TaxTMI 
TaxTMI 
1954 (3) TMI 61
X X X X Extracts X X X X
X X X X Extracts X X X X
....essment year 1943-44 the said Income-tax Officer by his order dated 23rd August, 1946, assessed the assessee on the total income of Rs. 4,42,693. The said assessment was confirmed by the Appellate Assistant Commissioner and by the Appellate Tribunal, in appeal. 4. In the calendar year 1941, accounting year for the assessment year 1942-43, the late Mafatlal Gagalbhai was the registered holder of 12,435 ordinary shares and 2,500 preference shares and in the calendar year 1942, accounting year for the assessment year 1943-44, he was the registered holder of 12,185 ordinary shares and 2,500 preference shares in the Gagalbhai Jute Mills Ltd., Calcutta. For the years ending 31st March, 1941 and 1942, the said company did not declare any dividend either on the ordinary or on the preference shares. Accordingly, the late Mafatlal Gagalbhai did not show in his returns for the assessment years 1942-43 and 1943-44 any income from dividend on the said ordinary and preference shares held by him nor was he assessed by the Income-tax Officer on such dividend income for the said assessment years. 5. In the case of the Gagalbhai Jute Mills Ltd., the Income-tax Officer, Companies District II, C....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uary, 1948, confirmed the orders of the Income-tax Officer. 9. The Gagalbhai Jute Mills Ltd., appealed to the Appellate Tribunal against the Appellate Assistant Commissioner's order and the grounds of decision. The Tribunal by its order dated 29th July, 1948, confirmed the orders of the Income-tax Officer and the Appellate Assistant Commissioner so far as the application of section 23A to the said company's case was concerned, but varied the order as to the distribution as follows : " Under the section the proportionate share of the dividends of each shareholder has to be counted for the purpose of the assessment. We notice that in the present case the amounts of the dividends paid to the ordinary shareholders and the preference shareholders have not been separately determined for the purpose of assessment. We, therefore, direct that such shares should be separately determined in arriving at the assessment. In other words, there should be firstly a distribution of Rs. 1,75,000 amongst the preference shareholders and the balance of the profits must then be distributed amongst the ordinary shareholders. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aid orders and issued notices of demand striking out the clause as to appeal from the said orders. By the said orders the Income-tax Officer reduced the amount deemed to have been distributed to the late Mafatlal Gagalbhai under section 23A as holder of ordinary shares and added the amounts deemed to have been distributed to the late Mafatlal Gagalbhai under section 23A as holder of preference shares. At the foot of the said notices of demand the Income-tax Officer stated that the assessment orders dated 23rd January, 1950, had been made to give effect to the Tribunal's decision in the case of the Gagalbhai Jute Mills Ltd. 14. The assessee appealed to the Appellate Assistant Commissioner, ' B ', Range, Bombay, against the orders of the Income-tax Officer. The Appellate Assistant Commissioner by his order dated 17th April, 1952, dismissed the assessee's appeals stating that the orders appealed against were not orders passed under any section of the Act, which were appealable under section 30. 15. The assessee appealed to the Appellate Tribunal against the said order of the Appellate Assistant Commissioner. The Tribunal by its order dated 23rd March, 1953, dismi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... at the date when the relevant general meeting of the company was held. In consequence of this order the Income-tax Officer reopened the assessment of the assessee for the assessment year 1942-43 and 194344 and he included in the assessment year 1942-43 a sum of Rs. 4,48,502 and in the year 1943-44 a sum of Rs. 7,96,082 as attributable to the dividends which had been distributed under the order made under section 23A. Against the order made by the Income-tax Officer under section 23A Gagalbhai Jute Mills Ltd., preferred an appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. The company then went in appeal to the Appellate Tribunal and the Appellate Tribunal took the view that the undistributed dividends had not been properly distributed among the various class of shareholders. Under the order of the Income-tax Officer the dividend had only been distributed among the ordinary shareholders. Therefore, the Appellate Tribunal directed that the undistributed profits should first be distributed amongst the preference shareholders and the balance should then be distributed amongst the ordinary shareholders. Th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iting that the undistributed portion of the assessable income of the company of the previous year shall be deemed to have been distributed as dividends among the shareholders as at the date of the relevant general meeting, 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. It will be noticed that this section creates a notional income, which income comes into existence when the order is made by the Income-tax Officer and the income consists of the undistributed profits of a company and those undistributed profits are deemed to be dividends having been distributed at the date of the general meeting referred to in that section, and the section provides that the proportionate share of each shareholder in these dividends shall be included in his total income for the purpose of assessing his total income. The view taken by the Tribunal is that the expression " 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 " casts an obligation upon the Income-tax Offi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....be made against an assessee, such an order should not be made unless he has been given an opportunity to show cause. Under section 23A an order is made against the company in respect of its undistributed profits and the effect of the order is that the shareholder becomes liable to pay tax in respect of the proportionate dividend which comes to his share and yet such an order could be made without the Legislature requiring any notice to be served upon the assessee. In this connection reference might be made to section 35 which gives power to the Commissioner and the other Income-tax Officers to rectify mistakes which are apparent on the face of the record, and even in a section which does not involve any assessment or re-assessment and which is confined to mere rectification of mistakes, the section provides that no such rectification shall be made having the effect of enhancing an assessment or reducing a refund unless the Commissioner, the Appellate Assistant Commissioner or the Income-tax Officer, as the case may be, has given notice to the assessee of his intention so to do and has allowed him a reasonable opportunity of being heard. The other important consideration is the ques....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cases where a shareholder may legitimately appeal without challenging the merits of the order under section 23A. One curious case came to this very Court and that was the case of Cambatta v. Commissioner of Income-tax, Bombay ([1946] 14 I. T. R. 748, 756). In that case an order was made under section 23A. Now, it is only the shareholder who is a shareholder on the register of the company at the date when the general meeting is held who is liable to pay tax on this notional income, and what the Department did in that case was that although the share register showed Mr. and Mrs. Cambatta as the shareholders the Department proceeded to assess Cambatta as the shareholder holding that Cambatta was the beneficial owner of the shares. Mr. Cambatta came to this Court on a reference challenging that decision and we upheld the challenge and held that it was not Cambatta who was assessable under section 23A but Cambatta and his wife as an association of persons, they being the persons recognised as shareholders in the register of the company. In that case Cambatta was not challenging the order on its merits, but he was challenging his own liability to pay tax determined by section 23A. The ot....
X X X X Extracts X X X X
X X X X Extracts X X X X
....; " In my opinion, looking at the scheme of the Act, section 23A is a procedural section and not a charging section. It creates a notional income, which is wholly artificial, and which does not in fact exist in the pocket of any shareholder. " Mr. Joshi has drawn our attention to other sub-sections of section 23A, and the relevant sub-section to which attention might be drawn is sub-section (3) (ii) which makes the company liable to pay tax if the Department fails to recover the tax from the shareholder. Therefore, this sub-section makes it clear that the primary liability to pay tax under section 23A is upon the shareholder and a secondary liability is cast upon the company on the failure of the shareholder to pay tax. Then clause (iii) of sub-section (3) provides for a notice of demand where tax is recoverable from a company. If it has any significance at all, what may be noted is that no provision is made for a notice of demand to be served upon the shareholder if tax has to be recovered from him under section 23A, although the answer may well be, as given by Mr. Joshi, that section 29 provides for notice of demand and it was unnecessary to provide for any such no....
X X X X Extracts X X X X
X X X X Extracts X X X X
....come-tax Officer received information that under that order the assessee must be assessed to tax in respect of certain dividends which by that order were made his notional income to be included in the total income of a relevant year, and as the assessee had not paid tax on that notional income it could be said that that income had escaped assessment and acting on that information and seeking to bring the escaped income to tax he proceeds to act under section 34. If we do not place this interpretation upon section 34, one of two results must follow, either of which would be most unfortunate. One would be to take the view which has already been suggested and rejected that under section 23A the order itself is an assessment order and no further assessment is necessary although such an order, as pointed out, could be made without notice to the assessee and in certain cases depriving the assessee of a right of appeal. The other result would be even more unfortunate from the point of view of the Department that if section 34 did not apply there would be no machinery provided by the Act itself for assessment in cases where notional income created by section 23A had to be assessed in the h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mended, and we must now look at the provisions of the amended section in order to decide what is the effect of limitation upon an order made under section 23A. The present sub-section with regard to limitation is sub-section (3) of section 34 and that provides : " No order of assessment under section 23 to which clause (c) of sub-section (1) of section 28 applies or of assessment or re-assessment in cases falling within clause (a) of sub-section (1) of this section shall be made after the expiry of eight years, and no order of assessment or reassessment in any other case shall be made after the expiry of four years, from the end of the year in which the income, profits or gains were first assessable. " The last part of sub-section (3) refers to all orders of assessment or re-assessment which do not fall within the category first enumerated and the period of limitation laid down is four years and the point from which limitation begins to run is the end of the year in which the income, profits or gains were first assessable. Mr. Palkhivala's contention is that by reason of section 23A the divi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ce as the income of the assessee, but it must have an existence even independently of that. In this case the dividend income did not have any existence at all till it was created, as it were, or brought into existence by the order made by the Income-tax Officer under section 23A. Therefore, in my opinion, applying section 34(3) to a case under section 23A, limitation with regard to the shareholder who is sought to be assessed begins to run from the end of the year in which the order under section 23A is made. Therefore applying that test to the present case, the position is that as the order was made on 20th February, 1947, limitation would begin to run from 31st March, 1947, and it would be open to the Income-tax Officer to make an order of assessment in time till 31st March, 1951. Mr. Palkhivala says that section 23A creates a legal fiction and the legal fiction is that a certain income should be deemed to be in existence at a particular time and we must give full effect to the legal fiction, and according to Mr. Palkhivala we are not giving full effect to the legal fiction when we are construing section 34(3) in relation to section 23A by holding that " first assessable " mea....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed in the order of the Tribunal given under section 33 and he was re-assessing pursuant to that direction. As against that Mr. Palkhivala's centention was that this proviso only enabled a re-assessment to be made when there was an appeal by an assessee and the direction was given in that appeal. Mr. Joshi further relied on a further amendment that has been made to section 34 which removes even that suggested difficulty from the way of the Department according to Mr. Joshi, and that further amendment is to the following effect : " Provided further that nothing contained in this section limiting the time within which any action may be taken or any order, assessment or re-assessment may be made shall apply to a re-assessment made under section 27 or to an assessment or re-assessment made on the assessee or any person in consequence of or to give effect to any finding or direction contained in an order under section 31, section 33, section 33A, section 33B, section 66 or section 66A. " Mr. Joshi says that the case would fall directly within this proviso because in giving effect to a direction given by the Trib....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e have been asked to decide is whether the order of the Income-tax Officer of 23rd January, 1950, was appealable. If the order was made under section 34, it is clearly appealable, because it is made appealable under section 30. It would then be for the Tribunal on appeal to decide whether the order was a good order or a bad order. I have already indicated that in my opinion the order is bad, and the parties told us that they wanted to avoid multiplicity of litigation by taking our opinion as to the nature of the order. But if the parties desire that a formal order should be obtained from the Tribunal after we have held that the order is appealable, it would be open to the parties to ask the Tribunal to pass the proper order on the appeal against the order of the Income-tax Officer preferred by the assessee. The second question referred to us is : " Whether it was incumbent upon the Income-tax Officer to take action under section 34 of the Indian-Income-tax Act before he revised the assessments on 23rd January, 1950 ? " That question I must answer in the affirmative for the reasons given by me in my judgment. The third question is :  ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to hold that the word " assess " in this heading means merely to compute the income. Although of course a heading need not necessarily govern the meaning of the section, the word as used in the heading obviously comprises the entire process of assessment. Therefore, Mr. Joshi urges that in the passage from section 23A which I have reproduced above, the word must be read as having the same meaning, viz., as comprising the entire process of assessment from its inception to the ascertainment of the liability of the assessee. As proof of the intention of the Legislature, that such is the meaning to be assigned to the word " assess " in this section Mr. Joshi further relies on sub-section (4) of the section which is in these terms ; " Where tax has been paid in respect of any undistributed profits and gains of a company under this section, and such profits and gains are subsequently distributed in any year the proportionate share therein of any member of the company shall be excluded in computing his total income of that year. " This sub-section refers to tax payable " under this section " and not....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nly right of appeal allowed against an order under sub-section (1) of section 23A is to the company and not to the shareholder. Now, of course, it is not wholly correct to say that even if section 23A was construed as a self-contained section, there would be no right of appeal in any case because it may be that at the date on which an order under section 23A is made the assessment of the assessee has not been completed but is pending, in which case the assessment ultimately would have to be under section 23(3) only. But there may also be a case where before an order under section 23A is made the assessment is already concluded, and in that case only, if it were held that section 23A was a self-contained section for assessment, the assessee would have to go without a right of appeal. Now, the answer of Mr. Joshi to this contention is that even assuming there was a right of appeal, such right cannot confer upon the assessee any tangible benefit because proviso (3) to section 30 enacts that a shareholder in a company in respect of which an order under section 23A has been passed by an Income-tax Officer, may not in respect of matters determined by such order appeal against the assessm....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uch cases in their very nature may be very few. It is no doubt true that a right of appeal is always a creature of statute and the mere fact that an assessee has not a right of appeal conferred on him does not necessarily enable a Court to come to the conclusion that a section or sections should be so construed as to confer upon him that right. But where, as in this case, as I have pointed out at the very outset, the arguments on both sides are somewhat evenly balanced, it becomes material, in determining which of the two rival contentions should be accepted, to consider whether upon a particular construction a valuable right which might otherwise accrue to the assessee would be lost. Mr. Palkhivala next urges that if section 23A is taken to be a selfcontained section, there is in it no provision for notice to the assessee before an assessment is actually made. It is an elementary principle of natural justice that nothing should be done to the prejudice of a person without his being given an opportunity to show cause against what is sought to be done ; and no doubt when action is taken to the prejudice of an assessee there are several sections in the Income-tax Act which provide....
X X X X Extracts X X X X
X X X X Extracts X X X X
....able. " Now, the section in its application to actual income undoubtedly provides that the period of limitation of four years shall be from the end of the year in which that income is assessable to tax because the income having been there it became assessable to tax during that year. But the key words in the section are " the year in which the income etc. were first assessable. " It is true of an actual income to say that it was assessable in the year next after the year in which the actual income arose because that would be the assessment year for any actual income arising in the preceding year. But is it possible to say in respect of what is sought to be taxed under section 23A that the income, profits and gains were first assessable in the year as of which they became assessable under section 23A ? The effect of an order under section 23A no doubt is that the undistributed profits which are deemed to have been distributed as dividends are assessable as income of the year in which the general meeting of the company was held. But it is one thing to say that they are assessable as the income of a particular year and quite another to say that they were first assessable in that ye....