1. This is a reference at the instance of the Commissioner under s. 66(1) of the Indian I.T. Act, 1922, and the following question of law stands referred to us :
'Whether, on the facts and in the circumstances of the case, the order of the Income-tax Officer under section 23A(1) of the Act was valid ?'
2. A few facts may be noted. The assessee is a private limited company and the assessment year involved in this reference is 1961-62. The short point involved is about the application of s. 23A(1) of the Indian I.T. Act, 1922. The accounting year followed by the assessee-company was the calendar year. Though the assessee was liable to distribute a dividend to the extent of 65% of its total income, it did not declare anything during the relevant assessment year. However, it had declared more than 65% of its total income less taxes as dividend on February 26, 1962, which is beyond the accounting year of the company. Accordingly, the ITO issued a show-cause notice to the assessee as to why an order under s. 23A(1) should not be passes for the assessment year in question. In reply, the assessee-company pointed out that it has declared dividends though after two months and 26 days from the expiry of the statutory period of 12 months and requested the ITO to condone the delay. Explanations were also given for the delay in holding the annual general meeting. According to the assessee, this was mainly due to the illness of the accountant and on account of the general manager of the company being on leave. The result was that more time was taken than allowed in auditing the branch accounts.
3. The ITO did not accept the submission on behalf of the assessee-company observing that there was nothing in s. 23A which conferred on the ITO such power to extend the specified period. In his view, therefore, the assessee-company had become liable to an order under s. 23A.
4. The assessee carried the matter in appeal to the AAC, who, however, concurred with the view taken by the ITO. According to the AAC, only that dividend which was declared within 12 months immediately following the expiry of the previous year was to be taken into consideration by the ITO and no discretion was given to the ITO for relaxing the condition.
5. Aggrieved by this appellate order, the assessee carried the matter in second appeal to the Tribunal. The same pleas as had been earlier raised were raised before the Tribunal and the circumstances under which the annual general meeting could not be held within the time allowed by the Companies Act were brought to the notice of the Tribunal. On a consideration of the rival contentions, the Tribunal took the view that s. 23A was a penal provision and if the assessee had not been able to call the annual general meeting for a good reason, then there was no warrant for holding that s. 23A had been violated. In the view of the Tribunal, only a company which had held its annual general meeting within this period and at that meeting declared no dividend or a dividend less than the statutory percentage, could the regarded as having violated s. 23A. The Tribunal applied its mind to the reasons offered by the assessee for the delay in holding the annual general meeting and concluded that the assessee could not be said to have not held the meeting with a motive to avoid distribution of dividend. According to the Tribunal, the fact the assessee had at the annual general meeting held belatedly declared dividend at higher percentage than what the statute provided was a very pertinent fact. The Tribunal also referred to the provisions in the Companies Act which permitted, in exceptional cases, that the annual general meeting could be held even after more than 12 months after the close of the accounting year. In the view of the Tribunal, there was no justification in the circumstances of the case for invoking s. 23A.
6. It is from the decision of the Tribunal that the reference has been made to us.
7. Before us Mr. Joshi pointed out that a view similar to the one taken by the ITO and the AAC had found favour with the Delhi High Court in its decision in CIT v. Grace and Style (P.) Ltd. : 90ITR247(Delhi) . In the view of the Delhi High Court, the necessary distribution should have taken place within 12 months immediately following the expiry of the previous year and if that was not done, the consequences envisaged in s. 23A must follow. Mr. Joshi, however, very fairly pointed out that in CIT v. Abdul Rahim Osman & Co. (India) (P.) Ltd. : 86ITR436(SC) , the Supreme Court had affirmed the principle which found favour with the Tribunal. In the view of the Supreme Court, in calculating the undistributed balance of the total income of a company for the purpose of the levy of super-tax under s. 23A(1) of the Indian I.T. Act, 1922, the ITO should take into account the dividend declared by the company even after the period of 12 months immediately following the expiry of the previous year relevant to the assessment year but before the date on which he makes an order under s. 23A (1). From the report, it is found that, although reported earlier, the Supreme Court decision is in fact delivered subsequent to the decision of the Delhi High Court in CIT v. Grace and Style (P) Ltd. : 90ITR247(Delhi) .
8. It is clear that the principle laid down by the Supreme Court in Abdul Rahim Osman & Co. 's case : 86ITR436(SC) is the one which found favour with the Tribunal and if that principle is applied, as it must be, then the action of the ITO was not valid.
9. In the result, the question referred to us is answered in the negative and in favour of the assessee. Parties, however, will bear their own costs of the reference.
10. Question answered in the negative.