RAJAGOPALA AYYANGAR, J. - These three writ petitions raise for consideration the proper interpretation of section 35 of the Income-tax Act and are directed to question the legality of orders of the Income-tax Officer making additions under section 35 of the Act to the tax liability of the respective petitioners as determined by a completed assessment.
The questions raised in W.P. No. 886 of 1956 and W.P. No. 1006 of 1956 are common while the point to be considered in W.P. No. 1527 of 1956 is slightly different. I shall first proceed to consider W.P. Nos. 886 and 1006 of 1956.
Manickavasagam Chettiar and Sundaram Chettiar are respectively the petitioners in the two petitions. Both of them are shareholders in a private limited company by name the East India Corporation. These petitions are concerned with the assessment of these two individuals for the assessment year 1946-47. Both Manickavasagams and Sundarams assessments for the year in question were completed on December 31, 1950. One of the sources of income disclosed in the returns and accepted by the Income-tax Officer was 'dividends from companies' and among these were sums of Rs. 105 and 120 respectively which they had received as dividend from the East India Corporation. The companys year of account was that ended 30th June of each year. For the year ended June 30, 1944, the company had declared dividends at a general body meeting in December, 1944. But the dividends was actually distributed and paid to the shareholders only on December 3, 1945. As a result of this distribution Manickavasagam received a sum of Rs. 105 as dividend and Sundaram Rs. 120. These sums were included by these two assessee in the returns which they submitted. These figures of Rs. 105 and 120 as dividends from this company were accepted by the Income-tax Officer who passed a final order of assessment on December 31,1950.
Proceedings had been taken against the East India Corporation under section 23A in respect of its distribution of dividend for the companys account year ended June 30, 1945. The general body meeting of the company which passed the balance-sheet for this year declared no dividends and it was the propriety of this act on the part of the general body that was canvassed in these proceedings against the company. On February 28, 1950, the Income-tax Officer, Special (North Circle, Madras) passed an order and he declared 'that the undistributed portion of the companys assessable income for the year ended June 30, 1945, less taxes thereon which has been worked to be Rs. 17,908 will be deemed to have distributed as dividends among the shareholders on December 31, 1945, the date of the general body meeting'. The amount due to have been received by each of these two petitioner who were shareholders in this company was computed by this officer as follows :
It is common ground that the Income-tax Officer who completed the assessment of these two assessees on December 31, 1950, accepting the returns as regard the quantum of dividends received by them was not aware of the order passed under section 23A on February 28, 1950. When however he was appraised of this fact he issued to these two assessees-petitioners notices under section 35 seeking to rectify the assessment completed on December 31, 1950, by the addition of Rs. 2,507 and Rs. 2,149 respectively. The assessees objected on various grounds, which included an attack on the legality of the order under section 23A on the company based upon the constitutional invalidity of section 23A itself. The Income-tax Officer overruled all these objections and made the additions which he proposed in the notices. The petitioners took the matter in appeal to the Assistant Appellate Commissioner. The appeal was dismissed on the ground, inter alia, that no appeal lay from an order under section 35. A further appeal to the Tribunal met with the same fate and an attempt by the petitioner to have a reference to this court of the points involved under section 66(1) of the Act also failed. After all these proceeding before the department authorities and the Tribunal, the petitioners have now approached this court with the petitions now under consideration.
Most of the objections raised by the petitioners in challenge of the validity of the order under section 35 have not disappeared and the only contention now urged, as I already stated in the opening, is whether on a proper construction of section 35 of the Income-tax Act the jurisdiction of the officer extended to the correction of the assessment which he effected by the order now impugned.
The reasoning upon which the Income-tax Officer passed his order which was sustained by the Appellate Assistant Commissioner and the Tribunal (though as I stated before the latter two upheld a preliminary objection by the Department to the maintainability of the proceeding before them) was briefly this : the assessee had included in their returns the dividends received by them from the East India Corporation during the year of account. The sums which they had included were only Rs. 105 and Rs. 120. Even before the date of the final order of assessment -December 31, 1950 - the Income-tax Officer had on February 28, 1950, passed an order under section 23A on the East India Corporation. By reason of that order the shareholders of the company were under the statue deemed to have received further sums noted against each in that year. It was because of the ignorance on the part of the Income-tax Officer who dealt with the assessments of these petitioners that the further sums of dividends statutorily deemed to have been received by the assessees were not included in the computation of their assessable income. This was a mistake apparent from the records within the meaning of section 35.
The correctness of this reasoning was disputed before me in these petitions. I will however premise the discussion as to the scope of section 35 by referring to one fact which had escaped the attention of the departmental and the Tribunal in dealing with this matter. The dividends of Rs. 105 and Rs. 120 received from the East India Corporation disclosed in their returns and included in the assessment were dividends declared by the company for the companys account year ended June 30, 1944 whereas the order section 23A was in relation to declaration of dividends for the next account year ended June 30, 1945. I am pointing this out even at this stage because if what was included in the assessment was one particular item income and the 'record' before the Income-tax Officer disclosed a mistake in that figures the jurisdiction of the officer to correct that mistakes under section 35 would be undoubted. In the present case the facts are different. The figure of the dividends included by the assessees in their returns and in the assessment order dated December 31, 1950, had not undergone any alteration by reasons of the order passed 23A. On the other hand, the effect of the order under section 23A was to add a new item of income 'deemed' to have been received by the assesses during the assessment year 1946-47.
To examine the legal position I shall first take a case where the entire source of income - say income from dividends - is omitted in a return on the basis of which an assessment order has been passed. That omission might be willful or inadvertent or might be due to the fact that it was not or could not be within the knowledge of the assessee. In the contingencies above referred to an assessee would be certainly under assessed and generally speaking the provision of section 34 would be attracted. One thing however is clerk that the under-assessment in such cases cannot be rectified by recourse to the provisions of section 35 and that would be so notwithstanding that the records of the assessment of the company might be before the Department and these records would have disclosed the distribution of dividends to the shareholders. This position sees to be tacitly accepted in the orders of the departmental authorities and the Tribunal passed on the assessees in the present case. Indeed learned counsel for the Department conceded that this would be so.
The next type of cases to be considered would be where the income from a particular source, namely, dividend is included in the return and in the assessment but there is an omission to include an item within that particular source. The case I have in mind is where the assessees return discloses a receipt of dividends from companies but he does not include in it the dividend factually received from one particular company. In such cases the records of the assessment of the particular company concerned which might disclose a distribution of dividend might be before the officer and available to him but this not justify the rectification of assessment under section 35 by including the dividend from this company. This could only be done by resort to the provision of section 34. This position also I did not understand the learned counsel for the Department to contest.
Next comes the case now on hand. The assessment order included dividends from a particular company for one particular account year of the company. There was no error or mistakes or under-statement in regard to the figure relating to that year. As I already stated if there had been any error in regard to that figure this could have been rectified under section 35. But during the same account year of the assessee, the assessee had received or must be deemed to have received, another item of dividend from the same company. Both these cases of actual receipt or deemed receipt must stand on the same footing as regards error. Suppose during the same account year of the assessee he had received further dividends from the company in respect of a different account year of the company. The non-inclusion of this item in the return and in the assessment would certainly lead to an under-assessment and could be rectified under section 34. In my opinion it cannot be rectified under section 35. I can see no sensible distinction between a case of an entire omission of dividend received from a particular company and one where one item of receipt from a particular company is disclosed but not another. From this it would follow that the same rule must govern a further 'deemed' receipt of dividend from a company.
The only features of the case stressed by learned counsel for the Department were two : (1) The order under section 23A was passed on February 28, 1950, long before the assessment order and if only the Income-tax Officer had looked into the records of the companys assessment the assessment would not have been passed without taking into account the dividend 'deemed' to have been received. There is no doubt that factually it would not be so. But this in my opinion is not determination of the question whether the original order of assessment was vitiated by mistake apparent from the record. If this argument of learned counsel for the Department were to prevail, the same rule would apply to cases where no income from dividends was included in the original assessment order, a position however which learned counsel for the Department did not assert. I therefore consider that though plausible this contention deserves to be rejected.
The second point urged was that the present assessees had been expressly named in the order under section 23A on the East India Corporation as having received the dividends and that it was therefore the statutory duty of the Income-tax Officer dealing with the assessments of the present petitioners to correct the discrepancy between the two records - the present assessment orders dated December 31, 1950, which did not include the 'deemed' income and the order under section 23A dated February 8, 1950. This argument, in my opinion, is merely another form of the argument which I have just now dealt with. Mr. Rama Rao Sahib referred me to the decision of the Privy Council in Commissioner of Income-tax v. Khemchand Ramdas and urged that on the passing of the order under section 23A the basis of the assessment order dated December 31, 1950, underwent a modification and that the Income-tax Officer in passing his order under section 35 was merely giving to that modification. I am afraid that this decision cannot help Revenue in the present case. The basis of the assessment order dated December 31, 1950, was that for that account year of the East India Corporation ended June 30, 1944, the assessee had received dividends amounting to Rs. 105 and Rs. 120 during had their account year. There was no error in this and this figure of the dividend never underwent any change. What happened however was that the company was 'deemed' to have declared dividends during its account year ended June 30, 1945. The assessee had included no portion of this dividend in their returns and naturally so because at the general body meeting of the East India Corporation at the end of 1945, no dividends were declared. No doubt during the assessees account year they had disclosed a receipt of dividends from the company for the latters account year ended June 30, 1944. If the date if the declaration of the dividend at the general body meeting were to be test for determining the date when the shareholder should be held chargeable with the receipt of the dividend, the dividends received, for the account year ended June 30, 1944, would have gone over to the assessees earlier assessment year. But evidently since the company actually paid the dividends much later than date of the declaration and the assessee included this dividend as having been received during their account year, the concerned assessment year being 1946-47. It is not now necessary to consider whether the attribution dividend in the assessment of the assessee for 1946-47 proceeds on a correct interpretation of section 16(2) of Income-tax Act. But what I am concerned to point out is, that the inclusion of this dividend in the assessees assessment for 1946-47 cannot obscure the fact that it was a dividend which related to an account year of the company which was unaffected by any order under section 23A. In my judgment, therefore, the error that there was in the assessment orders dated December 31, 1950, with which these two petitions are concerned, was not one rectifiable under section 35 of the Act.
The result is that these petitions are allowed and the rules are made absolute. There will be no order as to costs.
W.P. No. 1527 of 1956.
The facts in this case are different from those in the petitions I have just now dealt with. The petitioner, Sundaram Chettiar, is the same as the petitioner in W.P. No. 1006 of 1956. The case is concerned with the assessment of the petitioner for 1947-48. The petitioner was a shareholder in several private companies including one by the name of Sundaram & Co. Ltd., in which he was a major shareholder. At the time of the petitioners assessment the assessee declared that no dividend from these companies was included in his return because such dividends had not been declared. Even at that stage, the taking of proceedings against these other companies including Sundaram & Co. Ltd., under section 23A Of the Act was under contemplation. In view of this the assessee agreed to the completion of his assessment on the basis that if any order was passed under section 23A against these other companies the assessment then completed might be rectified by including such sums as would be deemed to have been received by the petitioner as result of such orders. The assessment order contained this reservation in these terms : 'The assessee is a shareholder in a number of private companies. It is likely that the provisions of section 23A of the Act will apply in the case of some of these companies and the undistributed profits of these companies will be deemed to have been distributed to the assessee during the account year ended March 31, 1947. The assessees representative has argeed that if the provisions of section 23A of the Act are invoked in the case of private companies the assessee will have no objection to the assessment for 1947-48 being revised later on irrespective of time limit.' On this basis the assessment was completed on November 30, 1951. As contemplated an order under section 23A was passed against Sundaram & Co. Ltd., on March 18, 1952. According to that order, a sum of Rs. 43,959 was deemed to have been distributed as dividends, among the shareholders of Sundaram & Co. Ltd., on December 24, 1946 (the date of the general body meeting of the company). From out of the profits of the year ended June 30, 1946, the assessees share of the dividend thus deemed to have been received was Rs. 36,633 net which when grossed amounted to Rs. 53,284. On this being communicated to the Income-tax Officer dealing with the assessment of the petitioner he issued a notice on April 18, 1953, calling for objections as to why the assessment should not be rectified under section 35. The assessee objected to the rectification on various grounds. But the Income-tax Officer overruling these objections passed an order on June 30, 1953, rectifying the assessment as proposed. In this case also the petitioner filed similar appeals and took other steps as have been mentioned in W.P. No. 1006 of 1056 and these further proceedings ended in the same manner. He has now approached this court with this petition under article 226 of the Constitution.
Two points of difference might be noticed between the petitions just now dealt with and W.P. No. 1527 of 1956. The first relates to the order under section 23A being passed subsequent to the date of the assessment order against the petitioner. If, as I have held, the existence of an order under section 23A even on the date of the assessment did not by itself justify the rectification under section 35 the present case appears to be a fortiori. On the date when the order of assessment was passed, it was right. The fact that by reason of subsequent events assessee was deemed to have been in receipt of other income not included in the original assessment would not be a ground for reopening an assessment which on the date it was made was correct.
But this cannot carry the petitioner to the full length necessary to succeed in this petition. This is because even at the date of the order of assessment both the assessee as well as the assessing officer were alive to the possibility of an order under section 23A on the private companies in which the assessee held a controlling interest and it was as a result of the recognition of this fact that the reservation which I have extracted earlier was made. The question I have now to consider is the legal effect of this estate of affairs. It is no doubt true that on the scheme of the Indian Income-tax Act there cannot be piecemeal assessments. This is far from saying that where the basis upon which an assessment procceeds is later found to be erroneous it cannot be rectified by recourse to section 35. In regard to this point I consider the submission of learned counsel for the Department relying on the principle of the decision of the Privy Council in Khemchands case to have force. In Khemchands case the basis of the original order of assessment was that the assessee was a registered firm and it was because of such an assumption that no super-tax was levied in the original order of assessment. Subsequently however that basic fact ceased to exist by reason of an order canceling registration of the firm. If the firm was unregistrated the assessee was bound to pay super-tax. The Privy Council held that the failure to impose super-tax in the altered circumstances was a mistake which could be rectified under section 35 within the time limited by the provision. Their Lordships said : '... in their Lordships opinion, the case clearly would have fallen within the provisions of section 35 had the Income-tax Officer exercised his powers under the within one year from the date on which the earlier demand was served upon the respondents. For, looking at the record of the assessments made upon them as it stood after the cancellation of the respondents registration - and the other effecting the cancellation would have formed part of that record - it would be apparent that a mistake had been made in stating that no super-tax was leviable.' I consider that the principle of this decision applies to the facts of this case. The common understanding and the basic assumption on which the assumption order dated November 30, 1951, proceeded was that no order under section 23A would be passed on companies in which the petitioner was a shareholder relative to the assessment year 1947-48. On that basis when an order under section 23A was passed on Sundaram & Co. there was a mistake apparent from record within the meaning of the ruling in Khemchands case. I therefore hold that the Income-tax Officer was within his jurisdiction in rectify in g the error under section 35.
The result is that the petition is dismissed and the rule nisi discharged. In view of the order as to costs passed in W.P. Nos. 886 and 1006 of 1956 there will be no order as to costs in this petition also.