Deemed dividend under section 23A required proper reassessment machinery, with limitation running from the section 23A order date.

A section 23A order was treated as creating only a deemed dividend for inclusion in a shareholder's income, not as a self-contained assessment. Where the shareholder's assessment had already been completed, the amount could be brought to tax only through the ordinary statutory assessment machinery, including action under section 34, so that notice and appeal rights were preserved. The limitation period for that reassessment was held to run from the end of the year in which the section 23A order was made, because the notional dividend became first assessable only on that date.

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Issues: (i) Whether an order made to give effect to section 23A was itself appealable by the shareholder. (ii) Whether the Income-tax Officer was required to take action under section 34 before revising the shareholder's assessment on the basis of section 23A. (iii) Whether the limitation period under section 34 applied to the inclusion of dividends deemed to have been distributed under section 23A.

Issue (i): Whether an order made to give effect to section 23A was itself appealable by the shareholder.

Analysis: Section 23A was treated as creating only a notional dividend which had to be brought into the shareholder's total income, but not as a self-contained final assessment code. The construction that treated the section 23A order itself as the assessment order was rejected because it would deny notice and, in some cases, deprive the shareholder of a statutory right of appeal. The order, where the shareholder's assessment had already been completed, had to be followed by a proper assessment order under the Act.

Conclusion: The order was appealable.

Issue (ii): Whether the Income-tax Officer was required to take action under section 34 before revising the shareholder's assessment on the basis of section 23A.

Analysis: The Court held that the inclusion of deemed dividend income in a completed assessment could not be done merely by acting under section 23A. Since section 23A did not itself provide the machinery for a completed assessment against the shareholder, the proper course was to proceed under section 34, read with the assessment provisions, so that the shareholder would be assessed through the statutory machinery. This also preserved the assessee's procedural protections.

Conclusion: Action under section 34 was necessary.

Issue (iii): Whether the limitation period under section 34 applied to the inclusion of dividends deemed to have been distributed under section 23A.

Analysis: The deeming provision did not create any fiction as to when the income was first assessable for the purpose of section 34. The notional dividend became first assessable only when the section 23A order was made, because before that date the income had no assessable existence. Accordingly, the limitation period under section 34 ran from the end of the year in which the section 23A order was passed.

Conclusion: Section 34's limitation applied, and it ran from the year in which the section 23A order was made.

Final Conclusion: The reference was answered in the assessee's favour on the substantive questions, and the deemed dividend could be brought to tax only through the proper statutory assessment machinery, subject to the applicable limitation computed from the section 23A order.

Ratio Decidendi: A section 23A order only creates a deemed dividend for inclusion in the shareholder's income; where a shareholder's assessment is already complete, the tax can be imposed only through a valid assessment under the ordinary machinery, and the limitation for that assessment runs from the date on which the section 23A order is made.

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