1. This is a consolidated reference relating to assessment years 1953-54 and 1954-55. The assessee has been described to be a public limited company, carrying on business in General Insurance. In respect o the said years, the Income-tax Officer originally allowed rebates in the sums of Rs. 4,989-84 and of Rs. 7708-11-0 at the rate of one anna in the rupee on the undistributed profits of the company. On 8-3-1958 the Income-tax Officer, however, passed orders under Section 23-A (1) by which the entire undistributed profits were deemed to have been distributed as dividends to the shareholders. As a consequence, the assessment orders were reopened under Section 34 with the result the rebates granted earlier were withdrawn. The assessee was unsuccessful before the Revenue as well as the Tribunal in his challenge as to the propriety of the order. The Tribunal's view was that Section 23-A created a fiction in respect of distribution of deemed dividends and it was, therefore, clear that the order passed under Section 23-A on 8-3-1958 related back to the anterior period and that further a logical extension of this view would be that at the time of the original assessment, an order under Section 23-A (1) had been passed and so the grant of rebate was improper. The assessee has moved for this reference under Section 66(1) of the Indian Income-tax Act on the following question-
'Whether, by reason of an order passed on 8-3-1958, under Section 23-A (1) on the assessee company subsequent to the original assessment made on the company, for the years 1953-34 and 1954-55, the rebate of one anna in the rupee on the undistributed profits granted in the original assessment in accordance with Schedule I Part B, Proviso (1) of the Finance Act, 1951 could' be withdrawn by a revised assessment?'
We may at the outset state that we do not accept the correctness of the reasoning of the Tribunal above referred to. Nevertheless, we are of opinion that its conclusion should be sustained, though entirely for different reasons. In arriving at that decision, our minds have to a certain extent oscillated from one end to the other, but at the end, we are firmly of the view, that the order of the Income-tax Officer reopening the assessment and withdrawing the rebate was competent and in order.
2. Mr. Swaminathan's argument which undoubtedly has been persuasive, is that grant of rebate under proviso (1) to Part B in Schedule I of the Finance Act postulates that the requisite conditions therefor have, in the opinion of the Income-tax Officer, been satisfied and that if therefore, he proceeded on the basis that there has been no order made under Section 23-A, it was to that extent, conclusive and could not be reopened or reviewed in exercise of his powers under Section 34, Learned counsel urges that Section 23-A does not belong to the realm of assessment, unlike Section 34, and it followed, therefore, that when rebate was granted, the decision of the Income-tax Officer that there has been no order under Section 23-A should stay, whatever may be the validity of an order passed subsequently under Section 23-A. He adds that such a subsequent order will be entirely innocuous for purposes of reopening the assessments under Section 34 and will be futile in withdrawing the rebate. On the other hand, the Revenue, equally persuasively, contends that the application of the proviso in Part B of Schedule I entirely covers the realm of assessment and, therefore, the whole range of it is within the purview of Section 34. On that basis, Mr. Balasubramaniam contends that, if the Income-tax Officer on a wrong view of the proviso proceeded merely on the physical fact of there being no order under Section 23-A when he? passed the assessment order, and later on he found that he was wrong in doing so and actually made an order under Section 23-A. that is a matter which could be reopened under Section 34. In applying Section 34, to such a situation, the Income-tax Officer is not to be taken as interfering with any order passed under Section 23-A.
3. In order to assess the rival contentions, it is first necessary to notice what precisely is the scope of the proviso. Its particular objective appears to be to encourage retention with the company of the amount that remains of the total income as reduced by the outgoings in the nature of taxes and dividends declared, without that amount also being distributed as dividends, by granting a rebate of one anna in the rupee. Where, however, such amount has also been distributed as dividend, the second clause of the proviso charges additional tax subject to certain limits. In our view this objective should be kept in mind in delimiting the scope and applicability of the proviso. The body of the proviso visualises that before the question of allowance of rebate is considered, the company concerned has made the prescribed arrangements for the declaration and payment of dividends payable out of the relative profits and has deducted super tax from the dividends in accordance with the provisions of Sub-section (3-D) or (3-E) of Section 18 of the Act. It is then one can examine whether the conditions for allowance or rebate in Clause (1) of the proviso have been satisfied. The conditions are two-fold:
(1) The total income as reduced by seven annas in the rupee and the amount exempt from income-tax exceeds the amount of dividends declared in respect of the whole or part of the previous year and (2) no order has been made under Sub-section (1) of Section 23-A of the Income-tax Act.
It is on the second condition, the argument on either side has centered. It seems to us to be obvious that this condition very really bears on the quantum of the total income with reference to which rebate is allowed. Whether or not sixty per cent of the total income as reduced by the reductions permissible under Section 23-A has been distributed as dividends, the absence of an order under the provision in the particular circumstances leads to precise data by which the amount eligible for rebate is fixed. It stands to reason, therefore, that a rebate may be allowed only after the Income-tax Officer has considered the applicability of Section 23-A and of the propriety of making an order under that section. The words 'no order has been made under Sub-section (1) of Section 23-A' do not merely mean the physical fact of there being no order under that provision in existence.
4. In Commissioner of Income-tax v. Afco (Pvt) Ltd., (1963) 48 ITR 7, the Supreme Court in considering the proviso has made certain observations which appear to support our view:
'The right to rebate arose under those Finance Acts if no order under Section 23-A was made. The Income-tax Officer had therefore to decide even before completing the assessment of the company whether the circumstances justified the making of an order under Sec, 23-A and unless an order under Section 23-A was made the assesses became entitled automatically to the rebate of one anna in the rupee. Such a provision led to delay in the disposal of assessment proceedings and caused administrative inconvenience. It appears that the legislature modified the scheme of granting rebate in enacting the Finance Act of 1955, with a view to simplify the procedure and avoid delays'.
5. Pitching himself on that position, Mr. Swaminathan urges that once rebate has been granted, it presupposes that a decision has been arrived at by the Income-tax Officer earlier or simultaneously under Section 23-A of the Income-tax Act and if that be so, there is no power vested in him under the Act to go back upon that view.
6. The assessment order for the assessment year 1953-54 began by stating that the assesses was a public limited company carrying on business of accident insurance. It was evidently on this view which is not now maintained, the Income-tax Officer thought that Section 23-A was inapplicable and, therefore, took it for granted that no order has been passed under that proviso. We are inclined to think that if the Income-tax Officer made a mistake in assuming that the physical fact of there being no order will suffice or because of the character of the company as he thought it to be that provision would be inapplicable, it would not disentitle him from reopening the assessment on the view that it had been made at too low a rate. As has been held by the Supreme Court in Sundaram and Co. (P.) Ltd. v. Commissioner of Income-Tax : 66ITR604(SC) where by reason of wrong allowance of rebate, there has been escapement of tax, it may be considered that the assessment had been at too low a rate and Section 34 would be available in such a case.
But Mr. Swaminathan invites our attention to P. S. Subramania v. Simplex Mills Ltd. : 48ITR182(SC) , and contends that the order made under Section 23-A subsequent to the assessment orders would not and could not relate back to the time when the assessments were made and led to an assumption that dividends had been declared to the extent of the amount with reference to which rebate had been given. On that reasoning, he says that Section 34 would not be attracted to the situation. We do not think that the authority cited supports him. All that was held in that case was that excess interest paid by the Revenue could not be recovered by an order under Section 34 on the strength of an amendment with retrospective effect because it did not relate to a charge of the income and, therefore to an assessment of the income. We do not think that the analogy has application to the instant case. Section 34 is invoked in the present case not to reopen or reconsider an order under Section 23-A but to set right an assessment which has been made at too low a rate. If the Income-tax Officer had applied his mind to the conditions necessary for making or not making an order under Section 23-A and then allowed a rebate, whether the position would be different, we are not called upon to consider in this case. There is nothing in the record to show that the Income-tax Officer, before or at the time of making the assessment order applied his mind to the provisions of Section 23-A in order to make an order under that provision. It is no doubt true that he proceeded on the basis that the assessee was a public limited company which possibly weighed with him in taking it for granted for purpose of the proviso that there has been no order under Section 23-A. But so long as the Income-tax Officer had not applied his mind to the question whether it would not be unreasonable to call upon the company to declare a further dividend, but nevertheless he granted rebate under the proviso, it would be a case where he wrongly understood the scope of the proviso in relation to that matter or ignored the requirement of his applying his mind and took it merely for granted that there has been no order under Section 23-A in a physical sense, and this resulted in assessing the income at too low a rate. Such a case will, in our opinion, squarely fall within the ambit of Section 34.
7. We may add that in view of the decision in Commissioner of Income-tax v. Jubilee Mills Ltd. : 68ITR630(SC) , there is no substance in the preliminary objection raised by the Revenue to the competence or validity of the reference.
8. In this view, we answer the question against the assessee with costs. Counsel's fee Rs. 250.