Satish Chandra, J.
1. This is a petition under Article 226 of the Constitution. It prays that notices dated 6th February, 1964 and 7th July, 1964 issued by the Income-tax Officer under Section 23-A of the Income Tax Act, 1922 be quashed and the respondents be prohibited from taking any further proceedings in virtue of the aforesaid notices. The question raised by this petition is as to the true nature and character of an order under Section 23-A of the Income-tax Act.
2. Messrs. J.K. Iron and Steel Company Ltd., Kanpur is the petitioner. It is Public Limited Company. It carries on the business of re-rollers, steel fabricators and foundry men and manufacturers of Hydraulic crancrushers. It also derives income from dividends and interest from stock. The petitioner is not a Company in which the public is substantially interested within meaning of Section 28-A of the Income-tax Act, 1922. The petition relates to the assessment year 1956-57, the accounting period ending on 30th April, 1955
3. The petitioner company returned an income of Rs. 5,88,265 for the year 1956-57. The regular assessment order under Section 28 of the Act was passed on 29-8-1961 assessing the total income of the company at Rs. 8,44,653/-. The company filed an appeal and was partly successful there. The appellate order dated 23-3-1963 reduced its assessable income to Rs. 8,33,456. No further appeal having been preferred, this order became final. On this income, income tax, super-tax and surcharge payable by the company was Rs. 3,62,032/45 leaving a balance of Rupees 4,71,434/- which was distributable as dividend amongst the share holders of the company. At the annual general meeting held on 30th December, 1955, a dividend of Rupees 1,89,000/- only was declared. This declaration of dividend fell short of the statutory percentage mentioned in Section 23-A by more than five per cent. The Income-tax Officer, issued a notice to the Company on 6-2-1964 requiring it to show cause why an order imposing additional super-tax on the undistributed balance of its income be not passed. The company took an adjournment, but having failed to make any reply, the Income-tax Officer issued another notice on 6-7-1964, stating that the statutory percentage, of dividend as stipulated in Explanation 2, Section 23-A (9) having not been declared within twelve months from the end of the accounting period, the Company should show cause why an order imposing additional super-tax at 37 per cent may not be passed. These are the two notices which are sought to be quashed by this petition.
4. The company replied by a letter dated 22-9-1964 that the proceedings under Section 23-A relating to the assessment year 1956-57 are barred by time in view of the four years period of limitation prescribed by Section 34 (3) having expired prior to the issue of the notice. In support, it relied upon the decision of the Gujrat High Court in Navnagar Transport Industries Ltd v. Income Tax Officer, : 54ITR271(Guj) . It also submitted that on the basis of the book profits of the company a distribution of nearly 66 per cent. has been made and that there is a shortfall of Rs. 461 only which cannot be distributed equitably. It prayed that the proceedings be dropped.
5. The next day, i.e. on 23-9-1964 the Income-tax Officer addressed another letter to the Company. It said that Section 23-A does not refer to the returned income of the company but to the assessed income. The company seems to have worked out the short fall of Rs. 461 on the basis of the returned income. This being incorrect, the company was asked to work out the correct short fall according to the total income. The matter was then heard on 30th September, 1964.
6. The present petition was filed on 5-10-1964. It is stated that at the hearing held on 30-9-1964, it appeared that orders under Section 23-A were likely to be passed by the 5th or 6th October, 1965 and that as the proceedings, being barred by time, are without jurisdiction, they are liable to be quashed. From the counter-affidavit filed by the Income-tax Officer it appears that he passed the order under Section 28-A on 5-10-1965 before he had received intimation of the interim order of this court staying further proceedings. In this order the Income-tax Officer held that the distributable income of the company was Rs. 471,424 A dividend of Rs. 1,89,000 alone having been declared there was an undistributed balance of Rs 2.82,424. He levied an additional super-tax on this balance at 25 n.p per rupee. He repelled the objection that the proceeding were barred by time and held that an order under Section 23-A prior to its amendment by the Finance Act 1955 could be made at any time There was no time limit prescribed for it The legislature having amended the section in 1955 has shifted the liability from the share holders on to the company itself. An order under Section 23-A was not an order of assessment and the limitation prescribed in Section 34 (3) can not apply to such an order
7. The petition challenges the legality of the proceedings on one ground only that the proceedings are barred by time. The impugned order itself has not been assailed.
8. The learned Advocate General appearing for the petitioner has stressed that Section 23-A after its amendment by the Finance Act 1955, was a charging Section and an order passed thereunder was an order of assessment to which Section 34 (3) was attracted Section 34 (3) provides that no order of assessment shall be made after the expiry of four years from the end of the assessment year No such order could hence be passed for the assessment year 1956-57, after 31st March 1961 The proceedings having commenced by the notice dated 16-2-1964, were beyond the permitted period of time and the Income-tax Officer lacked jurisdiction ab initio Sri R.L. Gulati. for the Revenue, on the other hand, submitted that Section 23-A is, in substance and in truth a provision penal in nature, and is not an assess ment section properly so called, to which alone Section 34 (3) applies. In order to resolve these rival contentions it will be necessary to adjudge the nature and character of these two provisions. Both these sections are in Chapter IV which is headed as 'Deductions and Assess merits'. This Chapter consists of Sections 18 to 39. The expression 'assessment' has been used in various sections of the Act. It is settled that the expression 'assessment' has been used in the Income-tax Act to convey different con notations. In Commr. of Income-tax v. Khemchand Ramdas. the Judicial Committee of the Privy Council observed.
'One of the peculiarities of most Income lax Acts is that the word 'assessment' is used as meaning sometimes the computation of income, sometimes the determination of the amount of tax payable and sometimes the whole procedure laid down in the Act for imposing liability upon the tax payer The Indian Income tax Act is no exception in this respect The Supreme Court approved this observation of the Privy Council in C.A. Abraham v. Income-tax Officer. : 41ITR425(SC) In that case Section 44 of the Income-tax Act came up for interpretation. Section 44 makes a partner of a discontinued firm liable to assessment in respect of the income, profits and gains of the firm. It was argued that the expression 'assessment', used in the section attracts the provisions relating to proceedings for assessment of income-tax alone and not those dealing with the imposition of penalty. The Supreme Court repelled this contention It approved of the dicta of Chief Justice Subbarao in Mareddi Krishna Reddy's case. AIR 1957 A P 368, that 'Section 28 is a provision enacted for facilitating the proper assessment of taxable income' and observed that by Section 28 the liability to pay additional tax which is designated 'penalty' is imposed in view of the dishonest or contumacious conduct of the assessee. Section 44 was enacted manifestly with a view to ensure continuity in the application of the machinery provided for assessment and imposition of tax liability notwithstanding the discontinuance of the business of the firm. The Supreme Court held that keeping this object of the legislature in view, the expression 'assessment' in Section 44 should be understood in its most comprehensive sense, so as to include proceedings for computation of income under Section 23 as also for imposing liability to additional tax called penalty, on the assessee's guilt of fraud, gross negligence, dishonest or contumacious conduct.
9. The construction of the word 'assess ment' was again raised before the Supreme Court in Commr. of Income-tax, Andhra Pra-deshv. Bhikaji Dadabhai and Co. : 42ITR123(SC) . The Finance Act 1950 repealed the Hyderabad Income-tax Act on the merger of that State with the Indian Union. Section 13 (1) of this Finance Act kept the operation of the Hyderabad Income tax Act alive in respect of levy, assessment and collection of income tax and super tax for the mentioned period. It was argued that the word 'assessment' in this section included the whole procedure for imposing liability upon the tax payer but not the procedure for imposing penalty. The High Court accepted this view point. It held that penalty was not tax and the provisions relating to imposition and collection of penalty did not survive the repeal. The Supreme Court overruled this view. It affirmed its decision in Abraham's case. : 41ITR425(SC) (supra) that penalty was only an additional tax imposed upon a person in view of his dishonest or confumacious conduct Their Lordships observed.
'It is true that under the Hyderabad Income-tax Act, distinct provisions are made for recovery of tax due and penalty, but that in our judgment does not alter the true character of penalty imposed under the two acts.'
Section 13 (1) of the Finance Act, 1950 was again a provision manifestly enacted with a view to ensure continuity in the process and machinery for assessment and imposing tax liability This object of the legislature influenced the Court in interpreting the word 'assess ment' in its widest and most comprehensive sense, namely, as not mere computation of income but also as including the entire machinery and procedure for imposing and enforcing the tax liability.
10. These decisions declare that the term 'assessment' is flexible, capable of many meanings. It will take its colour from the context in which it occurs. In Section 23 'assessment' signifies merely computation of income, and in Section 34 as computation of escaped income. In provisions ensuring continuity in the process and machinery for imposition of liability to tax, it includes proceedings for enforcement of the liability and preventing the evasion of payment of tax. Even though Section 28 uses the term penalty, it really levies an additional tax. The nomenclature does not prevent it from being an 'assessment' provision in a proper context.
11. Section 34 (3) provides a limit of four years time for making an order of assessment or reassessment. In N.N. Transport Industries Ltd. case : 54ITR271(Guj) (supra) the Gujarat High Court held that in Section 34 (3) the expression 'assessment' denotes the procedure for imposing liability upon the tax-payer. That decision proceeds on the basis that penalty proceedings under the Income-tax Act are not included in the expression 'assessment' in Section 34 (3) and are hence not govern ed by the time limit prescribed by it. Section 34 (3) thus has been held to be applicable to assessment proceedings properly so called This is a process which brings income to tax which it itself must bear under the Act. The cause of action for these proceedings is the accrual of income The penal provisions of the Act are, on the other hand, designed not to bring any income to tax, but to facilitate the smooth functioning of that process, by threatening punishment for defaults and evasions They are the necessary concomitants of the process of imposing tax liability, but are not intrinsically a part of that process Their object and field of operation is different. The provisions of Sections 18-A, 24, 25 (2), 28, 44 (e) (6), 44 (f) (5), 46 (1) are punitive in character. They operate when an assessee commits default in complying with the provisions of the Act or is guilty of dishonest or contumacious conduct.
12. In order to decide if a provision deals with 'assessment' as understood in Section 34 (3), the nomenclature given to that provision will rot be decisive; its object and impact will afford a true guide Sub-sections (6), (7) and (8) of Section 18-A do not use the term 'penalty' nonetheless they are penal in effect. They apply to assessees in default The levy under Section 28 has been held to be only an additional tax though the section designates it as 'penalty' All these proceedings are admittedly not assessment or re-assessment proceeding and are not governed by the limitation prescribed by Section 34 (3). Section 23-A prescribes the levy of additional super-tax. This liability will not be decisive of its nature and character, its object and impact will have to be seen. The question hence arises whether Section 23-A involves the process of assessment properly so called
13. Section 23-A does not apply to companies in which the public are substantially interested (vide Sub-section 9 of Explanation I) In substance such companies are those in which a majority of the voting power lies in the hands of persons other than the public. Such companies are generally controlled by a group of persons closely associated together. How the affairs of such a company can be manipulated to prevent the undistributed profits from being taxed is well illustrated by the following passage from Simon's Income-tax, second edition, Volume 3. page 341.
'Generally speaking, surtax is charged only on individuals, not on companies or other bodies corporate, various devices have been adopted from time to time to engage the individual to avoid surtax on his real total income or on a portion of it, and one method involved the formation of what is popularly called a 'one-man company'. The individual transfer of his assets, in exchange for shares to a limited company, specially registered for the purpose, which thereafter received the income from the assets concerned. The individual's total income for tax purposes was then limited to the amount of the dividends distributed to him as practically the only shareholder, which distribution was in his own control. The balance of the income which was not so distributed, remained with the company to form in effect a fund of savings accumulated from in come which had not immediately attracted surtax. Should the individual wish to avail himself of the use of any part of these savings he could effect this by borrowing from the company, any interest payable by him going to swell the savings funds and at any time the individual could acquire the whole balance o the fund in the character of capital by putting the company into liquidation.'
14. The Supreme Court in Sardar Baldeo Singh v. Commr. of Income-tax : 40ITR605(SC) held that Section 23-A was enacted for preventing such evasion of taxes It held that the conditions of its applicability clearly lead to that conclusion. The first condition is that the company not being one in which the public is substantially interested, must have distributed as dividend less than sixty per cent of its assessable income, after deduction of income-tax and super tax payable by it. The taxing authority must then be satisfied that the payment of a dividend or of a larger dividend than that declared, will, in view of losses incurred in earlier years of the smallnes's of the profits made not be unreasonable. It then makes an order that the entire undistributed balance of the company's assessable income shall be deemed to have been distributed, and then the proportionate share is liable to be included in the total income of the share holders.
15. In the case of Commr. of Income-tax, West Bengal v. Gangadhar Banerjee and Co. (Private) Ltd., Civil Appeal No 807 of 1963, dated 22-3-1965: (reported in : 57ITR176(SC) the Supreme Court again analysed the nature and effect of Section 23-A. It held that this Section was introduced to prevent exploitation of juristic personality of a private company by the members thereof for purposes of evading higher taxation. Their Lordships observed:
'The Income-tax Officer acting under this section is not assessing any income to tax; that will be assessed in the hands of the shareholders. He only does what the Directors should have done. He puts himself in the place of the Directors. Though the object of the section is to prevent evasion of tax, the provision must be worked not from the stand point of the tax collector but from that of businessman.'
Their Lordships went on to hold that Section 23-A of the Act is 'in the nature of a penal provision'. Both these cases of the Supreme Court related to Section 23-A as it stood prior to its amendment by the Finance Act of 1955. The view taken by the Gujarat High Court in (1964) 64 ITR 271: AIR 1965 Guj 105 (supra) that the unamended Section 23-A was a fiscal provision and not a penal provision is, with respect, not in accord with the law declared by the Supreme Court.
16. The 1955 Finance Act substituted the section by the present provision. The changes that have been made in it are designed to make the avowed object, namely, prevention of evasion of fax, more effective. Previously the undistributed balance was treated as having been distributed and thereafter the proportionate share of such balance was liable to be included in the total income of each shareholder. The company was not directly affected. After the 1955 amendment, the company itself has been made liable to bear the burden of the additional supertax on its failure to distribute the statutory percentage of its income as dividends within three months of the service of a notice to do so.
17. The underlying idea of Section 23-A is that a company should distribute the statutory percentage of its income as dividend so that it may be taxed in the hands of the share holders. The order under Section 23-A does not achieve this directly. It does not subject the undistributed balance of the statutory percentage of the company's income to the additional super tax or failure to distribute the statutory percentage, the entire undistributed income of the company is subject to its levy The company is not taxed on that part of its income which would have borne the legitimate lax in hands of the shareholders, if it had been distributed Thus the object is not to called lax which may have been avoided, but to penalise the mis conduct in attempting to avoid it The Income-tax Officer does not act as a tax-collector under Section 23-A. He acts as a prudent businessman. He sits in the Director's chair not to find the taxable income of the company, but the commercial profits which reasonably should have been distributed as dividend, and to take punitive action in case such distribution has not been made by the company Section 23-A, is a penal and not a fiscal provision. It does not involve the process of assessment That process arises at a different stage. If on receipt of a notice under Section 23-A, the company makes the required distribution as dividend, the proportionate share will become taxable in the hands of the share-holders. The proceedings taken in the case of individual shareholders will be assessment proceedings and will be governed by the limitation of Section 34 (3).
18. Section 36 of the Income-tax Act, 1922 deals with rectification of mistakes. Subsection (7) thereof provides that where the assessment of a company in whose case an order under Section 23-A has been made is modified in appeal, revision etc., the consequential recomputation of the shareholder's income may be made as if it was a rectification of a mistake apparent from the record.
19. Sub-section (8) after its amendment by the Finance Act. 1956, states:
'Where as a result of proceedings initiated under Clause (a) of Sub-section (1) or under Sub-section (I-A) of Section 34:
(a) a firm or an association of persons is assessed or reassessed, or
(b) a company is assessed or re-assessed and in respect thereof an order under Section 23-A is subsequently made,'
and it provides that the Income-tax Officer may, compute or recompute the total income of a shareholder in a company as if it was a rectification of a mistake apparent from the record.' The rectification under both these sub-sections can be done within four years from the date of the final order passed in the case of a company. Neither of these sub-sections or any other part of Section 35 provides for rectification of the order under Section 23-A on the variation of the assessment of the total income of a company in appeal or revision etc. or as a result of proceedings under Section 34. Section 34 (3) excludes from its operation orders of assessment or reassessment passed under Section 34 (1) (a) as well as Sub-section (I-A). Such orders can be passed at any time irrespective of the four year's lime limit. Clause (b) of Section 35 (8) contemplates that an order under Section 23-A can be made 'subsequent' to the order of assessment or reassessment under Section 34 (1) (a) or Section 34 (I-A). This provides a clue to the intention of the legislature that an order under Section 23-A can validly be made even after the expiry of four years limitation provided by Section 34 (3)
20. It was argued that the marginal note of the amended section is 'power to assess companies to super tax on undistributed income in certain cases' and it indicates that the section was intended for assessment of the company to super-tax. The marginal note to the section prior to its substitution in 1955 was ''power to assess individual members of certain companies'. It was none the less, held that the section itself does not assess anyone and was not a fiscal provision but a penal provision The marginal note of the section after amendment cannot affect its interpretation when the avowed object of the legislature, as discussed above, was nol changed.
21. It was also contended that in the scheme of the Act Section 28-A hag been placed in Ch. IV which deals with deduction and assess merit and therefore it should be construed relating to assessment proceedings. Section 23-A prior to its amendment in 1956 was, in spite of its situation in the Act, construed as being penal in nature. The legislature substituted the provision in 1955. The retenti(SIC) of its situation will not affect its field of operation.
22. To sum up; Section 23-A does not seek to impose a tax on an income which it itself has to bear under the Act. It threatens punitive action when it is found that the controlling group of share holders of a company have indulged in a commercial malpractice with a view to evade payment of tax. It is designed to punish such contumacious conduct. In my opinion, the provision is penal in nature. An order under Section 23-A is not an order of assessment to which the limitation prescribed by Section 34 (3) may apply. Such an order can there fore, be made at any time. The question raised is answered against the assessee.
23. As the petition fails on merits, it is not necessary to go into the other point raised for the revenue that there being an adequate alternative remedy by way of statutory appeals the relief under Article 226 ought to be refused.
24. In the result the petition fails and is dismissed. The parties shall bear their own costs.