Rebate recall on later dividend declaration under income-tax law applied even to completed assessments

Section 35(10) of the Income-tax Act, 1922 was construed to apply to rebates already granted in completed assessments for earlier years where the company later used the relevant undistributed profits to declare dividends. The provision created a deeming fiction allowing the earlier rebate to be treated as wrongly allowed and recomputed as if rectifying a mistake apparent from the record, while leaving the original assessment of income otherwise undisturbed. Finality of the earlier assessments before 1 April 1956 did not prevent its operation, because the section expressly contemplated prior rebates being affected by later dividend declarations. The officer was therefore empowered to recall the rebate and make the recomputation.

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Issues: Whether section 35(10) of the Income-tax Act, 1922, as introduced by the Finance Act, 1956, applied to rebate granted in completed assessments for earlier years when the undistributed profits were later used for declaration of dividends.

Analysis: The provision was construed according to its plain language. It expressly covered rebates allowed in assessments for the years beginning on 1 April 1948 to 1 April 1955 and created a legal fiction that, where the company later used the amount on which rebate had been allowed for declaring dividends, the earlier relief was to be treated as incorrect and the tax could be recomputed as on rectification of a mistake apparent from the record. The operation of the section did not amount to reopening the assessment in the ordinary sense, because only the rebate was liable to be recalled and the original assessment of income remained undisturbed. The fact that the assessments had become final before 1 April 1956 did not exclude the application of the section, since the deeming provision itself contemplated prior rebates being affected by later events.

Conclusion: Section 35(10) applied to the petitioner's completed assessments, and the Income-tax Officer had power to make the impugned recomputation and recall the rebate. The contention against its application failed.

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