Commissioner of Income Tax, West
Bengal Vs. M/S. Abdul Rahim Osman & Co. (India) Private Limited [1972] INSC
229 (19 September 1972)
REDDY, P. JAGANMOHAN REDDY, P. JAGANMOHAN
HEGDE, K.S.
KHANNA, HANS RAJ
CITATION: 1972 AIR 2469 1973 SCR (2) 372 1972
SCC (2) 854
ACT:
Indian Income Tax Act, 1922 (Act 11 of
1922)-Section 23A(1)Scope of.
HEADNOTE:
The respondent is a private company. The
assessment 'was for the years 1958-59 and 1959-60 of which the accounting year
ended on 30th June 1957 and 30th June 1958 respectively. The Company had
declared dividend after the 12 months following the accounting year, and hence,
the Income Tax Officer subjected the Company to Super Tax in terms of the
latter part of S. 23A(1) of the Indian Income Tax Act, 1922 by including the
dividends of Rs. 15,000 and Rs. 90,000 declared and paid by the Company in
respect of relevant accounting years.
The respondent contended that once dividend
is declared before: an order is made under S. 23-A(l), no Super-Tax can be
levied in respect of those dividends. This submission was rejected by the
I.T.O., who sought to assess the respondent by including the dividends already
declared and paid. An appeal to the Appellate Assistant Commissioner was
unsuccessful. The Tribunal, however, referred the following question to the
High Court under S.66(1)of the Indian Income Tax Act 1922:"whether, on
the. facts of the case, the Tribunal was right in holding that in the matter of
calculation of undistributed balance of the total income of an assessee for the
purpose of levy of Super Tax, in terms of S.23-A(1) of the income-tax Act,
1922, the I.T.O.
should take into consideration dividend
declared by the Company after the period of twelve months immediately following
the expiry of the previous years relevant to the assessment years, 1958-59 and
1959-60, but before the date on which the orders under S.23-A(1) had been made
by the Income Tax Officer;". The High Court has answered that question in
the affirmative and against the Department. The question before this Court was
whether the High Court was right in answering the question in the affirmative
referred to by the Tribunal. Dismissing the appeal,
HELD : (i) S.23-A(1) has been enacted with a
view to deter private Companies which do not distribute more than 60% of their
able income; otherwise their undistributed balance of the net income will by
subjected to additional Super Tax.
The object of the Section is to prevent the
share-holders in adopting device to avoid payment of Super Tax inasmuch as the
rates of Super Tax for the Companies being lower, there may be temptation to
get the Company accumulate profits and capitalise them, such as, for instance,
to issue bonus shares, which were not assessee able as income in the hands of
the shareholders., It is done to avoid these artifices and force such companies
to declare the, minimum statutory dividends. in cases where the provisions have
not been complied with, the I.T.O., with the previous approval of the
inspecting Assistant Commissioner, may make an order if at the time of the
passing of the order, it is found that the company has not distributed its
dividends within 12 months immediately following the accounting year less than
the statutory percentage of its total income of the accounting year as reduced
by the amount of taxes payable by the company. Though the I.T.O. has
jurisdiction to pass an order under Sub-Section (1), he has to make a regular
assessment of the company under S. 23, which be cannot do if in fact, a 373
dividend had been declared before the making of that order, as otherwise, the
company's undistributed balance which is assessed by the I.T.O. would exceed
its commercial profits.
There is also a likelihood of double taxation
because notonly the company is charged Super-Tax for not distributing the
dividends, but also it. will be assessed on the dividends it has in fact
distributed, to income tax and once again, to the Super-Tax. Such a result was
not intended as the company can declare dividends in General Meetings from the
profits, earned by it and when that is declared and paid, the I.T.O., though
for the non fulfillment of the conditions prescribed in the Section, may seek
to reopen it, he cannot make an assessment in cases where the dividend has.
actually been declared and paid, before the date of his order. [375F]
CIVIL APPELLATE JURISDICTION: C. A. Nos. 1378
and 1379 of 1969.
Appeals by certificate from the judgment and
order dated May 21, 1968 of the Calcutta High Court in Income-tax Reference No.
17 of 1965.
V.S. Desai, P. L. Juneja, R. N. Sachthey and
S. P. Nayar, for the appellant.
M.C. Setalvad, S. Roy Chowdhary and G. S.
Chatterjee, for the respondent.
The Judgment of the Court was delivered by
JAGANMOHAN REDDY, J. This appeal is by certificate and though no reasons have
been given for the grant of it, the learned advocate for the respondent does
not contest that a question of law does arise and has not objected to the
certificate. The question that was referred to the High Court by the Tribunal
under s. 66(1) of the Indian Incometax Act, 1922 (hereinafter called. the
'Act') is as follows "Whether, on the facts and in the circumstances of
the case, the Tribunal was right in holding that in the matter of calculation
of undistributed balance of the total income of an assessee for the purpose of
levy of' super-tax in terms of S. 23-A(1) of the Income-tax Act, 1922, the
Income-tax Officer should have taken into consideration dividend declared by
the company after the period of 12 months immediately following the expiry of
the previous years relevant to the assessment years 1958-59 and 1959-60 but
before the date on which the orders under S.
23-A(1) had been made by the Income-tax
Officer ? The High Court has answered that question in the affirmative and:
against the department following the reasoning which was obiter in the case of
Moore Avenue Properties Private Ltd. v. C.I.T.(1)(1) 59 I.T.R. 466.
374 The respondent is a private company to
whichit is not disputed, sub-s.(1) of s.23-A would be attracted if it fulfilled
the conditions prescribed therein. The assessment relating to which the
Income--tax Officer sought to exercise his jurisdiction under that section was
for the years 195859 and 1959-60 for which the accounting year ended on 30th
June 1957 and 30th June 1958 respectively. The order of the Income-tax Officer
was dated October 31, 1961. The contention of the appellant is that the company
had, declared the dividends after the 12 months following the accounting year
and hence the Income-tax Officer had with the previous sanction of the
Inspecting Assistant Commissioner, validly subjected the company to super-tax
in terms of the latter part of s. 23-A(1). On behalf of the respondent it was
submitted that once dividends were declared before an order is made under this
section no super-tax can be levied in respect of those dividends. This
submission was rejected by the Income-tax Officer who sought to assess the
respondent by including Rs. 15,000 and Rs.90,000/declared as dividends at the
general meetings held on December 17, 1959 and May 26, 1960 in respect of the
relevant assessment years. An appeal to the Appellate Assistant Commissioner
was unsuccessful. The Tribunal however on a reading of the relevant parts of
the section came to the conclusion that in computing the undistributed balance
of the "total income not only the income-tax and super-tax payable by the
company but also any other tax levied by the local authority ,etc. are to be
deducted but also "dividends actually distributed, if any" which are
the words used in the latter part of s. 23-A(1). It was also of the view that
no time limit was applicable in taking into account the actual distribution of
dividends in passing an order under s. 23-A(1) by the Income-tax Officer as
such it directed that the sums of Rs. 15,000 and 90,000/were to be taken into
account in arriving at the undistributed balance of the total income of the
respondent company for the purpose of levy of super-tax. Before considering the
contention on behalf of the revenue it will be necessary to examine the terms
of the section and the object for which it was enacted. S.23-A(1) after it was
recast by the Finance Act of 1955 is as follows :"Where the Income-tax
Officer is satisfied that in respect of any previous year the profits and gains
distributed as dividends by any company within the twelve months immediately
following the expiry of that previous year are less than the statutory
percentage of the total income of the company of that previous year as reduced
by(a)the amount of income-tax and super-tax payable by the company in respect
of its total income, but excluding the amount of any super-tax payable under
this section;
(b)the amount of any other tax levied under
any law for the time being in force on the company by the Government or by a
local authority in excess of the amount, if any, which has been allowed in
computing the total income; and (c)in the case of a banking company, the amount
actually transferred to a reserve fund under s.17 of the Banking Companies Act,
1949;
the Income-tax Officer shall, unless he is
satisfied that, having regard to the losses incurred by the company in earlier
years or to the smallness of the profits made in the previous year, the payment
of a dividend or a larger dividend than that declared would be unreasonable,
make an order in writing that the company shall, apart from the sum determined
as payable by it on the basis of the assessment under section 23, be liable to
pay super-tax at the rate of fifty per cent in the case of a company whose business
consists wholly or mainly in the dealing in or holding of investments, and at
the rate of thirty-seven per cent in the case of any other company on the
undistributed balance of the total income of the previous year, that is to say,
on the total amount as reduced by the amounts, if any, referred to in clause
(a), clause (b) or clause (c) and the dividends actually distributed, if
any." This provision is procedural and applies only to companies in which
the public are not substantially interested. It seems to have been enacted with
a view to deter private companies which do not distribute more than 60% of
their assessable income on pain of exposing them to the drastic consequences of
subjecting their undistributed balance of the net income to additional super tax.
The object of the section is to prevent the shareholders in adopting a device
to avoid payment of super-tax inasmuch as the rates of super-tax for the
companies being lower there may be a temptation to get the company to
accumulate profits and capitalise them such as for instance to issue bonus
shares which were not assessable as income in the hands of the shareholders. It
is to avoid these artifices and force such companies to declare the minimum
statutory dividends, though in the light of the changed definition of
'dividend' under s. 2(6A) profits may attract tax even when they reach the
shareholder in capitalised forms, or where they are distributed to them on
liquidation from accumulated profits over the years they will be chargeable as
dividends. In cases where the provisions have not been complied with, the
Income-tax Officer with the previous approval and consent of the Inspecting
Assistant Commissioner will get jurisdiction to make 376 an order if at the
time of the passing of the order it is found that the company has not
distributed by way of dividends within twelve months immediately following the
accounting year less than the statutory percentage of its total income of the
accounting year as reduced by the amount of taxes payable by the company and in
the case of banking companies the amount actually carried to a reserve fund
under a statutory compulsion. Though the Income-tax Officer has jurisdiction to
pass an order under sub-s.(1) he has to make a regular assessment on the
company under S. 23 which he cannot do if in fact a dividend had been declared
before the making of that order, as otherwise the company's undistributed
balance which is assessed by the Income-tax Officer would exceed its commercial
profits. There is also a likelihood of double taxation because not only the
company is charged with super-tax for not distributing the dividends, but also
it will be assessed on the dividends it has in fact distributed to income-tax
and once again super tax. Such a result was not intended. As the company can
only declare dividends in general meeting from the profits earned by it, and
when that is declared and paid the Income tax Officer though for the non-fulfillment
of the conditions prescribed in the section may seek to reopen the cannot make
an assessment in cases where the dividend has actually been declared and paid
before the date of his order. In this view, we think the High Court was right
in answering the question in the affirmative. The appeal is accordingly
dismissed with costs.
S.C. Appeal dismissed.
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