1. This appeal is brought, by special leave, on behalf of the Commissioner of Income-tax against the judgement of the Bombay High Court dated September 18, 1962, in Income-tax Reference No. 34 of 1961 whereby the High Court held that the order passed against the respondent, hereinafter referred to as 'the assessee' under section 23A of the Indian Income-tax Act, 1922 (hereinafter referred to as the 'Act'), was not justified and valid for the assessment year 1951-52.
2. The assessee is a public limited company registered under the Indian Companies Act. Its share capital consist of 50,000 shares subscribed and paid up. Out of these shares, 47,493 are held by Shree Raghunath Investment Trust Ltd., a company incorporated as a private company under the law of Jammu and Kashmir (hereinafter referred to as 'the Jammu Co.') and having its registered office there. Out of remaining 2,507 shares, 2,500 shares were held by another private limited company incorporated in India having its registered office in New Delhi and the remaining 7 shares were held by seven individuals. The shares of the assessee are not quoted on the stock exchange anywhere in India. There is nothing, however, in its memorandum and articles of association placing any restriction on the free transfer of it shares. The assessee entered a partnership on April 20, 1950, with a firm called 'The India Steel Syndicate. 'There was a reconstitution of this firm on December 2(sic), 1950. The shares of profit of the assessee from this firm (which was registered under Section 26-A of the Act) as upto November 30, 1950 and upto March 31, 1951 totalling Rs. 70,895 were included in the assessment of the assessee or the assessment year 1951-52.
3. During the assessment years 1950-51 and 1951-52, for which the previous years ended on September 30, 1949, and September 30, 1950, the Income-tax Officer determined the assessable income of assessee at Rs. 60,350 and Rs. 93,884 respectively. After deduction of the taxes payable, the balance was Rs. 35,834 in the first year and Rs. 53,103 in the second year. As the assessee had not declared any dividend as its annual general meeting during either of the aforesaid two years or within six months thereafter, the Income-tax Officer issued notices to the assessee to show cause why an order under section 23A(1) of the Act should not be passed for the two years. The assessee, however, contended that section 23A was not applicable inasmuch as the public were substantially interested within the meaning of the Explanation appended to the third proviso to section 23A(1). Over-ruling this contention the Income-tax Officer made an order under section 23A against the assessee in respect of the undistributed profits for the said two years. Against these orders the assessee appealed to the Appellate Assistant Commissioner. A further ground was taken in the appeal that the order under Section 23 A was unwarranted so far as assessment year 1950-51 was concerned inasmuch as the assessable profits included a sum of Rs. 70,895 being the share of the assessee's income which arose in its partnership with the Indian Steel Syndicate as upto November 30, 1950 and March 31, 1951, and that the income accrued after the accounting year of the assessee which ended on September 30, 1950. The Appellate Assistant Commissioner dismissed the appeals and his order was affirmed by the Appellate Tribunal on June 28, 1959 for both the assessment years. At the instance of the assessee the Appellate Tribunal stated a case to the High Court under S. 66 (1) of the Act on the following question of law:
'Whether the order passed against the assessee for the assessment years 1950-51 and 1951-52 under section 23A are justified are valid ?'
By its judgement dated September 18, 1962, the High Court answered the question in so far as it pertained to assessment year 1950-51 in the affirmed and in so far as it pertained to assessment year 1950-51 in the negative and against the appellant.
4. Section 23A of the Act, as it stood before its amendment by the Finance Act, 1955, was to the following effects :
23A. Power to assess individual members of certain companies. - (1) Where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company up to the end of the sixth month after its accounts for that previous year are laid before the company in general meeting are less than sixty per cent. of the assessable income of the company of that previous year, as reduced by the amount of income-tax and supertax payable by the company in respect thereof he shall, unless he is satisfied that having regard to losses incurred by the company in earlier years or to the smallness of the profit made, the payment of a dividend or a larger dividend than that declared would be unreasonable, make with the previous approval of the Inspecting Assistant Commissioner an order in writing that the undistributed portion of the assessable income of the company of that previous year as computed for income-tax purpose 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:
5. Provided that when the reserves representing accumulations of past profits which have not been the subject of an order under this sub- section exceed the paid up capital of the company, together with any loan capital which is the property of the shareholders, or the actual cost of the fixed assets of the company whichever of these is greater, this section shall apply as if instead of the words 'sixty per cent.' the words 'one hundred per cent'. were substituted :
Provided further that no order under this sub-section shall be made where the company has distributed not less than fifty-five per cent. of the assessable income of the company as reduced by the amount of income-tax and super-tax payable by the company in respect thereof, 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 sixty per cent. of the assessable income of the company of the previous year concerned as reduced by the amount of income-tax and super-tax payable by the company in respect thereof :
Provided further that this sub-section shall not apply to any company in which the public are substantially interested or to a subsidiary company of such a company if the whole of the share capital of such subsidiary company or by the nominees thereof....'
6. Section 2(11) of the Act states :
'2. In this Act, unless there is a anything repugnant in the subject or context, -
(11) 'previous year' means -
(i) in respect of any separate source of income, profits and gains -
(a) the twelve months ending on the 31st day of March next preceding the year for which the assessment is to be made, or, if the accounts of the assessee have been made up to a date within the said twelve months in respect of a year ending on any date other than the said 31st day of March, then, at the option of the assessee, the year ending on the date to which his accounts have been so made up.
Provided that where in respect of a particular source of income, profits and gains an assessee has once been assessed, or whether in respect of a business, profession, or vocation newly set up an assess has exercised the option under sub-clause (c), he shall not, in respect of that source or, as the case may be, business, profession or vocation exercise the option given by this sub-clause so as to vary the meaning of the expression 'previous year' as then applicable to him except with the consent of the Income-tax Officer and upon such conditions as the Income-tax Officer may think fit to impose; or...
(ii) in respect of the share of the income, profits and gains of a firm where the assessee is a partner in the firm and the firm has been assessed as such, the period as determined for the assessment to the income, profits and gains of the firm;...'
7. On behalf of the appellant the Attorney-General put forward the argument that the High Court was in error in holding that the sum of Rs. 70,895 which was the assessee's share of income in its partnership with the Indian Steel Syndicate should be left out of the consideration so far as the assessment year 1951-52 was concerned. It was pointed out that the assessee had two different sources of income : (1) from its own business, and (2) from the share of the partnership business with the Indian Steel Syndicate and that under section 2(11) of the Act the assessee must be deemed to have two previous years with regard to two different sources of income. It was therefore argued that the High Court was in error in holding that the income from the partnership could not be included in the assessment income of the assessee for the assessment year 1951-52. On behalf of the assessee the contrary view-point was put forward by Mr. Radhey Lal Aggarwal. It was submitted that the sum of Rs. 70,895 related to the share Of the profits of the assessee from out of the partnership for the period between November 30, 1950 to March 31, 1951 and this period was after the accounting year of the assessee which ended on September 30, 1950. It was contended at its general meeting held on May 17, 1951 the assessee could not be expected to declare a dividend for the assessment year 1951-52 which related to the accounting year ending on September 30, 1950 out of its profits that accrued during the subsequent accounting period. In our opinion, the argument put forward by the Attorney-General on behalf of the appellant is well founded and must be accepted as correct. It is true that the assessee had prepared a balance sheet on the basis that its, accounting year ended on September 30, 1950. It is, however, admitted that the assessee had two sources of income: (1) from its own business, and (2) from the share of the partnership business with Indian Steel Syndicate. Under S. 2 (11) of the Act an assessee may have different previous years in respect of different sources of income and under the scheme of the Act the income of the varying previous years from the different sources should be lumped together to arrive at the total income of the assessee. The provisions of Sec. 2 (11) of the Act make it clear that except in cases where a previous year is determined by the Department under Cl. (b) the varying previous years must all necessarily end with or within the financial year next preceding the assessment year. In the present case, the previous year so far as the persona business of the assessee was concerned, was the previous year ended on September 30, 1950, but with regard to the income of the partnership the pervious year was the period between November 30, 1950 and March 31, 1951 when the accounts of the partnership were made up and closed. In our opinion, the provisions of Section 23-A (1) must be construed in the context of Section 2 (11) of the Act and the expression previous year' of the company in Section 23A (1) must be interpreted as meaning two previous years where the company carries on two different businesses with two different sources of income for which there are separate accounting periods. It follows therefore in the present case that the Income Tax Officer was right in holding that the assessable income of the company included the share of the assessee's profits in its partnership with the Indian Steel Syndicate for the purpose of application of Section 23A of the Act so far as the assessment year 1951-52 was concerned.
8. The argument was, however stressed on behalf of the respondent that in any event the share of the profit of assessee from the partnership business for the period from October 1, 1950, to March 31, 1951, was not known to the assessee before its annual general meeting on May 17, 1951. It was pointed out that for the first time the Income-tax Officer was intimated on August 11, 1953, that the share of the profit of the assessee in the partnership was to the extent of Rs. 70,895 and should be included in its assessment. After receipt of the intimation the Income-tax Officer rectified the original assessment made on February 29, 1952, and included the said amount of Rs. 70,895. In our opinion, there is no warrant for the argument put forward on behalf of the respondent. It is conceded in this case the annual general meeting of the assessee was held on May 17, 1951, after the close of the accounting year of the Indian Steel Syndicate. It is true that the actual profits of the assessee from the its partnership business by appeal by Macnaghten J. in the king's Bench Division of the High Court. The Court of the Appeal, however, reversed this decision and a further appeal was taken by the assessee to the House of Lords. The House of Lords held that on the true construction of the agreements, the commissions in question were earned by the assessee in the year in which the policies were underwritten, and must be brought into account accordingly and confirmed the decision of the Court of Appeal. At page 96 of the report Lord Wright observed :
'I agree with the Court of the Appeal in thinking that the necessary conclusion from that must be that the right to the commission is treated as a vested right which has accrued at the time when the risk was underwritten. It has then been earned, though the profits resulting from the insurance cannot be then ascertained and, in practice, are not ascertained until the end of two years beyond the date of underwriting. The right is vested, though its valuation is postponed - and is not merely postponed but depends on all the contingencies which are inevitable in any insurance risk, losses which may or may not happen, returns of premium, premiums to be arranged for additional risks, reinsurance, and the whole catalogue of uncertain future factors. All these have to be brought into account according to ordinary commercial practice and understanding. But the deals and difficulties which there may be in any particular case, however, they may affect the profit, do not affect the right for what it eventually proves to be worth.'
9. Lord Simonds also stated at page 110 of the report as follows :
It is clear to me that the commission is wholly earned in year 1 in respect of the profits of that year's underwriting. If so, I should have thought that it was not arguable that that commission did not accrue for income tax purposes in that same year, though it was not ascertainable until later.'
10. It is admitted in the present case that the Indian Steel Syndicate closed the accounts of partnership for the first time for the first set of partners on November 30, 1950, and for the other set of partners on March 31, 1951, and a assessee as a partner was, therefore, entitled to the share of the profits as on the last day of the accounting period of the partnership, i.e., March 31, 1951.
11. For these reasons we hold that the Income-tax Officer was wright in holding that the amount of Rs. 70,895 which was share of the assessee's income from its partnership with Indian Steel Syndicate for the period ending March 31, 1951, should be included in the assessable profits of the company for the assessment year 1951-52 and should be treated as the part of the distributable profit of the company for the purpose of section 23A(1) of the Act. In other words, the order made by the Income-tax Officer against the assessee under section 23A of the Act for the assessment year 1951-52 must be held to justified and valid and the question of law referred by the Appellate Tribunal must be answered against the assessee and in favour of the income-tax department for the year 1951-52 also. We accordingly set aside the judgement of the Bombay High Court dated September 18, 1962, so far as the assessment year 1951-52 is concerned and allow this appeal with costs.
12. Appeal allowed.