Deemed dividend under section 23A was held outside tax charge where the company was foreign and distribution was outside taxable territories.

Deemed dividend under section 23A of the Indian Income-tax Act, 1922 is treated by legal fiction as distributed to shareholders on the relevant meeting date, but only to the extent the statute permits. Where the company had become a foreign company and the deemed distribution was to be regarded as having occurred outside the taxable territories to a non-resident shareholder, Explanation 3 to section 4(1) did not apply because it concerned dividend paid by an Indian company outside the taxable territories. On that footing, the other definitions invoked did not extend the charge, and the deemed dividend was not taxable in the shareholder's hands.

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Issues: Whether deemed dividend under section 23A of the Indian Income-tax Act, 1922 could be assessed in the hands of a non-resident shareholder where the company, at the time of the deemed distribution, had become a foreign company and the deemed dividend was treated as having been declared outside the taxable territories.

Analysis: Section 23A creates a legal fiction by directing that the undistributed portion of the assessable income of a company shall be deemed to have been distributed as dividend amongst shareholders as at the date of the general meeting. The fiction must be carried to its logical consequence, but only so far as the statute permits. On the facts, the deemed dividend had to be treated as having been paid by a foreign company outside the taxable territories to a non-resident shareholder on a date when neither was within the taxable territories. In that setting, Explanation 3 to section 4(1) did not apply, because it speaks of dividend paid by an Indian company without the taxable territories. The other definitions relied upon did not extend the charge to this deemed dividend in the circumstances of the case.

Conclusion: The deemed dividend was not taxable in the assessee's hands under section 23A.

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