The judgment of court was delivered by
K. T. DESAI, C.J. - The assessee in this case is Motilal Harilal and Co. Ltd. The assessment year is 1956-57, the accounting year being the calendar year 1955. The total income of the assessee company for this assessment year was computed at Rs. 4,13,561. Under the provisions of the Finance Act of 1956 which was applicable for the relevant period, the assessee company was liable to pay super-tax at the rate of Rs. 0-6-9 in the rupee. The Finance Act, however, provided for certain rebate being given. By sub-clause (ii) of proviso 1 to paragraph D of Part II of the Schedule to the Finance Act, 1956, it was provided that 'a rebate at the rate of four annas per rupee of the total income shall be allowed in the case of any company which satisfies condition (a) but not condition (b) of the preceding clause'. It is not disputed that the company in this case satisfied the aforesaid condition (a) but not condition (b), with the result that if this sub-clause stood by itself, the assessee company would be entitled to a rebate of four annas per rupee. There is, however, a further proviso which lays down that the amount of rebate under the aforesaid clause (ii) would be reduced by the sum, if any, equal to the amount or the aggregate of the amounts, as the case may be, computed as therein mentioned. The provisions relating to such computation are material for the purpose of the purpose of the present case and we set out the same in extenso :
'(b) in addition, in the case of a company referred to in clause (ii) of the preceding proviso which has distributed to its shareholders during previous year dividends in excess of six per cent. of its paid-up capital, not being dividends payable at a fixed rate -
on that part of the said dividends which exceeds 6 per cent. but does not exceed 10 per cent. Of the paid up capital.
at the rate of two annas per rupee.
On that part of the said dividends whcihe xceeds 10 per cent. Of the paid up capital.
At the rat of three annas per rupee.'
Acting under this provision, the Income-tax Officer reduced the amount of rebate by a certain sum. The Income-tax Officer took the view that the company had distributed to its shareholders during the relevant previous year dividends in excess of six per cent. of its paid up capital. The company, during the relevant accounting year, had distributed dividends in the manner following :
Date of general meeting
Amount of dividend
Date of payment
Year of profits (Calendar year)
The company thus distributed a sum of Rs. 4,18,560 by way of dividends during the calendar year 1955. This amount exceeded six per cent. of the paid-up capital of the company. The amount of Rs. 4,12,560 distributed as aforesaid was made up of profits made during the accounting years 1947, 1948, 1949 and 1954. In connection with the accounting year 1947, the provisions of section 23A of the Income-tax Act were applied by the income-tax authorities and individual shareholders were assessed to tax on the footing of the company being deemed to have distributed as dividends the sum of the company being deemed to have distributed as dividends the sum of Rs. 1,03,680 to the shareholders as at the date of general meeting of the company, viz., 29th May, 1948. The provisions of section 23A were also applied by the income-tax authorities for the accounting year 1948, when a sum of Rs. 1,45,920 was deemed to have been distributed as dividend among the shareholders on 10th June, 1949. For the accounting year 1949, the provisions of section 23A were also applied and a sum of Rs. 1,38,880 was deemed to have been distributed as dividends amongst the shareholders on 9th June, 1950. It is strongly urged behalf of the assessee company by Mr. M. M. Thakore, the learned advocate for the company, that once a company has been deemed to have distributed dividends under the provisions of section 23A, there could not be any further distribution of dividends in respect of the amounts so declared to have been distributed by the company. He placed strong reliance upon the following observations of Lord Asquith of Bishopstone in the case of East End Dwellings Co. Ltd. v. Finsbury Borough Council :
'If you are bidden to trace an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it. One of these in this case is emancipation from the 1939 level of rents. The statute says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs.'
It is urged that once a distribution is deemed to have been made, all necessary consequences must inevitably flow therefrom. It is urged that one of such consequences is that a particular income cannot be distributed twice over. It is urged that the income for the years 1947, 1948 and 1949 having been deemed to have been distributed as dividends by reason of the fiction created under the provisions of section 23A, the same cannot be considered to have been distributed as dividends in any subsequent year. In connection with legal fictions, it is well established that such fiction should be limited to the purpose for which they are enacted. This has been enunciated by Venkatarama Ayyar J. in the case of Bengal Immunity Company Limited v. State of Bihar. In this very case, Justice Bhagwati observes at page 720 as follows :
'A legal fiction pre-supposes the correctness of the state of facts on which it is based and all the consequences which flow from that state of facts have got to be worked out to their logical extent. But due regard must be had in this behalf to the purpose for which the legal fiction has been created. If the purpose of this legal fiction contained in the Explanation to article 286(1) (a) is solely for the purpose of sub-clause (a) as expressly stated it would not be legitimate to travel beyond the scope of that purpose and read into the provision any other purpose howsoever attractive it may be. The legal fiction which was created here was only for the purpose of determining whether a particular sale was an outside sale or one which could be deemed to have taken place inside the State and that was the only scope of the provision. It would be an illegitimate extension of the purpose of the legal fiction to say that it was also created for the purpose of converting the inter-State character of the transaction into an intra-State one. This type of conversion could not have been in the contemplation of the Constitution makers and is contrary to the express purpose for which the legal fiction was created as set out in the Explanation to article 286(1) (a).'
In the present case, the legal fiction has been created by section 23A for the purpose of taxing in the hands of individual shareholders income which had not been distributed by way of dividends by the company, but which is deemed to have been distributed by the company under the circumstances set out in the said section 23A. This fiction cannot be carried in every respect to its logical conclusion. This fiction would not enable the shareholders to demand from the company payment by way of dividends of that which has been deemed to have been distributed under the provisions contained in section 23A. The object of the legislature in enacting section 23A is to tax the shareholder. The head-note to the section indicates the drift of the section. It runs as follows : 'Power to assess individual members of certain companies'. The section is aimed at foiling an attempt to avoid tax by individual shareholders. We have here to interpret the language used in clause 1(b) of the second proviso to paragraph D of Part II of the Schedule to the Finance Act, 1956, which has been quoted by us earlier. What we have to consider is the meaning of the words '...... a company....... which has distributed to its shareholders during the previous year dividends in excess of six per cent. of its paid-up capital'. Can we say in the present case that the company has distributed to its shareholders dividends in excess of six per cent. of its paid-up capital. It cannot be denied on the facts of the present case that the company has in fact distributed amounts in excess of six per cent. of its paid-up capital. The company has purported to do so by way of dividends. The distribution has been made out of profits of various previous years. But merely because the distribution has taken place out of the profits of previous years, it cannot be said that distribution has not been made during the relevant accounting year 1955. It is urged that what has been distributed is money but not dividends. There is no warrant for saying so. In the statement of the case itself it is shown that the various amounts distributed therein have been distributed as dividends. These various amounts appear under the heading 'amount of dividends'. Merely because any amount is paid out of profits of an earlier year, it cannot be said that it is not paid by way of dividend. It was urged on behalf of the assessee that once there is a deemed distribution of dividends, there cannot thereafter in fact be an actual distribution of dividends. There is no warrant for this assertion. Sub-section (4) of section 23A itself refers to deemed distribution and actual distribution. It lays down as follows :
'Where tax has been paid in respect of any undistributed profits and gains of a company under this section, and such profits and gains are subsequently distributed in any year the proportionate share therein of any member of the company shall be excluded in computing his total income of that year.'
That which is notionally deemed to have been distributed under the Indian Income-tax Act, 1922, is liable to be actually distributed at a subsequent stage, having regard to the provisions of the Indian Companies Act and the articles of association of the company. Merely because an amount is deemed to have been notionally distributed, it cannot be said that such amount is therefore incapable of being subsequently distributed as dividend. In our view, the fiction created by section 23A which is intended for taxing income in the hands of shareholders cannot be extended when taxing the income of a company. The distribution that has been made in the present case falls within the plain, natural and grammatical meaning of the words used in clause 1(b) of the second proviso to paragraph D referred to above. There is no reason why when a distribution falls within the language of a provision, we should hold that it does not fall within it. The learned advocate for the assessee contended that the various amounts of dividends that have been distributed related to different accounting years and that all the amounts distributed during the calendar year 1955 cannot be considered to have been distributed during the year 1955 within the meaning of clause 1(b) of the second proviso. There is no substance in this argument. What we have to consider is the amount distributed in a particular year. In the present case, the year of account is 1955 and the four amounts referred to by us earlier, totalling to Rs. 4,18,560 have been distributed during that year. Merely because they happen to be distributed out of the profits of various previous years, it cannot be said that the distribution has not been made during the year in which the said amounts have been distributed.
The questions raised before us are as follows :
'(1) Whether on the facts and in the circumstances of the case the action of the Income-tax Officer in reducing the rebate allowable to the assessee company under clause (ii) of proviso 1 to paragraph D of Part II of the Schedule to the Finance Act, 1956, in terms of clause 1(b) of proviso 2 of the same paragraph was legal and,
(2) Whether on the facts and in the circumstances of the case the distribution of the dividend during the previous year 1955 was saved by the orders of the Income-tax Officer under section 23A in respect of the profits of the previous years 1947, 1948 and 1949 directing that the dividends should be deemed to have been distributed on the respective dates of the annual general meetings falling prior to the previous year 1955 ?'
Our answer to question No. (1) is in the affirmative and to question No. (2) is in the negative. The assessee will pay to the respondent the costs of the reference.
Questions answered accordingly.