Commissioner of Income-Tax, Bombay Vs.
Robert J. Sas  INSC 320 (16 November 1962)
Income Tax-Notice of assessment-Limitation
for-Income deemed to be distributed as dividend-Indian Income-tax Act, 1922 (11
of 1922), ss. 23 A (1), 34.
The assessees were the three shareholders of
a private company. The company made profits in the calendar year 1947, but did
not declare any dividend at the shareholders meeting held on December 4, 1948. The Income-tax Officer passed an order under s. 23 A (1) of the
Income-tax Act whereby the income of the company was deemed to have been
divided amongst the three shareholders. He issued notices to the assessees
which were served on them on April 1, 1954.
The assessees contended that the notices were
served beyond the period of four years allowed by s. 34 (1) (b).
Held, that the notices served under s. 34 (1)
of the Act were beyond time and the Income-tax Officer had no jurisdiction to
assess the assessees. Under s. 23A (1) the dividend was to be deemed to have
been distributed not on June 30, 1949, by which date the company should have
distributed the dividend, but on the date of the general meeting i.e.,
December, 4, 1948 within the accounting year 1948 and assessment year 210
1949-50. The notice was not served within four years from the end of the
assessment year. It made no difference that under s. 23 A (1) an order could be
passed at any time.
CIVIL APPELLATE JURISDICTION :Civil Appeals
Nos.138 to 138 of 1962.
Appeals by special leave from the judgment
and order dated March 19, 1958, of the Bombay High Court in Income-tax
Reference No. 74 of 1957.
Gopal Singh and R. N. Sachthey, for the
R. J. Kolah, J. B. Dadachanji, 0. C. Mathur
and Ravinder Narain,' for the respondents.
R. Gopalakrishnan, for the Intervener.
1962. November 16. The judgment of the Court,
was delivered by KAPUR J.These 'three appeals by special leave are brought
against the judgment and order of the High Court Bombay.
The appellant in all the three appeals is the
Commissioner of Income-Tax but in each of the appeals the respondent is
different 1. C., one of: the three shareholders of a private limited company
A.C.E.C. 'Private (India) Limited which was carrying on business in India and
made profits during the calendar year 1947. The accounting year is the calendar
year ending, December 31, 1948, and the relevant assessment year 1949-50.
Although the, company had earned large profits during the year 1947 it did not
declare any dividend at the shareholders' meeting held on December 4, 1948. On
March 29; 1954, the Income-tax Officer passed an order under s. 23A(1), 'of the
Income-tax Act, hereinafter termed the Act Whereby the income of the 'Company.
was in accordance with that provision, deemed to have been divided amongst the
shareholders. By that order the following dividends were 211 deemed to have
been distributed amongst the three shareholders, each a respondent in one of
Mr. Paul Rouffart :Rs. 1,09,8591Mr. Paul
Victor Hermans :Rs. 1,00,189/Mr. Robert J. Sas :Rs. 1,09,859/The Income-tax
Officer issued notices under s. 34 of the Act and the notices were served on
the respective respondents on April 1, 1954. Thereafter the return of the
income was submitted and the assessment was completed in regard 'to the
shareholders. Appeals were taken first to the Appellate Assistant Commissioner
and then to the Income tax Appellate Tribunal. One of the points taken before
the Tribunal was that the Income-tax Officer had no jurisdiction to take
proceedings as the notices were served on the assessee respondents beyond the
period of four years allowed under s 34(1)(b) of the Act. This plea was
accepted by the Tribunal and at the instance of the Commissioner of Income tax
a case was stated to the High Court under s. 66(1) of the Act and the following
two questions were referred to it:
(1) Whether on the facts and circumstances of
the case it was necessary for the Income tax Officer to initiate action under
section 34 of the Indian Income-tax Act in order to tax the deemed income
distributed by virtue of the order under section 23A(1) of the Act made in the
cage of the A.C.E.C. Private (India) Ltd.
? (2) If the answer to question No. 1 is in
the affirmative whether having regard to the observations of their lordships in
Navinchandra Mafatlal v. Commissioner of Income tax,, Bombay City 1 (1955) 27
I.T.R. 245 the notice, served on April 1, 1954 was out of time;? 212 The second
question was reframed by the High Court as follows :
If the answer to question No. 1 is in the
affirmative whether the notice served on April 1, 1954 was out of time ? Both
the questions were answered in the affirmative and against the Commissioner of
Income-tax. Against that judgment and order he has come in appeal to this court
by special leave.
In view of the decision of this court in
Sardar Baldev Singh v. Commissioner of Income-tax, Delhi & Ajmer (1) and
Commissioner of Income-tax V. Navinchandra Mafatlal (2) in which it was held
that an assessment cannot be made under s.23A of the Act because that section
does not make provision for an assessment to' be made and assessment can only
be made under s. 34 of the Act, the first question no longer survives for
decision and was rightly not argued before us.
The only question that remains for decision
is the second question i. e., whether the notice served on April 1 , 1954, was
out of time. Counsel for the appellant-Commissioner of Income-tax-argued (1)
that there was no limitation prescribed in regard to the order to be made under
s. 23A of the Act and if the period mentioned in a. 34 (1) (b) is made
applicable to orders under s. 23A then that section (s. 23A) would become
unworkable; (2) that as under s. 23A(1) there was a period of six months up to
the end of which dividends could be distributed the accounting year would, in
the present case, be 1949 and the assessment year 1950-51 and therefore the
notice could be served within four years of the end of that year i. e.. up to
March 31, 1955. Finally it was urged that proviso (1) to sub-s. (3) of s. 34
applied and as the notice was issued within four years under s. 34(1)(b) there
was (1)  1 S.C.R. 482.
(2)  42 I.T.R. 53.
213 a period of one year from the date of
service of the notice during which the assessment or reassessment could be made
and the impugned order having been made within that period it was a proper and
a valid order.
In the present case the High Court in its
advisory ,.jurisdiction had to give its opinion on the question submitted to it
and it refrained the question in order to bring out the question which arises
from the order of the Tribunal We did not allow the question of the
applicability of proviso (1) to s. 34(3) to be raised as the question does not
take in the point raised about the proviso to sub-s. (3) of s. 34. The question
as framed by the High Court is whether the service of notice under s. 34(1)(b)
was out of time. The proviso to sub-s. (3) of s. 34 relates to completion of
assessment within a particular period when the notice is issued before the
period of limitation referred to in s. 34(1)(b). The two are different
questions and one does not include the other.
At the relevant date s. 23A which empowered
the Income-tax Officer to assess individual members of certain companies read
as under :
S. 23A. Power to assess individual members of
certain companies (1). Where 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 losses
incurred by the company in earlier years or to the smallness of the profit
made, the 214 payment of a dividend or a larger dividend than that declared
would be unreason able, 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." The Income-tax Officer has power
to make an order under this section determining the amount of undistributed
balance out of the profits of a company where the company has distributed by
way of dividends out of the income of the previous year less than 60% of the
assessable income; and if it has distributed less than 60% up to the sixth
month after the holding of the general meeting then the undistributed assessable
income shall be deemed to have been distributed as dividend amongst the
shareholders as at the date of the general meeting. Thereafter the
proportionate share of each shareholder shall be included in the total of such
shareholder for the purpose of assessing his total income.
It comes to this that if at the end of the
sixth month after the general meeting of a company to consider its accounts of
the previous year the income of which is being assessed, the Income-tax Officer
finds that the dividends distributed are less than 60% of the assessable income
then such undistributed income shall be deemed to have been distributed at the
general meeting or in 215 accordance with the resolution passed at the general
meeting and proportionate share shall be included in the total income-of each
individual shareholder. Thus s. 23A(1) creates a fictional distribution of
dividend which is deemed to be a receipt of dividend 'by the shareholder
although in fact the shareholders does not receive it. It is deemed to have been
distributed on the date on which accounts of the previous year were laid before
the company at its general meeting. Thus construed the undistributed assessable
income in the present case was rightly determined by the Income tax Officer
because 60% was not distributed by way of dividends up to the end of the sixth
month after the holding of the meeting which was on December 4, 1948. Under s. 23A(1)
of the Act dividend distributed by June 30, 1949, should not have been less
than the statutory limit but the effect of the deeming provision is not that
the income should be deemed to have been distributed on June 30, 1949, but on
the date of the general meeting i.e. December 4, 1948, and therefore within the
accounting year 1948, the relevant assessment year being 1949-50. It makes no
difference that according to the wording of s. 23A(1) the order could be passed
at any time, the assessment would still have to be 'Made under s. 34(1)(b) of
the Act and if a notice is not served in accordance with that provision the Income
tax Officer will have no jurisdiction to take any ,action against the
shareholder. The notice under s. 34(1) is to be served within four years from
the end of the assessment year. It was held by this court in First Additional income-tax
Officer, Mysore, v. H. N. S. lyengar that the period of eight or four years
under s.34(1)(a) or (b) begins from the end of the assessment year. Besides we
,cannot see why s. 23A(1) 'Should, become unworkable merely because the notice
under s. 34(1) which is the assessment section. prescribes a time limit for
taking action for escaped incomes nor was any reason (1) Supp. 1 S.C.R.I.
216 brought to our attention in support of
In this view of the matter the answer given
by the High Court to the second question was correct and the assessment made
under s. 34(1)(b) of the Act after four years from the end of the relevant
assessment year was out of time. This is the only question which survives for
decision and in our opinion the High Court answered it correctly.
These appeals, therefore fail and are
dismissed with costs.
One hearing fee.