1. This reference arises from proceedings taken under section 23A of the Income-tax Act, 1922, in respect of the assessment year 1956-57 of which the previous year is the calender year 1955.
2. The assessee-company is carrying on business as the managing agents of certain companies. It is an undisputed fact that it is a company to which section 23A applies and that it was required under that section to distribute as dividends the whole of its total income after deducting therefrom the amounts permissible under sub-section (1) of that section as its reserves exceed the total paid-up capital. There is also no substantial disagreement with regard to facts from which these proceedings arose. For the assessment year 1956-57, the total income assessed under the order dated May 29, 1957, came to Rs. 13,42,960 and the tax payable on that amount came to Rs. 6,93,968 which left a balance of Rs. 6,48,972. At the annual general meeting held on March 29, 1956, the company declared a dividend of Rs. 3,03,360 only. Prima facie, therefore, the distribution of dividend was inadequate as the company was one to which the rule of 100 % distribution and not 60 % applied.
3. On December 11, 1957, the Income-tax Officer addressed a letter to the assessee-company, drawing its attention to the requirements of section 23A, not only for the assessment year 1956-57, but also for two other years, and the company replied to that letter on October 8, 1959. The Income-tax Officer thereafter gave notice to the company, calling upon it to explains why action under section 23A(1) should not be taken, and after hearing the company he passed an order dated March 24, 1960, whereby he held that the company was liable to pay additional super-tax on the undistributed amount of Rs. 3,45,612 as provided by the section as it was in force on April 1, 1956. Before the Income-tax Officer, the company raised the following contentions :
(a) That an amount of Rs. 13,955 paid as charity should be deducted from the aforesaid undistributed amount;
(b) That as provided by sub-section (6) of section 23A which was in force at the relevant time, the excess dividend declared in the preceding year 1954 should be computed taking 60 % as the statutory percentage. According to the assessee-company, the excess distribution for the year 1954 was Rs. 6,64,320 while the distributable balance of income was Rs. 5,80,398. According to the assessee-company, the excess distribution in that year came to Rs. 3,24,847 that being at the rate of 60 percent. out of the distributable balance. According to the Income-tax Officer, however, the excess distribution in that year would be only Rs. 83,922, being the difference between Rs. 6,64,320 and Rs. 5,80,398.
(c) That if the excess distribution made during the year 1954 were considered together with the amount of distributed dividend during the previous year 1955, no action under section 23A would be warranted; and
(d) the dividend distributed for the calender year 1955, together with the excess dividend distributed in the year 1954, even as computed by the department, namely, Rs. 83,922, would exceed 55 per cent. of the distributable balance and, therefore, clause (ii) of sub-section (2) of section 23A would apply and that no notice under that clause having been given to the assessee-company, the action taken under section 23A(1) was illegal.
4. These contentions failed before the Income-tax Officer and, as aforesaid, he passed the order charging additional super-tax on the balance of Rs. 3,45,612, at the rate of four annas amounting to Rs. 86,403. The assessee-company thereupon went in appeal before the Appellate Assistant Commissioner before whom it raised two main objections, (1) that the Income-tax Officer was wrong in not deducting the charity amount, and (2) that he also erred in not taking into account the excess distribution made in 1954 which, if properly considered, would wipe out the undistributed balance. The Appellate Assistant Commissioner accepted he first but rejected the second contention and thereupon, both the assessee-company and the Income-tax Officer filed appeals before the Tribunal. The contentions urged by the assessee-company before the Tribunal were :
(1) that once the assessment order dated May 29, 1957, for the assessment year 1956-57 was made and the assessment was completed, that assessment could only be reopened under section 34 and, therefore, the proceedings under section 23A were illegal. This contention was raised on the ground that charging the amount of Rs. 86,403 as additional super-tax was tantamount to reopening the aforesaid assessment which could only be done under the machinery provided by section 34 ;
(2) that charging aforesaid amount as additional super-tax amounted to a piecemeal assessment which was not warranted by the Income-tax Act ;
(3) that under the provisions of sub-section (6) of section 23A, the assessee-company was entitled to the credit of Rs. 3,24,847 which, according to the company, was the excess distribution in the assessment year 1955-56. This amount had to be added to Rs. 3,03,360 the distributed dividend, and so also the charity amount of Rs. 31,955 and if so computed action under section 23A would not be warranted. The excess amount of Rs. 3,24,847 was arrived at by the company as follows : Its contention was that under sub-section (6), out of the amount distributed in the assessment year 1955-56 only 60 percent. and not 100 percent. should be taken into account as distributable dividend. On that footing, the excess distribution would come to Rs. 3,24,847. On the other hand, the view of the department was that since the company was liable to distribute the whole of its total net income, that is say, since the company was one to which the 100 percent. rule applied, the proper computation would be to deduct the total income from the dividend distributed, which would leave the excess at Rs. 83,922;
(4) that the additional super-tax under section 29A can be levied on the balance of the undistributed amount less the excess distributed in the preceding year, and not on the entire undistributed amount; and
(5) that the assessee-company was entitled to a notice under clause (ii) of sub-section (2) of section 23A.
5. The Tribunal held as regards the first contention that section 34 would not apply to proceedings under section 23A. As regards the second contention, the Tribunal held that it was impossible, according to the object and the scheme of section 23A, for the Income-tax Officer to pass his order together with or simultaneously with the order of assessment for the relevant assessment year and that, therefore, charging the aforesaid amount as additional super-tax was not a piecemeal assessment. Regarding the third contention, the Tribunal held that sub-section (6) had no application to cases where companies fall under the proviso to sub-section (1). Regarding contention No.4, the Tribunal held that no deduction of the excess distribution in the preceding years was provided for while ascertaining the undistributed balance for levying super-tax. Finally, as regards contention No.5, the Tribunal held that no notice under clause (ii) of sub-section (2) was necessary as the excess distribution in the earlier year was relevant for determining only the reasonableness or otherwise of the distribution in the current year. Besides, since the distribution was less than 55 per cent., it was not incumbent upon the Income-tax Officer to issue a notice. On these findings, the Tribunal rejected the appeal filed by the assessee-company. As regards the department's appeal, the Tribunal allowed the appeal, holding that for the purposes of section 23A, the only two figures to be taken into count by the Income-tax Officer were the total income and the taxes payable thereon and that no third figure would enter into the computation. The Tribunal further held that items such as donations, charity, gratuity, bonus, etc., payable by a company were relevant for the purpose of deciding the reasonableness or otherwise of the deduction. Once that stage was passed, no question of deduction arose. The only question then would be, what were the amounts of the total income and the total amount of taxes payable thereon, and the difference between the two would be the amount from which divided has to be declared depending upon which rule of percentage applied to the company in question. On this reasoning, the Tribunal set aside the order passed by the Appellate Assistant Commissioner and directed that the amount of donation by way of charity was not deductible from the amount of the undistributed income on which additional super-tax was leviable.
6. At the instance of the assessee, the Tribunal framed seven questions for reference to this court. These seven questions are as follows :
'(1) Whether, on the facts and in the circumstances of the case, the order under section 23A passed by the Income-tax Officer on the assessee-company after the completion of the regular assessment under section 23(3) is valid in law
(2) Whether, on the facts and in the circumstances of the case, the order under section 23A passed by the Income-tax Officer without recourse to section 34 is valid in law
(3) Is his a company to which section 23A(6) was applicable for this year
(4) If the provisions of section 23A(6) are applicable to the assessee-company's case, what is the excess distribution of the assessment year 1955-56 to be taken into account for the assessment year 1956-57. Is it Rs. 3,24,847 as claimed by the assessee or any other sum
(5) Whether, in the event of section 23A(6) being held to apply here, on the facts and in the circumstances of the case, and on a proper construction of section 23A(1), the excess distribution under section 23A(6) has to be deducted from the distributable balance of total income before charging super-tax under section 23A
(6) Whether, on the facts and in the circumstances of the case, the assessee-company was entitled to notice under section 23A(2)(ii) and
(7) Whether, in arriving at the undistributed balance of the total income for levy of super-tax under section 23A, the sum of Rs. 31,955, paid as donation is deductible ?'
7. Section 23A has been amended from time to time, and since the entire argument on all these questions depends upon the construction of some of its provisions, it is necessary to quote those provisions so far as they are relevant to the question before us. The section, as it stood at the material time and which applies to the present facts, is as follows :
'23A. (1) Subject to the provisions of sub-sections (3) and (4), where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the twelve months immediately following the expiry of that previous year are less than sixty per cent. of the total income of the company of that previous year as reduced by -
(a) the amount of income-tax and super-tax payable by the company in respect of its total income but excluding the amount of any super-tax payable under this section;
(b) the amount of any other tax levied under any law for the time being in force on the company by the Government or by a local authority in excess of the amount, it any, which has been allowed in computing the total income; and
(c) in the case of a banking company, the amount actually transferred to a reserve fund under section 17 of the Banking Companies Act, 1949 (10 of 1949);
the Income-tax Officer shall, unless he is satisfied that, having regard to losses incurred by the company in earlier years or to the smallness of the profits made in the previous year, the payment of a dividend or a larger dividend than that declared would be unreasonable, make an order in writing that the company shall, apart from the sum determined as payable by it on the basis of the assessment under section 23, be liable to pay super-tax at the rate of eight annas in the rupee in the case of a company whose business consists wholly or mainly in the dealing in or holding of investments, and at the rate of four annas in the rupee in the case of any other company, on the undistributed balance of that total income of the previous year, that is to say, on the total income reduced by the amounts, if any, referred to in clause (a), clause (b) or clause (c) and the dividends actually distributed, if any :
Provided that -
(a) in the case of a company whose business consists wholly or mainly in the dealing in or holding of investments; and
(b) in the case of any other company where the accumulated profits and reserves (including the amounts capitalised from the earlier reserves) representing accumulations of past profits which have not been the subject of an order under this sub-section, exceed either the aggregate of -
(i) the paid up capital of the company exclusive of the capital, if any, created out of its profits and gains which have not been the subject of an order under this sub-section, and
(ii) 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 for the words 'sixty per cent. of the total income', wherever they occur, the words 'the whole of the total income' had been substituted.
(2) No order under sub-section (1) shall be made -
(i) in the case of a company referred to in clause (a) of the proviso to that sub-section, which has distributed not less than ninety per cent. of its total income as reduced by the amounts, if any, referred to in clause (a), clause (b) or clause (c) of that sub-section, or
(ii) in the case of any other company which has distributed not less than fifty-five per cent. of its total income as reduced by the amounts, if any, aforesaid, or
(iii) in any case where according to the return made by a company under section 22, it has distributed not less than sixty per cent. of its total income as reduced by the amounts, if any, aforesaid, but in the assessment made by the Income-tax Officer under section 23 a higher total income is arrived at, and the difference in the total income does not arise out of the application of the proviso to section 13 or sub-section (4) of section 23 or the omission by the company to disclose its total income fully and truly,
unless the company, on receipt of a notice from the Income-tax Officer that the proposes to make such an order, fails to make within three months of the receipts 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 total income of the company of the relevant previous year as reduced by the amounts, if any, aforesaid.'
8. Sub-sections (3), (4) and (5) are not material for our purposes and, therefore, are not recited. Sub-section (6) provides as follows :
'Where in respect of any one or more of the three previous years immediately preceding the previous year, the profits and gains distributed as dividends by a company are in excess of sixty per cent. of its total income of the relevant previous year as reduced by the amounts, if any, referred to in clause (a), clause (b), or clause (c) of sub-section (1), but in respect of the previous year the profits and gains distributed as dividends by it are less than sixty per cent. of its total income similarly reduced, so much of the said excess, if any, as has not been adjusted under this sub-section in a preceding year, shall net taken into a count in determining whether an order under sub-section (1) should be made in respect of the previous year.'
9. Questions Nos. (1) and (2) involve two points, namely whether an order passed under this section can be said to be a piecemeal assessments and if so, whether it is warranted under the Act. Even if a separate order is warranted whether the machinery provided under section 34 is applicable and, therefore, a notice has to be issued under section 34 before an order under this section can are made. The argument of Mr. Kaji was that the Act does not warrant piecemeal assessment and, therefore, an order passed under section 23A has to be part and parcel of the assessment order passed under section 23. His further argument was that even if a separate order can be passed under section 23A, such an order is in substance and effect the re-opening of the assessment already completed and, therefore, before passing such an order, the Income-tax Officer concerned that to go through the procedure laid down in section 34. Briefly, the contention was that once can assessment is completed under section 23, an order passed under section 23A(1) levying additional super-tax would be an order on the ground of non-assessment, or under-assessment and, that being so, it would in effect amount to reassessment and, therefore, the provisions of section 34 would be attracted. In this connection, Mr. Kaji sought to rely upon the decision of the Privy Council in Commissioner of Income-tax v. Khemchand Ramdas. In our view, this decision has no application to the contention raised by Mr. Kaji. The decision dealt with the nature of an order of assessment completed and passed under section 23 and has nothing to do with the provisions of section 23A. The only proposition that was laid down in this decision was that once a final assessment is made, the Income-tax Officer cannot go on making fresh computations and issuing fresh notices of demand and that the final assessment once made could not reopened except in circumstances set out in sections 34 and 35 and within the time specified in those sections. Clearly, therefore, Mr. Kaji cannot derive any assistance from this decision. It will be seen that the object of section 23A is to prevent avoidance of super-tax by the shareholders of a company in which the public are not substantially interested. The rates of super-tax applicable to companies are much lower than the highest rates applicable to other assessees. Though income-tax paid by the company is deemed to have e been paid on behalf of the shareholders, the shareholders have to pay super-tax again in the respect of the dividends even if the dividends are paid out of profits which have borne super-tax in the hands of the company. An individual may try to avoid the high incidence of super-tax by transferring to a private limited company, in return for shares, the sources of his income, and by securing that instead of any dividend beings declared, the profits made by the company should be allowed to accumulate in the hands of the company and should be ultimately distributed in capital form by creating bonus shares which are not assessable as income in the hands of the shareholders. Therefore, this section aims at preventing an attempt to avoid super-tax by such means. One of the conditions required to be satisfied before an order can be made under sub-section (1) of this section is that the assessee-company should have e distributed by way of divided within the twelve months immediately following the expiry of the relevant accounting year less than the statutory percentage of its total income as reduced by the amount of taxes payable by the company. Obviously, therefore, the Income-tax Officer would not be able to know whether this condition is satisfied or not until the dividend has been declared within the period of twelve months immediately following the expiry of the previous year. The distributable surplus under this section can only be determined after deducting from the total income the taxes payable by the company. Such determination, therefore, can only be made after an order of assessment has been passed under section 23. Besides, sub-section (1) itself provides that an order levying additional super-tax is an order apart from the sum determined as payable by the company on the basis of the assessment made under section 23. Thus, the section itself shows that an order made under this section is not a piecemeal assessment but a separate and an independent order. In Navanagar Transport & Industries Ltd. v. Income-tax Officer, we examined the provisions of this section and held that an order under section 23A(1) was an order of assessment. We observed there that the Income-tax Officer acting under section 23A has first to ascertain whether the conditions of the section are fulfilled and whether the section is applicable to the company. If it is, then the will have to arrive at the undistributed income of the company, liable to the additional super-tax. We also said that section 23A was a self-contained section imposing additional super-tax and provising for its computation and an order under the section was therefore, an order of assessment. The result would be that the there would be two orders of assessment in respect of the same company, one a regular assessment under section 23 and the other an assessment under section 23A. We further said that there was no reason why there could not be two orders of assessment in the case of the same assessee. If there are two charges of tax made by the Act, not only there may be but there would ordinarily be two separate orders of the assessment, one in respect of which charge. There is also nothing in the scheme of the Act which in any way offends against the making g of two different orders of assessment against an assessee. The argument, therefore, that an order under section 23A has to be part and parcel of assessment made under section 23 and that the order in question amounted to a piecemeal assessment not warranted under the Act, cannot, in the view we took in that case, be sustained. In our view the order passed under section 23A was a separate order passed under a distinct and an independent machinery and procedure and it is independently and by itself subject to an appeal.
10. The next argument was that since an order under this section is made on the footing that the distributable surplus was not distributed according to the statutory percentage provided by the section, omission to do so would result in under-assessment, if not non-assessment and must attract the provisions of section 34. This argument also cannot be accepted, for there is no question of under-assessment or non-assessment arising in a case to which this section is applicable. As already stated, an order levying additional super-tax under this section is not an order of assessment passed under section 23, and such an order is passed not on the footing that income e assessable under such an order has escaped assessment or was under-assessed, but it is an order which is passed on the basis that certain conditions set out in section 23A are satisfied, on of them being that the distributable surplus is not distributed in accordance with the statutory percentage laid down in the section. As already stated, an order passed under section 23A is an independent order based on the liability created under this section for breach of an obligation to distribute a certain percentage as dividend out of distributable surplus. In our view, there is no question in such a case of the provisions of section 34 being attracted and, consequently no question of a notice to be given thereunder can possibly arise. The Income-tax Officer proceeds under section 23A and assessees additional super-tax without there being any non-assessment or under-assessment as contemplated by section 34. Section 34 can apply to cases where the Act does not furnish machinery to reassess and reopen an assessment already made, but it cannot apply to a case falling under section 23A, for the section furnishes a machinery complete in outself and provides for an order levying additional super-tax apart from and independently of section 23. The contention raised by Mr. Kaji, therefore, cannot be sustained and has to be rejected.
11. Questions Nos.(3), (4) and (5) largely depend for their answers on a true and proper interpretation of the provisions of sub-section (6) and their impact, if any, on sub-section (1). The controversy reflected in these questions has arisen in the following manner : Though the distributable balance for the account year 1955 was Rs. 6,48,972 the assessee-company distributed Rs. 3,03,360 as dividend, leaving undistributed the surplus of Rs. 3,45,612. The company took the stand that it was entitled under sub-section (6) to adjust and have the benefit of the excess distribution made by it in the preceding year, i.e., 1954. The controversy centres round the quantum of that excess to which the company would be entitled to adjust under sub-section (6). As aforesaid, according to the company, the excess that would be available to it would be Rs. 3,24,847 worked out on the basis of 60 per cent. of the distributable balance, that is to say, 60 per cent. of Rs. 5,80,398 whereas, according to the department since the company was one to which the proviso to sub-section (1) applied, that is the rule of 100 per cent. applied, the excess distribution would be only Rs. 83,922, i.e., Rs. 6,64,320 being the dividend distributed in 1954, less Rs. 5,80,398 the distributable balance for that year. If the contention of the company were to be right, the Income-tax Officer would have to add Rs. 3,24,847 to Rs. 3,03,360 the amount actually distributed in 1955, which would make a total of Rs. 6,28,207 and if the charity donation of Rs. 31,965 were to be added, the total would come to Rs. 6,60,152 and in that event, section 23A(1) would not apply and no order thereunder could be passed levying additional super-tax on Rs. 3,45,612. The argument of Mr. Kaji proceeded on the footing that sub-section (6) projected itself into sub-section (1) and, therefore, sub-section (1) had to be read along with and subject to sub-section (6). If so read, the argument proceeded, sub-section (6) required the excess distribution to the be taken into account before the Income-tax Officer was satisfied that the distribution was less than the statutory percentage. Sub-section (6) talks about adjustment of such excess distribution and the provisions regarding such adjustment, according to Mr. Kaji, show that the distributions as contemplated by sub-section (1) is to be considered in totality along with the excess distribution for the previous year in question. In other words, it is a deemed distribution for the purposes of sub-section (1). He next argued that sub-section (2) contemplated distribution of 55 per cent. but that 55 per cent. also would include excess distribution in the preceding year. According to Mr. Kaji, this is so because whereas sub-section (1) uses the words 'actually distributed', sub-section (2) does not contain those words. Therefore, the scheme of sub-section (2) is to allow the adjustment of the excess distribution of the preceding year to make up the 55 per cent. Thus, sub-section (6) applies at the state when the Income-tax Officer has to determine whether a notice under sub-section (2) is necessary, in other words, to make up 55 per cent. necessary thereunder, and consequently, notice under sub-section (2) was necessary in the present case and the time of three months had to expire without the assessee-company making up the deficiency before the impugned order under section 23A could be passed by the Income-tax Officer.
12. These contentions, in our opinion, are not well-founded, for they do not in the first instance take into account the express language of sub-sections (1) and (2), and in the second place they seek to introduce into those sub-sections the concept of a deemed distribution, a concept not warranted by the language of either sub-section (1) or sub-section (2) or even by the language of sub-section (6). They also do not take into account the object and the scheme of the section. Sub-section (1) lays down certain conditions which, if satisfied, empower the Income-tax Officer to levy additional super-tax on the undistributed balance of the total income of the previous year, 'that is to say, on the total income reduced by the amounts, if any, referred to in clause (a), clause (b) and clause (c) and the dividend actualy distributed, if any'. The dividend to be deduced from the total net income in order to arrive at the undistributed balance on which additional super-tax can be levied is this dividend actually distributed and not dividend deemed to have been distributed by making into account the excess distribution of the preceding year or years. Sub-section (1) thus clearly contemplates actual and not deemed distribution and, therefore, the provisions of sub-section (1) cannot be read subject to or as if the provisions of sub-section (6) are incorporated in it. Once, therefore, the Income-tax Officer finds that a company has not actually distributed dividend according to the statutory percentage applicable to it, subject to the test of reasonableness embodied in sub-section (1), the company becomes liable to be charged with additional super-tax on the undistributed balance. Under sub-section (1) the distribution, therefore, is the actual distribution and the condition is that such distribution, i.e., the actual distribution, is less than 60 per cent. of the total income reduced by the amounts specified in clause (a), clause (b), and clause (c). But, by virtue of the proviso to sub-section (1), in the case of a company which falls either under clause (a) or clause (b) of that proviso, the rule of 100 per cent. is made applicable as the legislature by that proviso directs that the words '60 per cent of the total income' wherever they occur in the section are to be substituted by the words the 'whole of the total income.' Therefore, so far as companies falling under clause (a) or (b) of the proviso are concerned, the percentage of the actual distribution has to be 100 per cent. Therefore, the of the total income reduced by the amounts under clause (a), clause (b) and clause (c) has to be actually distributed. Mr. Kaji, therefore, was not right when he contended that the statutory percentage can be me by bringing in and including in the sum distributed the excess distribution of the preceding years for the purposes of sub-section (1).
13. Coming to sub-section (2), the object of the sub-section clearly is to give an opportunity to the company to make good the deficiency and to save itself thereby from the penal and drastic provisions of sub-section (1). The sub-section provides that no order under sub-section (1) shall be made if a company falling under clause (a) of the proviso, i.e., an investment company, has distributed 90 per cent. of its total income and in the case of any other company such company has distributed 55 per cent. of its total income, unless the company is served with a notice and fails to make a further distribution so that the total distribution made is less than 60 per cent. of the total income as reduced by the amount set out in clauses (a), (b) and (c) of sub-section (1). It should be remembered that by reason of the proviso to sub-section (1), the companies to which the proviso applied have to make 100 per cent. distribution, for the words 'sixty per cent. of the total income' have to be substituted by the words 'the whole of the total income'. But as stated already, sub-section (2) was enacted to enable companies falling under the mischief of sub-section (1) to make good the deficiency in the requisite distribution of dividend. The distribution of dividend to the extent of 90 per cent. and 55 per cent. mentioned there refers to the distribution mentioned in sub-section (1) and therefore again, the concept of the deemed distribution does not enter into the construction of sub-section (2). It follows, therefore, that sub-section (2) can only apply to cases where there has been actual distribution to the extent specified therein. In ascertaining, therefore, whether there has been distribution as contemplated by clauses (i) and (ii) of this sub-section, the excess distribution of the preceding years does not figures at all and, since the assessee-company had not distributed 55 per cent. of the total net income, the sub-section would not apply and therefore there was no question of a notice to be given to it before the Income-tax Officer could pass his order under sub-section (1). In our view, since sub-section (2) contemplates actual distribution and not deemed distribution, the 90 per cent. and 55 per cent. of the distribution and not deemed mentioned therein are not susceptible of being interpreted as being made up of the actual distribution plus the excess distribution of the preceding years, if any. The construction sought to be placed on sub-section (2) on behalf of the assessee-company, if accepted, would create an anomaly in the sense that if it is a company to which the proviso to sub-section (1) applies, as in the present case, and has distributed, for instance, 101 per cent. in the preceding year and has distributed 99 per cent. in the previous year, it cannot get the benefit of this sub-section. But if it has distributed 55 per cent. in the previous year, it would go the benefit of this sub-section. Again, if the company is one to which the proviso to the sub-section applies, i.e., it has to distribute the whole of its total net income and it has distributed 100 per cent. in the earlier year, if the excess is to be calculated as the assessee suggests, i.e., 60 per cent. of the distributable income, the company, for the purposes of making up its deficiency of distribution in the previous year, would still get the benefit of 40 per cent. of the excess distribution of the earlier year. In our view, the sub-section cannot be susceptible of a construction which creates such anomalies. Therefore, the proper construction of sub-section (2), in our view, is that the distribution there referred to is the actual distribution to the extent of 90 per cent. or 55 per cent. as the case may be, and it is where such distribution has been made that a notice has to be issued to the company to give an opportunity to it to make good the deficiency.
14. Coming now to sub-section (6), it seems to us that the object of enacting this sub-section was to lessen the rigour of the drastic provisions of the sub-section (1). Mr. Kaji's contention was that in a case where a company has declared dividend in excess of 60 per cent. of its total net income in the three preceding years but it has distributed dividend to the extent of less than 55 per cent. in the previous year, the benefit of that excess has to be given to the company and the company can adjust its deficiency by adding that excess to the distribution in the previous year and if by such adjustment the aggregate is equivalent to the statutory percentage, sub-section (1) would not come into operation and no order levying additional super-tax can in such a case be made. On the other hand, the learned Advocate-General argued that sub-section (6) does not provide in terms that no such order can be passed in such a case and that the words there used are that such excess distribution in the preceding years shall be taken into account in determining whether the order under sub-section (1) should be made. The learned Advocate-General contended that sub-section (1) left it to the discretion of the Income-tax Officer whether on taking into account such excess distribution, an order under sub-section (1) should be made or not. It is not necessary for us to decide this question, for in the view we take of the section, the fiction of deemed distribution is not contemplated at all and even sub-section (6) does not enact such a fiction. Since there is no room for such deemed distribution, the distribution relevant for the purposes of sub-section (1) and sub-section (2) is the actual distribution. In the present case, the conditions of sub-section (1) were satisfied as the distribution was in fact less than the statutory percentage. Since the actual distribution was less than 55 per cent. sub-section (2) would not apply. So far as sub-section (6) is concerned, since it is a company to which admittedly the proviso to sub-section (1) applies, the distribution had to be of the whole of the total net income. Therefore, even under sub-section (6), the excess distribution in the preceding years, which would be available to the assessee-company for adjustment, would be of the amount of Rs. 83,922, i.e., the difference between Rs. 6,64,320, and Rs. 5,80,398 and, therefore, even if such an excess were added to the amount of the actual distribution, namely, Rs. 3,03,360 the aggregate would be only Rs. 3,87,282 which is less than the total distributable amount. Section 23A(1), therefore, would apply and the Income-tax Officer was entitled to levy the additional super-tax as he has done.
15. As regards Rs. 31,958, the charity donation made by the company in the previous year, it is clear that that amount was not deductible from the distributable surplus. Sub-section (1) is clear, namely, that the distributable amount has to be arrived at by deducing the amount set out in clauses (a), (b) and (c) in sub-section (1) from the total income of the assessee-company. Obviously, the donation by way of charity does not fall under any one of these three clauses and, therefore, the Tribunal was right in allowing the appeal filed by the department. On the same reasoning sub-section (1) does not contemplated deduction of excess distribution in the preceding year from the undistributed surplus on which additional super-tax is to be levied.
16. In the view are we take of the provisions of section 23A, our answer to the questions are as follows :
Question No.1. In the affirmative;
Question No.2. In the affirmative;
Question No.3. In the affirmative;
Question No.4. Part (1) as computed by the Income-tax Officer, and
(2) only Rs. 83,922 and not Rs. 3,24,847;
Question No.5. In the negative;
Question No.6. In the negative; and
Question No.7. In the negative.
17. The assessee-company will pay to the Commissioner the costs of this reference.