the Tribunal allowed the appeal of the assessee. On an application made by the Commissioner of Income-tax under sub-section (1) of section 66 of the Act, the Tribunal drew up a statement of the case and has referred the following question of law to this court :

'Whether, on the facts and circumstances of the cases, the Income-tax Officer was right in taking into account income arising to the assessee company from the Baroda State and which was exempt from taxation under section 14(2)(c) for the purposes of passing order under section 23A dated March 28, 1953, for the assessment year 1947-48 and order dated March 17, 1954, for the assessment year 1948-49 ?'

3. It is not in dispute that if the expression 'assessable income of the company' occurring in sub-section (1) of section 23A of the Act means the total income of the company, then the answer to the question will have to be in favour of the revenue. On the other hand, if the said expression means income on which, under the provisions of the Act, tax can be levied, then the answer will have to be in favour of the assessee. It is, therefore, to be seen what is the true import of that expression as occurring in sub-section (1) of section 23A. The material part of sub-section (1) of section 23A 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... are less than 60 per cent. of the assessable income of the company of that previous year, as reduced by the amount of income-tax and super-tax payable by the company in respect thereof he shall.. make ...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-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.' (Under lining is by us).

4. We will also reproduce sub-section (5) of the said section because an argument has been advanced by Mr. Joshi on the basis of the provisions of that sub-section. Sub-section (5) reads as follows :

'(5) When a company is a shareholder deemed under sub-section (1) to have received a dividend, the amount of the dividend thus deemed to have been paid to it shall be deemed to be part of its total income for the purpose also of the application of that sub-section to distribution of profits by that company.'

5. Mr. Joshi contends that the expression 'assessable income' used in the sub-section means the total income of the company and that the two expressions 'total income' and 'assessable income' made one and the same thing. In support of his contention the placed reliance on sub-section (5) of section 23A, which provides that the dividend which is deemed to have been distributed under sub-section (1) of section 23A shall be deemed to be part of the total income of a shareholder company for the purpose of application of sub-section (1) of that section to distribution of profits by that company. He also refereed to sections 3, 4, 17, 22 and 23 of the Act and the decisions in (Phaltan Sugar Works Ltd. v. Commissioner Income-tax, Ezra Proprietary Estates Ltd. v. Commissioner of Income-tax, Juggilal Kamlapat Cotton Spinning & Weaving Co. Ltd. v. Commissioner of Income-tax and Indra Singh & Sons Ltd. v. Commissioner of Income-tax. It must also be said in fairness to Mr. Joshi that he also pointed out to us the provisions of sub-sections (4) and (5) of section 15C of the Act, which are likely to run counter to the proposition contended for by him.

6. We find it difficult to accept the contentions raised by Mr. Joshi. The Act defines 'income', 'total income' and 'total world income'. The expression 'assessable income', however, is not defined. The primary meaning of the word 'assess' as given in Webster's Dictionary is to fix or determine the rate or amount of tax; to determine and impose a tax or fine upon a person, community, estate or income. In the Oxford Dictionary 'to fix the amount of tax or fine to be paid by a person or community; to determine the amount of and impose upon; to impose a fine or tax upon a person or community'. The primary meaning thus of the word 'assess' is to determine the amount of tax payable. The expression 'assessable income' would, therefore, primarily mean income on which the tax is payable. The words 'assess' and 'assessment', however, in the Income-tax Act have been used in different senses. As observed by their Lordships of the Privy Council in Commissioner of Income-tax v. Khemchand Ramdas :

'The word 'assessment' is used in Income-tax Acts as meaning sometimes the computation of income, sometimes the determination of the amount of tax payable, and sometimes the procedure laid down in the Act for imposing liability upon the taxpayer.'

7. It has to be seen in what sense the expression 'assessable income' is used in sub-section (1) of section 23A of the Act. Now, in that sub-section the expression 'assessable income' is qualified by the clause 'as reduced by the amount of income-tax and super-tax payable in respect thereof'. It has to be noticed that the clause does not say 'if payable'. On the other hand it says 'payable.' This qualifying clause to the expression 'assessable income', therefore, indicates that the assessable income referred to in the said sub-section is an income in respect of which tax is payable. In other words, the income is such on which tax can be levied. Reading this sub-section (1) in juxtaposition with the provisions of clause (c) of section 14(2), as it then stood, it leaves no doubt that the income exempted under clause (c) of sub-section (2) of section 14 from tax cannot enter the assessable income within the meaning of sub-section (1) of section 23A of the Act. That clause reads as follows :

'14. Exemptions of a general nature. -

(1).....

(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 a Part B state unless such income, profits or gains are received or deemed to be received in or are brought into the taxable territories in the previous year by or on behalf of the assessee, or are assessable under section 12B or section 42.'

8. Now this clause in express terms provides that tax shall not be payable in respect of the income falling within the meaning of clause (c) and sub-section (1) of section 14. Section 23A in express terms mentions that for purposes of ascertaining the question as to whether the dividends distributed are less that 60% of the assessable income, the assessable income is to be reduced by the amount of income-tax and super-tax payable in respect thereof. It is admitted position that the income derived by the assessee from its branch at Billimora in Baroda State in the assessment year 1947-48 amounted to Rs. 8,95,921. It is also not in dispute that the said income fell within clause (c) of sub-section (2) of section 14 of the Act and, therefore, no tax was payable in respect of the said income. That being the position, in our opinion, it is clear that the said income cannot be taken into account as assessable income for the purposes of making an order under section 23A of the Act.

9. It is next to be seen whether the other provisions, to which Mr. Joshi referred us, in any manner affect the construction, which we have put on sub-section (1) of section 23A of the Act. As already stated, Mr. Joshi had laid great emphasis on the concluding portion of sub-section (5) of this section, viz. :

'... it shall be deemed to be part of its total income for the purpose also of the application of that sub-section to distributions of profits by that company',

and had argued that the expressions 'total income' and 'assessable income' have been used in one and the same sense. We are unable to infer from the said concluding clause that these two expressions have been used in one and the same sense. The provisions of the Income-tax Act, and it is not necessary to refer to them in detail at this stage, show that tax may not be payable in respect of the entire total income of an assessee in certain cases. Certain classes of income, though they form part of the total income, are exempted from payment of tax, for instance, classes of income mentioned in sections 14, 15, 15A, 15B and 15C. Yet the rate at which the tax is payable is determined with reference to the total income. The inclusion of particular incomes in the total income, therefore, would not necessarily lead to the conclusion of including it in an income that is taxable; in other words, income on which tax could be levied. The provisions of sub-section (5), in our opinion, therefore, do not lead to an inference that these two expression have been used in one and the same sense in the section. On the other hand, in sub-section (1) itself both these expressions have been used and that further indicates that they have been used in different senses. Had the legislature intended to use both the expressions in one and the same sense, it would not be unreasonable to assume that the legislature would have throughout used either the expression 'assessable income' or 'total income' in sub-section (1) itself.

10. Referring to section 3, Mr. Joshi pointed out that the tax is payable in respect of 'total income'. Referring to section 4, Mr. Joshi said that the manner in which the total income is to be computed is mentioned in the said section. Referring to sections 22 and 23, Mr. Joshi pointed out that the assessee is required to deliver a return of its total income and the Income-tax Officer is enjoined with a duty to assess the total income of the assessee and determine the sum payable by him on the basis either of the return filed by the assessee, if it is accepted, or on the basis of the assessment of the total income otherwise made by the Income-tax Officer. Referring to the provisions of sub-sections (2), (3) and (4) of section 17, Mr. Joshi pointed out the procedure followed in the matter of determination of tax payable by the assessee. These provisions, in short, point out that though a particular class of income is exempt from payment of the tax in respect thereof, it will nevertheless be included in the total income for the purposes of determination of the rate at which the tax is payable. Now, the income exempted from tax under section 14(2)(c) can be brought to tax in the year it is brought into the taxable territory. In that year it would again be taken into account. Sub-section (4) of section 17 provides relief to the assessee in such cases. Relying on all the provisions of these various sections, Mr. Joshi argued that the income exempted under section 14(2)(c) has to be taken into account for the purpose of assessment of the total income; it thus enters assessment and is therefore, 'assessable income'.

11. It true that the expression 'assessable income' is capable of being construed as income liable to be assessed in determining the total income. But, as already stated, the expression has been used in different senses in different sections in the Act. In such a case, therefore, the context in which that expression has been used has to be kept in view to ascertain its true meaning in that particular section. The qualifying clause 'as reduced by the amount of income-tax and super-tax payable in respect thereof' leaves no doubt that the expression 'assessable income' used in sub-section (1) of section 23A means income in respect of which tax is payable. The sections on which reliance is placed by Mr. Joshi are, therefore, hardly of any assistance in construing the expression 'assessable income' occurring in sub-section (1) of section 23A of the Act. The decisions on which reliance is placed by Mr. Joshi also do not take the department's case any further.

12. In Phaltan Sugar Works Ltd. v. Commissioner of Income-tax, the assessee was a private limited company incorporated in the Phaltan State. It may be mentioned that the Ruler of that State had made the provisions of the Indian Income-tax Act applicable to the State. Under an agreement entered into between the assessee company and the Ruler of the Phaltan State, the State had agreed to exempt the company from payment of income-tax in respect of its sugar factory for a period of ten years from the date of the regular manufacturing of sugar and after the expiry of the said period of ten years to levy income-tax at a rate not exceeding one anno in a rupees on the net profits of the sugar factory. As the company did not distribute any part of its profits by way of dividends to its shareholders in the year ending 30th September, 1938, action was taken under section 23A(1) of the Act and an order was made that all assessable profits of the company should be deemed to have been distributed amongst the shareholders of the company. The question arose whether the company had committed a breach of the provisions of section 23A of the Act. The argument advanced on behalf of the assessee was that as the Ruler of the Phaltan State has under an agreement exempted the assessee company from payment of tax in respect of its profits, those profits were not assessable income within the meaning of the section and, therefore, the provisions of sub-section (1) of section 23A were not attracted to the facts of the case and, consequently, there was no breach of that sub-section. This contention was negatived on the ground that the exemption granted by the Ruler in the matter of payment of tax did not mean that the income of the company was not assessable to tax. It is to be noticed that the income in the case was assessable to tax but for the agreement between the assessee company and the State. This decision is therefore not an authority for the proposition that the income exempted from tax under the provisions of the Act itself is assessable income within the meaning of sub-section (1) of section 23A of the Act.

13. In Juggilal Kamlapat Cotton Spinning & Weaving Co. Ltd. v. Commissioner of Income-tax, the question raised was whether the assessable income means the income which the company considered to be its assessable income and treated it as such in its balance-sheet and accounts or it means the assessable income as determined by the Income-tax Officer. It was held that 'assessable income' means income determined by the Income-tax Officer as assessable to income-tax under the Act and not the income which the company considered to be its assessable income and treated it as such in its balance sheet and accounts. We are not here concerned with any such question. The decision does not say that the assessable income means the total income of an assessee. From the other two decisions Mr. Joshi referred us to certain observations of the learned judges relating to the purpose for which section 23A was enacted. The observations in short are that the sub-section aims at preventing companies from distributing too little of their profits. It had been found that the companies frequently made large profits but distributed very little. The undistributed profits were accumulated and distributed by way of bonus shares. To prevent this, this section was enacted and by the terms of sub-section (1) of section 23A, if the company had not distributed a reasonable amount of its profits to its shareholders, then the undistributed portion of the profits would be deemed to be distributed and the shareholders would be assessed as if they had received not only the dividends declared but their shares in the profits which are deemed to have been distributed. It is the argument of Mr. Joshi that as the section aims at preventing companies from distributing too little of their profits, the expression 'assessable income' must be given a wider meaning, viz., 'total income'. The object of the legislation can hardly be taken into consideration in construing a section. Mere intention on the part of the legislature is not sufficient to fasten a liability on a person. The legislature must in clear terms express its intention and bring home the liability to the person, who is sought to be held liable in any particular time. These decisions also, therefore, are of no assistance in the matter.

14. The provision of section 15C relate to exemption from tax of newly established industrial undertakings. Sub-section (1) provides that save as otherwise provided in that section, the tax shall not be payable by an assessee on so such of the profits or gains derived from any industrial undertaking to which this section applies as do not exceed six per cent. per annum on the capital employed in the undertaking, computed in accordance with such rules as may be made in this behalf by the Central Board of Revenue. In short, sub-section (1) of section 15C exempts from payment of tax the profits and gains of a newly established industrial undertaking to the extent of 6 per cent. on the capital employed in the undertaking. Sub-section (4) similarly grants exemption from payment of tax to the shareholders of that industrial undertaking on the dividends received by them so that they are attributable to 6 per cent. of the profits and gains of the company on which the tax is not payable by the company. Sub-section (5) then reads :

'Nothing in this section shall affect the application of section 23A in relation to the profits or gains of an industrial undertaking to which this section applies, and for the purposes of that section, the expression 'assessable income' shall be deemed to include the profits or gains in respect of which the tax is not payable under this section.'

15. Now, this is a deeming provision and that means that, in the absence of this deeming provision, the expression 'assessable income' used in section 23A of the Act would not have included the income exempted from taxation under the provisions of sub-section (1) of section 15C. It indicates that the expression 'assessable income' used in sub-section (1) of section 23A does not include an income which is exempted from tax by virtue of the provisions of the Act.

16. Mr. Joshi's argument, however, is that this provision was made in view of sub-section (4) of section 15C of the Act. The legislature intended that the concession granted to the shareholders under sub-section (4) should be available to the shareholders only if profits were actually distributed and not when breach of section 23A was committed. It is not possible for us to accept this catenation. The legislature could have easily said so in sub-section (4) itself. Apart from it, even assuming that the provision of sub-section (5) is of no assistance in construing the expression 'assessable income', the provision of sub-section (4) of section 23A itself leaves no doubt in the mind about the true meaning and import of the expression 'assessable income'. If Mr. Joshi's contention is accepted, the logical consequence thereof would be that income, which is exempted from tax in the hands of an assessee company would, by virtue of an order under section 23A, be deemed to have been nationally distributed amongst is shareholder and notionally deemed to have been received by them rendering them liable to pay tax thereon. The result would be that an income which is exempted from tax in the hands of the company may be rendered chargeable to tax in the hands of its shareholders and that too without their having received it. We hesitate to attribute any such intention on the part of the legislature in enacting the legal fiction contained in section 23A(1).

17. For reasons stated above, in our opinion, the income earned by the assessee company from its branch in the Baroda State, being exempt from taxation under section 14(2)(c) of the Act, could not enter its 'assessable income'. The Income-tax Officer, therefore, was in error in taking that into account for the purpose of passing orders under section 23A of the Act.

18. The answer to the question referred to us, therefore, will have to be in the negative. We answer the question accordingly. The department shall pay the costs of the assessee.

19. Question answered in the negative.


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