RAMAPRASADA RAO J. - This tax case has come up at the instance of the Commissioner of Income-tax as applicant under section 66(1) of the Indian Income-tax Act, 1922. The respondent is a private limited company. The assessment year in question is 1955-56. By a resolution passed a its general meeting held on December 31, 1954, the company distributed 60% of its profits as dividend as envisaged in section 23A of the Act as it then stood. The accounting year of the company ended with May 31, 1954. The distribution was so effected in accordance with the letter and procedure as was in force on the date of distribution which but for the supervening amendment of section 23A by the Finance Acts of 1955 and 1956, appears to be in order. We shall refer to the scope and effect of the Finance Acts as above presently. For the respondent, the assessment for the years 1955-56 was originally completed on February 17, 1956, on a total income of Rs. 2,58,168. After the amendments to section 23A were made during the subsequent years, which according to the revenue were retroactively operative, the Income-tax Officer initiated proceedings under section 34 of the Act on the foot that the percentage adopted by the assessee for declaring dividends was not in accord with the prescribed percentage under the amended provisions and that 100 per cent. of the distributable profits ought to have been declared as dividends instead of 60 per cent. After following the prescribed procedure, the Income-tax Officer, by his order dated March 30, 1961, levied additional super tax on the assessee, in exercise of his powers under section 23A of the Act as amended. Two contentions were raised by the assessee in his appeal to the Appellate Assistant Commissioner. His first contention was that the proceedings as initiated by the Income-tax Officer were barred by limitation and that the admendments made in the Finance Acts of 1955 and 1956 were not applicable to the assessee. He was unsuccessful before the Appellate Assistant Commissioner. His appeal to the Tribunal resulted in a reversal of the order of the Appellate Assistant Commissioner. The Commissioner of Income-tax having required the Tribunal to refer certain questions of law arising out of the order to this court, the following two questions have been referred :
'(1) Whether, on the facts and in the circumstances of the case, the order under section 23A was barred by limitation as provided by section 34(3) of the Income-tax Act ?
(2) Whether the amendment made to section 23A by the Finance Act, 1956, could not be applied to the assessee company for the assessment year 1955-56 ?'
We may immediately dispose of the first question as it is covered by the authority in M. M. Parikh, Income-tax Officer v. Navanagar Transport and Industries Ltd., where the Supreme Court has finally settled the question by stating that an order under section 23A of the Indian Income-tax Act, 1922, made by the Income-tax Officer, directing payment of super-tax is not an order of assessment within the meaning of section 34(3) of the Act and to such an order the period of limitation prescribed under section 34(3) does not apply. The first question is answered accordingly and against the assessee.
The answer to the second question depends upon whether the text and content of the amendment is made applicable expressly or by necessarily implication to the accounting period of the assessee ending with May 31, 1954. On the subject whether any given statute, rule or notification has retroactive effect, it is well known that the provision has to be interpreted without permitting ones imagination to boggle; respect to the imaginary state of affairs becomes necessary and it would be inevitable to give effect to the provisions, if they are indeed retrospective in effect. As stated by the Supremee Court in Commissioner of Income-tax v. Teja Singh :
'It is a rule of interpretation well settled that in construing the scope of a legal fiction it would be proper and even necessary to assume all those facts on which alone the fiction can operate.'
Their Lordships also approved the classical passage of Lord Asquith in East End Dwellings Co. Ltd. v. Finsbury Borough Council, which reads :
'If you are bidden to treat 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.'
In the instant case, while it is necessary to consider the scope of the retroactive operation of the amendment caused by the Finance Act of 1955 and 1956, it should also be remembered that section 23A is in the natural of a penal provision and necessarily the onus is on the revenue to prove that the ingredients of the section are satisfied before an order is made thereunder. Veeraswami J. in Indian Commerce and Industries Co. Ltd. v. Commissioner of Income-tax, after observing the ratio in Commissioner of Income-tax v. Gangadhar Banerjee and Co. Private Ltd., reiterated :
'......the section is in three parts; the first relevant to jurisdiction, the second with reference too the exercise of jurisdiction, and the third for making an order declaring statutory dividends. The Supreme Court further laid down that the words having regard to in section 23A are not a limiting factor but only indicated that the two factors mentioned in the section should necessarily be taken into account. but the ambit of enquiry as to whether payment of a dividend or a larger dividend than that would be unreasonable would not be limited to those factors, but all relevant circumstances should be taken into account.'
It is thus seen that for making an order under section 23A the mere existence of jurisdiction and the consequential exercise of such jurisdiction by themselves are not sufficient, if the third factor, namely, that the directive of the Income-tax Officer in issuing an order under section 23A satisfies the test of reasonableness as is normally and commercially understood, is not established.
In the light of the above well-settled guidelines, the relevant provisions of the Finance Acts of 1955 and 1956 have to be read and interpreted in the instant case. By section 15 of the Finance Act of 1955, section 23A was recast so as to, inter alia, increase the percentage of distributable dividends as one hundred per cent. instead of sixty per cent. in the case of a company :
'........where the 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,.........'
By section 20(1) of the Finance Act of 1955, the amendment as above shall have effect on and from 1st April, 1955. Sub-section (4) of section 20 of there Act provided :
'For the removal of doubts, it is hereby declared that the provisions of section 23A of the Income-tax Act, as in force immediately before the 1st day of April, 1955, shall continue to apply to a company in respect of its profits and gains of a previous year relevant to any assessment year prior to the assessment year ending on the 31st day of March, 1956, and also to its shareholders referred to in sub-section (1) of section 23A as then that the relevant assessment years in respect of such previous years end on or after the 31st day of March, 1956.'
The Finance Act of 1956, which closely followed the above amendments, further amended section 23A of the main Act so as to read in clause (b) of the proviso to sub-clause (1) stated above for the words 'where the reserves' the words 'where the accumulated profits and reserves'. By such substitution, which, according to section 28 of the Finance Act of 1956, shall be deemed to have come into force on the 1st day of April, 1955, the Finance Act of 1956 is expressly retroactive. It is not seriously disputed by the learned counsel for the assessee that if the text of the amendments in the Finance Acts is applied to the company in question, then it has failed to satisfy the prescribed indicia therein as regards the percentage of distributable dividends. Whereas the law prescribes 100 per cent., the company has declared 60 per cent. of the profits as dividends.
But the main question argued is whether the Finance Act of 1955 is applicable at all to the company. It may be stated at once that the Finance Act of 1956 merely substitutes one expression for another and makes such substitution effective from April 1, 1955. The Finance Act of 1955, however, is clear in scope and application. Sub-section (4) of section 20 of the Finance Act of 1955 makes the prior law (prior to 1st of April, 1955) applicable to a company in respect of a year previous to the assessment year ending with the 31st day of March, 1955. Therefore, the old law was still continued as regards profits for the assessment year 1954-55. This means that continuance of the unamended section would relate to the financial year 1953-54, that is the accounting year ending March 31, 1954. In the instant case, the accounting year of the company ended with May 31, 1954. Therefore, the old law necessarily is inapplicable to the facts of this case. In fact, the statement of object and reasons of the Bill leading to the Finance Act of 1955 also make this position clear. The mere fact that the dividend of 60 per cent. of the profits was declared in December, 1954, would not, in our view, make any difference.
We are unable to agree with the decision of the Tribunal which, were have to state, is highly evolved and not clear. It may be that the vehicle of expression used by the legislature in effectuating their intention is slovenly, but the assessee cannot claim the continuance of the old law in view of the unquestionable intention of the Finance Act of 1955 read with the Finance Act of 1956. Question No. 2, therefore, is answered accordingly and against the assessee.
We have already said that there are three parts in section 23A. One concerns itself with the jurisdiction and the second refers to the exercise of such jurisdiction. These two elements of the section are satisfied here. But the third part whether the company should necessarily declare 100 per cent. of its profits during the year depends upon an investigation into the merits and relevant circumstances. Notwithstanding the statutory prescription by reason of the amendments noted, yet the Income-tax Officer should find that the act of the company in not having declared the statutory percentage of dividend is unreasonable. We are of the view that section 23A of the Indian Income-tax Act, 1922, is susceptible to the test of reasonableness envisaged in the section. Whether, in the facts and circumstances of this case, it was unreasonable on the part of the assessee-company in not having declared the 100 per cent. of its profits as dividends, which scale was prescribed later by the Finance Acts but with retrospective effect and whether there are other circumstances which prompt one to justify the action of the company as reasonable are matters prompt one to justify the action of the company as reasonable are matters which have to be considered but not animadverted to by the revenue at any time. Even the Tribunal failed to consider this. Whilst, therefore, answering the second question against is considered by the Tribunal it would bear in mind the third ingredient of section 23A and find whether the company acted unreasonably in declaring 60 per cent. of its distributable profits as dividends. In the circumstances, there will be no order as to costs.