SINHA J. - This is a reference made under section 66(1) of the Indian Income-tax Act. The facts are as follows : Sir Indra Singh and his two sons, Sardar Baldev Singh and Ajaib Singh, were the only shareholders in Messrs. Indra Singh & Sons Private Ltd. Sir Indra Singh transferred 350 shares to his grandson, Sardar Surjit Singh, before the annual general meeting of the said company which was held on the 30th March, 1949. The said Sardar Surjit Singh is the assessee in this case, and we are concerned with the assessment for the year 1949-50. On the 19th January, 1953, an order was made under section 23A of the Income-tax Act upon Messrs. Indra Singh & Sons Private Ltd. and by that order it was directed that the undistributed portion of the assessable income of the company should be deemed to have been distributed as dividend among the shareholders as at the date of the general meeting aforesaid, and in consequence the proportionate share thereof of each shareholder was to be included in the total income of such shareholder for the purpose of assessing his total income. The amount of dividend that was thus deemed to have been distributed to the assessee was Rs. 1,38,052. On the 27th November, 1954, a notice was issued under section 34 of the said Act, requiring the assessee to file a return. Although in the statement of the case, section 34 only is mentioned, it appears that the actual notice was under section 34(1)(a). Previous to this notice, the assessee had no assessable income and never filed a return. Upon receipt of the said notice, he filed a return showing the said amount of dividend for Rs. 1,38,052 under protest. He was assessed upon that income. Against this assessment, the assessee appealed to the Appellate Assistant Commissioner and, thereafter, to the Appellate Tribunal, both of whom have upheld the assessment. Before the Tribunal the assessee raised three contentions :
(1) the provisions of section 23A were ultra vires the Constitution;
(2) the issue of the notice under section 34(1)(a) was not in accordance with law, and was barred by limitation;
(3) the income of the assessee was not actual income but a 'deemed income', and, therefore, could not be held to have escaped assessment so as to enable proceedings to be taken under section 34.
The Tribunal held against the assessee, whereupon the assessee asked for an order of reference and the following questions were referred.
'(1) Whether the Tribunal was correct in holding that the provisions of section 23A were not ultra vires the Constitution ?
(2) Whether the Tribunal was correct in holding that the provisions given in section 23A enabled the Income-tax Officer to include the deemed income contemplated by that section in the total income of the shareholder for the purpose of assessing his total income ?
(3) Whether on the facts and in the circumstances of this case the provisions of section 34(1)(a) are applicable and the notice under section 34(1)(a) of the Indian Income-tax Act had been validly issued and the assessment made pursuant to the said notice was not barred by limitation ?'
The provisions of section 23A which are applicable to this case is the section as it stood before the amendment by the Finance Act of 1955. The relevant provisions thereof were as follows :
'23A. (1) Whether the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company up to the end of the sixth month after its accounts for that previous year are laid before the company in general meeting are less than sixty per cent. of the assessable income of the company of that previous year, as reduced by the amount of income-tax and super-tax payable by the company in respect thereof, he shall, unless he is satisfied that having regard to the losses incurred by the company in earlier years or to the smallness of the profit made, the payment of a dividend or a larger dividend than that declared would be unreasonable, make with the previous approval of the Inspecting Assistant Commissioner an order in writing that the undistributed portion of the assessable income of the company of that previous year as computed for income-tax purposes and reduced by the amount of income-tax and super-tax payable by the company in respect thereof shall be deemed to have been distributed as dividends amongst the shareholders as at the date of the general meeting aforesaid, and thereupon the proportionate share thereof of each shareholder shall be included in the total income of such shareholder for the purpose of assessing his total income.'
It is clear that the income which is assessed is not the actual income, but a 'deemed income' in the hands of the shareholder. The first point that has been canvassed before us is that a law which treats the income of a company as the income of a shareholder, although he has not received it, should be held to be unconstitutional. It is said that it contravenes the provisions of articles 14, 19(1)(g) and 31 of the Constitution. It is also argued that there is a violation of the principles of natural justice.
The question as to whether the provisions of section 23A are ultra vires came to be considered by the Madras High Court in C. W. Spencer v. Income-tax Officer, Madras. The first point taken there was the absence of legislative competence. What had to be considered was entry 54 in List 1 of the Seventh Schedule of the Government of India Act, 1935. This heading related to 'Taxes on income other than agricultural income'. It was held that there was legislative competence. The learned judges referred to the case of Navinchandra Mafatlal v. Commissioner of Income-tax which laid down that legislation to prevent evasion of tax was well within the ambit of the power to levy a tax, and that it was ancillary to the power to tax income, which was authorised by entry 54. With regard to the argument that section 23A attempted to tax a person by introducing a fiction to the effect that he had income, while he had never received the income, and the income was really that of the company, the learned judges said as follows :
'.... the legal fiction enacted by section 23A does correspond to reality, if the veil of the legal personality of the corporate person, the company, is pierced, in order to look at the real person behind that corporate personality. It should be remembered that section 23A deals with controlled companies, as distinguished from companies in which the public have a substantial interest. In fact, in popular parlance, such companies have come to be called section 23A companies even as in England they are known as section 245 companies. The extracts from Simons Income Tax, second edition, volume 3, page 341, which we have set out above, explain the real possibilities of evasion by a person or group of persons by resort to the device of a corporate personality. The income does in reality belong to them, and is under their control all the time. The evasion of liability to super-tax is equally real. That in such companies there might be an individual member or two in a minority unable to force a factual distribution at any given point of time, cannot affect the reality of the situation which section 23A was designed to meet. The basis assumption that underlies section 23A is the identity of the interests of the shareholders and the controlled company. That assumption is founded on reality. The shareholder created a veil of a corporate personality as legally distinct from his juristic personality. That was legal. The legislature countered that with a legal fiction. That was also legal. if both are forgotten the taxpayer and the tax-gatherer proceed on the realities of the situation. The profits are taxed.'
The same objection was taken before the Supreme Court in the case of Sardar Baldev Singh v. Commissioner of Income-tax Sarkar J. explained the real nature of section 23A as follows :
'The section thus applies to a company in which at least 75 per cent. of the voting power lies in the hands of persons other than the public, which can only mean a group of persons allied together in the same interest. The company would thus have to be one which is controlled by a group. The group can do what it likes with the affairs of the company, of course, within the bounds of the Companies Act. It lies solely in its hands to decide whether a dividend shall be declared or not. When, therefore, in spite of there being money reasonably available for the purpose, it decides not to declare a dividend it is clear that it does so because it does not want to take the dividend. Now it may not want to take the dividend if it wants to evade payment of tax thereon. Thus by not declaring the dividend the persons constituting the group in control evade payment of super-tax, which, of course, is a form of income-tax. They would be able to evade the super-tax because super-tax is payable on the dividend in the hands of the shareholders even though it may have been paid by the company on the profits out of which the dividend is paid, and because the rate at which super-tax is payable by a company may be lower than the rate at which that tax is payable by other assessees. By providing that, in the circumstances mentioned in it, the available assessable income of a company would be deemed to have been distributed as dividend and be taxable in the hands of the shareholders as income received by them, the section would prevent the members of such a group from evading by the exercise of their controlling power over the company, payment of tax on income that would have come to them. That being so, the section would be within entry 54.'
It was held that section 23A was properly enacted under power contained in entry 54 of List I in the Seventh Schedule to the Government of India Act, 1935. Coming back to Spencers case, it was held that section 23A does not offend article 14 of the Constitution. Section 23A is not a charging, but a procedural section. An order passed under 23A against the company is not itself an order of assessment. It defines the liability of the shareholder of the company and provides for an order of assessment as against him. Article 14 of the Constitution, however, applies not only to substantive law but also to procedural laws. The objection taken was that section 23A is discriminatory in its effect. It was argued that while other assessees could claim a right of appeal against orders of assessment, the proviso to section 30(1) of the Act restricted the right of a shareholder assessed under section 23A, and denied him a right of appeal against the order made against the company, which was the basis of the order of assessment against the shareholder. In other words, although under section 23A the Primary liability to pay the tax fell on the shareholder, he was denied an opportunity to show cause against an order being passed against the company under section 23A. It was held that, for the purposes of section 23A, there was a substantial identity of interest between the controlled company and its shareholders. The company was entitled to notice and was entitled to appeal against the order passed under section 23A. Since there was this identity of interest, there was in reality no hardship in denying to the shareholder a right to appeal, because he must be taken to have already had that right through the company concerned. The apparent discrimination, therefore, was not a real one. It was held that section 23A does not offend article 14 of the Constitution, as section 23A-companies (as they are popularly called) constitute a well defined class, and the classification of the shareholders of section 23A-companies into a separate class for purposes of right of appeal and other procedural matters has a just and reasonable relation to the object sought to be achieved by that section. Rajagopalan J. said as follows :
'The controlled companies or as they are popularly known as section 23A-companies, constitute a well defined class. So do their shareholders. The identity of interest between the company and its shareholders in that class is a well recognised reality. The object of section 23A is to prevent evasion of tax liability, which the screen of corporate personality would have otherwise helped. The right of appeal conferred on the company is virtually for the benefit of its shareholders... The corporate personality of the company could be utilised by the shareholder to exercise a real right of appeal. The difficulties of permitting each of the shareholders to appeal against the order passed under section 23A should be obvious. The shareholders, even if they are few, may be scattered and an adjudication of the same question by different appellate authorities may, apart from other inconveniences both to the authorities and the company, lead to the grave inconvenience of conflicting decisions. The advantage of a single appeal against an order passed under section 23A should be equally obvious. The possibility of using the name of the company, to avoid tax liability was removed. The possibility - indeed it would normally be a reasonable certainty - of the use of the name of the company for protecting the interests of the shareholders was left intact. The classification of the shareholders of the section 23A-companies is valid and it has a just and reasonable relation to the object sought to be achieved by the impugned legislative provision section 23A.'
It was also held that there was no violation of article 19(1)(f) of the Constitution. The learned judge pointed out that in Himmatlal Harilal Mehta v. State of Madhya Pradesh it was held that a tax levy, which is illegal, may constitute an unreasonable restriction on the right of the citizen to hold property. It was however not established that the provisions of section 23A were illegal. As has been pointed out above, it has now been held by the Supreme Court that section 23A is a provision for preventing an evasion of tax. That being a legitimate object, it cannot be said that a provision of law, which has that object in law, is an unreasonable restriction on the fundamental rights of a citizen. This is a provision for the benefit of the public at large, because it must be presumed that the public is benefited, if there is a proper collection of the revenue. With respect, I agree with the view expressed in the Madras decision and hold that section 23A is not violative of the provisions of article 14 or 19(1)(f). The arguments advanced with regard to article 19(1)(g) before us were also on the same lines, and merit the same answer. With regard to article 31, the matter was really not pressed before us and, as pointed out in Spencers case, little could be said on the point in view of the decision of the Supreme Court in Laxmanappa Hanumanthappa v. Union of India.
This really disposes of the second question as well. In Sardar Baldev Singh v. Commissioner of Income-tax, Sarkar J. said as follows :
'It is contended that on a proper reading of section 34 this would not be a case of income escaping assessment because that section applies to incomem actually escaping assessment and not to income deemed to have escaped assessment which is all that has happened in the present case. It is said that in order that income may escape assessment, there must in fact have been an income.... On its own merits also we are unable to accept the argument of learned counsel for the appellant. Section 23A requires that on an order being made under it, the undistributed portion of the assessable income of the company for a year, as computed for income-tax purposes and after the deductions provided in the section, is to be deemed to have been distributed as dividends amongst the shareholders as at the date of the general meeting, being the meeting at which the accounts for the year concerned were passed, and thereupon, the proportionate share thereof of each shareholder shall be included in the total income of such shareholder for the purpose of assessing his total income. The section creates a fictional income arising as on a specified date in the past and it does so for the purpose of that income being included in the income of the shareholders for assessment of their income-tax. The income must, therefore, be deemed to have been in existence on the date mentioned for the purpose of assessment to tax. It is as if actually existed then. Now if the assessment for the relevant year does not include that income, it has escaped assessment. That is what happened in this case. Therefore, the case is one to which section 34 would clearly apply.'
I now come to the third question, which is the substantial point argued before us at length. This question, as postulated, may be divided into two parts. The first is as to whether notice should be issued under section 34(1)(a) or under section 34(1)(b) of the Income-tax Act, and the second part of the question is as to whether the notice issued was barred by limitation. In reality, the question of limitation would depend on the answer to the first part of the question. If the notice has to be given under section 34(1)(a), as the authorities are said to have done in this case, the limitation is eight years, whereas if the notice has to be given under section 34(1)(b), then the limitation is four years. As has been mentioned above, the assessment is for the year 1949-50, and the four years limitation would expire on the 31st March, 1954. The notice was actually issued on 27th November, 1954. Therefore, if section 34(1)(b) is applicable, then the proceedings are barred by limitation, because it is not disputed that the issue of a valid notice under section 34 is the very foundation of jurisdiction for making the assessment or reassessment as the case may be. In my opinion, the preponderance of authority is to the effect that notice in such case must be issued under section 34(1)(b) of the Income-tax Act. In Navinchandra Mafatlal v. Commissioner of Income-tax, at pages 258-259, it was assumed that the limitation was for four years, from which it can be inferred that notice under section 34(1)(b) was appropriate. In C. W. Spencer v. Income-tax Officer, Madras, it was held that where an order has been made under section 23A, the department was entitled to reopen the assessment under section 34(1)(b). Rajagopalan J. said as follows :
'The petitioners share of the undisbursed profits of the company was not disclosed and could not have been disclosed at any time before their returns were accepted and the assessments were completed on 28th February, 1951. It was not, therefore, a case which could fall within section 34(1)(a). There was no default on the part of the petitioners. They could not include in their returns what was not known to them at all. But the effect of the legal fiction enacted by section 23A was that the income in question accrued on 23rd December, 1949. It was a notional income. It was a fictional income. But none the less the effect of the fiction was an accrual on 23rd December, 1949. If there had been an accrued on 23rd December, 1949, the amount should have been assessed in the relevant assessment year. It was not assessed. The original assessment proceedings were not pending on the date notice was issued under section 34. It was, therefore, in our opinion, a case of escaped assessment which fell within the scope of section 34(1)(b).'
This precise point was decided by the Bombay High Court in Commissioner of Income-tax v. Robert J. Sas. In that case the facts were as follows :
The assessment in dispute was for the year 1949-50, that is to say, for the year ending March 31, 1949. The assessee was a shareholder of a company called A. C. E. C. Private (India) Ltd. For the year 1947, although the company earned a large income, it did not declare any dividend at its general meeting held on December 4, 1948. On March 29, 1954, the Income-tax Officer passed an order under section 23A(1) of the Income-tax Act, as it then stood. He immediately issued a notice under section 34 of the Act. The notice was served on the assessee on the 1st April, 1954, and the assessment was made. The matter went on appeal before the Tribunal and it was contended that notice under section 34 was served beyond the limit of four years, the last date when a valid service could be made being 31st March, 1954. The first point that was raised was as to whether it was at all necessary to issue notice under section 34. It was next contended that even if section 34 notice was necessary the time-limit would run from the end of the year in which the order under section 23A was passed. The matter came upon reference to the High Court and it was held by Chagla C.J. that, although there was no period of limitation prescribed for making an order under section 23A, if the original assessment of the shareholder for the year in which the income so deemed to be distributed falls has already been completed, the national income so deemed to be distributed can be added to the total income of the assessee for that assessment year, only by initiating proceedings of reassessment under section 34, by the issue of a valid notice. In such a case, the assessment of the shareholder can be reopened only under section 34(1)(b) of the Act, and the period of limitation for a notice under that section was four years from the end of the year of assessment. If the notice is issued beyond the period of limitation, the reassessment proceedings would be invalid. The learned Chief Justice said as follows :
'... it is obvious that if proceedings were to be initiated under section 34, they can only be initiated by means of a notice, and if the legislature in clear terms lays down a period of limitation for the issuing of a notice, a notice issued beyond the time indicated by the legislature would be an invalid notice. Therefore, the effect of our taking the view that the period of limitation for serving this notice is four years from the end of the assessment year in which the income escaped tax would be to compel the department to make an order under section 23A within four years of that time. It is not correct to say that an order under section 23A would become infructuous. It is more correct to say that the department should be more vigilant and should not postpone making an order under section 23A beyond the period of four years laid down by the legislature for the purpose of serving a notice.'
The same view has been taken by the Punjab High Court in Commissioner of Income-tax v. Shanti Sarup. It was held there that where the Income-tax Officer seeks to reopen an assessment of any year under section 34(1)(b), the notice must not only be issued but served on the assessee within four years of the end of the year when the income accrued. The next case to be considered is a decision of the Madras High Court in S. Seethai Achi v. Income-tax Officer, Coimbatore. It was held there that where an order under section 23A has been made after the shareholders assessment has been completed for the year in which the dividend so distributed is deemed to have accrued, the only way of making an assessment is to proceed under section 34. The notice to be issued should be under section 34(1)(b), and the four years limitation should apply. A notice issued under section 34(1)(b) beyond four years after the expiry of the year when the income accrued, to reopen assessment of that year, for the purpose of including the dividend deemed to be distributed by an order under section 23A(1) was invalid, and does not confer any jurisdiction on the Income-tax Officer to reopen the assessment. It was pointed out by Rajagopalan J. that in Navinchandra Mafatlals case, Chagla C.J. did express the view that the period of limitation would have to be computed from the date when an order under section 23A was passed. That question, however, was recognised by him in Commissioner of Income-tax v. Robert J. Sas, where it was held that the order under section 23A in such a case was irrelevant in computing the limitation for the assessment or reassessment of the assessee-shareholder. It may be mentioned here that Navinchandra Mafatlals case, where the four years limitation is mentioned, went up to the Supreme Court and was affirmed : see Commissioner of Income-tax v. Navinchandra Mafatals.
The question that has been asked is, therefore, fully covered by authority and it must be held that where an order is made under section 23A, and where the assessment of the individual shareholder for the year in which the income is deemed to have arisen had already been completed or no assessment had been made, then the Income-tax Officer must proceed under section 34 and the appropriate notice to be served would be under section 34(1)(b). This notice is the foundation of jurisdiction and must be made within four years from the end of the year of assessment, that is to say, the year in which the deemed income accrued. In the instant case, the assessee had not made a return previously, because he had no assessable income. Therefore, the Income-tax Officer would have to proceed under section 34. Mr. Meyer attempted to make an argument that inasmuch as there was no prior return filed, there was some difference. I fail to appreciate this argument altogether. Surely, in the case of deemed income, the assessee cannot possibly know anything about it before an order is made under section 23A. If he had no assessable income it is only natural that he did not file a return. I do not see how this affects the question of service of notice under section 34 or the period of limitation.
For the reasons aforesaid, the questions must be answered as follows :
Q. (1) : The Tribunal was correct in holding that the provisions of section 23A were not ultra vires the Constitution.
Q. (2) : Yes.
Q. 3 (3) : In the facts and circumstances of this case, the provision of section 34(1)(a) are not applicable, but the provisions of section 34(1)(b) are applicable. Such a notice, not having been issued at all, or alternatively because the notice issued was beyond the period of four years from the end of the year in which the assessment should have taken place, the bar of limitation applies and the assessment made in pursuance thereof is invalid.
No order as to costs.
DATTA J. - I agree.