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J.K. Cotton Spinning and Weaving Mills Co. Ltd. Vs. Commissioner of Income-tax, U.P., Lucknow. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberI.T. Miscellaneous No. 59 of 1950
Reported in[1958]34ITR856(All)
AppellantJ.K. Cotton Spinning and Weaving Mills Co. Ltd.
RespondentCommissioner of Income-tax, U.P., Lucknow.
Excerpt:
.....like an order under section 23a(1) of the act which is made for the purpose of ultimately assessing the income of the..........company by the income-tax officer after the expiry of the period of four years from the end of the year of assessment 1940-41, in view of the provisions of section 34(2) of the income-tax act.we may note that the reference in the argument is to section 34(2) the income-tax act, as at the relevant time the limitation for an order of assessment or re-assessment was laid down by section 34(2) of the income-tax act, the act not having been amended by the income-tax and business profits tax (amendment) act (xl viii of 1948). this contention was repelled by the income-tax appellate tribunal and consequently, the question mentioned above has been referred the opinion of this court.the question, as framed requires a pronouncement by this court whether the order under section 23a(1) of the.....
Judgment:

BHARGAVA J. - The question of law referred by the Income-tax Appellate Tribunal for the opinion of this court is as follows :

'Whether the order of the Income-tax Officer under section 23A(1) of the Indian Income-tax Act is barred by limitation on the ground that it was passed on 14th March 1946 in respect of the assessment year 1940-41, the relevant previous year of the assessee company being calendar year 1939 ?'

The assessee, which is company incorporated under the Indian Companies Act, maintained accounts treating each calendar year as the year of account, so that the books of account were closed on the 31st of December, every year. The company during the calendar year 1939 earned profits to the extent of Rs. 10,16,602 which were assessed in the hands of the company in the relevant assessment year 1940-41. Out of these profits, dividends amounting to Rs. 4,05,000 were declared at the annual general meeting of the assessee company held on 26th January, 1944, and those dividends were distributed amongst the shareholders.

The assessment of the company was made by the Income-tax Officer on 23rd November, 1944, and by the order of assessment, the income held to be liable to income-tax was found to be somewhat higher than the amount of Rs. 10,16,602. Thereafter, the Income-tax Officer gave a hearing to a representative of the assessee company and, on 14th March, 1946 passed an order under section 23A(1) of the Income-tax Act holding that the undistributed portion of the assessable income of the assessee company for the previous year 1939, as computed for income-tax purposes and as reduced by the amounts of income-tax and super-tax payable by the assessee company, shall be deemed to have been distributed as dividends amongst the shareholders as at the date of the general meeting, to the extent of the difference between the 60 per cent. of the amount and the amount of dividend already declared and distributed.

Against this order the assessee company filed appeals before the Appellate Assistant Commissioner of Income-tax and before the Income-tax Appellate Tribunal but unsuccessfully. The main point urged was that no order under section 23A(1) of the Income-tax Act could be passed against the assessee company by the Income-tax Officer after the expiry of the period of four years from the end of the year of assessment 1940-41, in view of the provisions of section 34(2) of the Income-tax Act.

We may note that the reference in the argument is to section 34(2) the Income-tax Act, as at the relevant time the limitation for an order of assessment or re-assessment was laid down by section 34(2) of the Income-tax Act, the Act not having been amended by the Income-tax and Business Profits Tax (Amendment) Act (XL VIII of 1948). This contention was repelled by the Income-tax Appellate Tribunal and consequently, the question mentioned above has been referred the opinion of this court.

The question, as framed requires a pronouncement by this court whether the order under section 23A(1) of the Income-tax Act is barred by limitation. Learned counsel for the assessee had to concede that there is no specific provision in the Income-tax Act prescribing a period of limitation for an order by the Income-tax Officer under section 23A(1) of the Act. Limitation was prescribed, principally, for orders of assessment or re-assessment of income and that provision contained in sub-section (2) of section 34 of the Income-tax Act.

What learned counsel for the assessee has contended is that, in case we hold that an order under section 23A(1) of the Income-tax Act be passed by the Income-tax Officer at any time irrespective of the limitation the result would be that the provisions of section 34(2) the Act would be defeated and, consequently, his point was that, by necessary implication, we should read in the Income-tax Act a principle laid down by the Legislature that no such order is to be made after period of limitation prescribed by section 34(2) of the Income-tax has expired.

In dealing with this question, an important point that has to be kept in view is that the order, which an Income-tax Officer passes under section 23A(1) of the Act, consists of two different component parts : there is first an order holding that a certain amount shall be deemed to have been distributed as dividend amongst the shareholders as at the date of the general meeting of the company, and then there is the second part of the order by which the proportionate share of that sum of each shareholder is included in the total income of such shareholder for the purpose of assessing his total income.

The Income-tax Act gives a right of appeal against an order under this provision of law to the assessee company under section 30 of the Act. Of the two parts of the order under section 23A(1) of the Act, it is only the first part which is directed against the company. The second part of the order is directed against the shareholder. The present reference before us, in fact, arises out of an order of the Income-tax Officer relating to the first part of the order under this provision of law.

The Income-tax Officer had merely passed an order declaring that a certain amount shall be deemed to have been distributed as dividend amongst the shareholders as at the date of the general meeting of the present company, which was held on the 26th of January, 1944. The subsequent order for inclusion of the proportionate share of each shareholder in his total income does not appear to have been passed so far, or at least it does not appear that it had been passed before the assessee company proceeded to file the appeal before the Appellate Assistant Commissioner of Income-tax.

There is no mention of such an order for inclusion of the proportionate share of each shareholder in his total income in the order from which the present reference has arisen. We are, therefore, concerned with the question as to whether we must hold that there is a period of limitation governing the power of an Income-tax Officer to make an order which is limited to a declaration that a certain amount of profits, earned by the assessee company, shall be deemed to have been distributed as dividends amongst the shareholders as at the date of the general meeting of the company.

In this view, we do not see that section 34(2) of the Income-tax Act can have any bearing at all. The order directed against the company declaring a part of its profits as deemed to have been distributed as dividends amongst the shareholders in no way affects the assessment of the company itself, nor is such an order followed up by any re-assessment of the income of the company. The order is made with the specific purpose of assessing the profits of the company as income of the shareholders, holding those profits which are deemed to be distributed dividends by a fiction of law.

If a company proceeds to act contrary to the intention of the Legislature as expressed in section 23A(1) of the Act, there appears to be no reason to hold that a period of limitation must necessarily be laid down for an Income-tax Officer, limiting his powers of passing the order so as to compel the company to comply with the requirements of law. The Act is for the purpose of assessing incomes which are to be charged with income-tax and super-tax.

In the case of the amounts deemed to have been distributed as dividends, an order is a passed under section 23A(1) of the Act solely with the object of taxing those amounts in the hands of the shareholders and thus the shareholders are principally concerned with the assessment of those amounts. So far as the shareholders are concerned, they can, of course, claim the protection afforded by the period of limitation laid down by the Act in all cases where an order under section 23A(1) passed against the company is further pursued by inclusion of the proportionate share of the shareholder in his total income, at the time when the Income-tax Officer proceeds to assess the shareholders income or to re-assess it.

That remedy is open to the shareholder under section 34(2) of the Income-tax Act. The further question, as to the date from which the period of limitation under section 34(2) would have to be computed when the assessment or re-assessment of the income of the shareholder is being made, need not engage our attention in the present reference as that point can only arise if and when it is raised by the shareholder in whose total income the Income-tax Officer proceeds to include the amount which is his proportionate share of the amount deemed to be distributed as dividend.

The argument, which was advanced at the initial stage, proceeded on the basis that the period of limitation prescribed by section 34(2) of the Income-tax Act must be computed from the end of the assessment year of the company relevant to the previous year, in which the company had earned the profits which were the subject of the order of the Income-tax Officer under section 23A(1) of the Act. When, during the course of arguments, the position explained above came up, it was clear that the amounts deemed to be declared as dividends, which are to be included in the total income of the shareholders, will have to be taken into account when the assessment of the income of the shareholders is made by the Income-tax Officer.

As a result, learned counsel for the assessee slightly changed his arguments and urged that, though it may not be possible to contend that the limitation for an order under section 23A(1) should be deemed to be governed by the provisions of section 34(2) of the Act, a similar limitation must, however be deemed to exist for passing an order under section 23A(1) of the Income-tax Act on the ground that, if an order is passed beyond the corresponding period of limitation, the order would defeat itself.

The contention was that if an order under section 23A(1) is passed after the period of limitation prescribed under section 34(2) for the assessment of the income of the shareholders has expired, the consequential order for inclusion of the dividends deemed to be declared in the income of the shareholders, even if made, would not be capable of being given effect to, as it would not be permissible for the income-tax authorities thereafter either to assess or re-assess the total income of the shareholder.

Learned counsel thus urged that a limitation for the making of an order under section 23A(1) of the Income-tax Act should be taken to be implied on the ground that the law would not permit an order to be made which would be ineffective and useless. We are unable accept this contention either. It appears to us that the Legislature, in enacting the provisions of the Income-tax Act, considered it necessary to prescribe limitation only in respect of orders of assessment or re-assessment of income.

It was not considered necessary to prescribe any limitation for an order of an interlocutory nature like an order under section 23A(1) of the Act which is made for the purpose of ultimately assessing the income of the shareholder. The shareholder is not affected by the delay in the making of the order under section 23A(1) inasmuch as he always has the right of claiming that his income be assessed or re-assessed by virtue of section 34(2) of the Income-tax Act when the Income-tax Officer actually proceeds to do so; so that if the Income-tax Officer proposes to make an assessment or re-assessment of the income of the shareholder after the limitation under section 34(2) has expired and, at that time, to take into account an order under section 23A(1) of the Act which was passed at a very late stage, the shareholder can get the relief of not being affected by the order under section 23A(1) by challenging the validity of his assessment or re-assessment as a whole.

It appears to us that, if the Legislature had intended that a limitation should be prescribed even for orders under section 23A(1) of the Income-tax Act, it could easily have done so by making a specific reference to such an order under section 34(2) of the Income-tax Act. The omission was made as it was not intended that there should be any limitation for such an order. After an order under section 23A(1) of the Act had been passed and when an attempt was made to give effect to it at the time of assessment or re-assessment of a shareholders income, the shareholder was given the right of claiming the benefit of the period of limitation under section 34(2) of the Act.

What would be the limitation under section 34(2) and from what date it would be computed need not, as we have said above, be considered by us in the present case. There appear to be three different dates which might be relevant for computing the period of limitation. The limitation may be computed either from the end of the assessment year of the shareholder, which is relevant to the previous year during which the profits were earned by the company; or if the share deemed to be received by the shareholder as dividend by virtue of an order under section 23A(1) of the Act is added to his income of the previous year in which the date of the general meeting falls, the period of limitation may have to be computed from the end of the assessment year relevant to that previous year.

There is the third alternative that the period of limitation may be computed from the end of the assessment year relevant to the previous year of the shareholder in which falls the date on which the order under section 23A(1) of the Income-tax Act is passed by the Income-tax Officer. We have mentioned all these three alternative because the first alternative was the one which was, at the initial stage, put forward by learned counsel for the assessee. The second is the alternative which by appears to have been accepted by the Madras High Court in C. W. Spencer v. Income-tax Officer, Madras. The third alternative appears to have been accepted by the Bombay High Court in Navinchandra Mafatlal v. Commissioner of Income-tax Bombay City.

So far as we are concerned we have already held above that, in the present reference, it is not necessary for us to go into that question. So far as this reference is concerned, we are only called upon to answer whether there is any limitation at all for that part of the order under section 23A(1) by which the Income-tax Officer declares that a certain part of the profits earned by the assessee company shall be deemed to have been distributed as dividends amongst the shareholders as at the date of the general meeting aforesaid. Our view that, so far as this part of the order is concerned, no period of limitation can be read in the Income-tax Act, is borne out by a decision of the Bombay High Court in Sir Kasturchand Ltd. v. Commissioner of Income-tax Bombay City, and by a decision of this court in Juggilal Kamlapat Cotton Spinning and Weaving Co. Ltd v. Commissioner of Income-tax, U.P. and C.P. and Bear.

As a result, our answer to the question referred by the Income-tax Appellate Tribunal is in the negative. The Department will be entitled to its costs of this reference which we fix at Rs. 250.

Question answered in the negative.


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