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1960 Supreme(SC) 198
SUPREME COURT OF INDIA
2nd September, 1960
B.P. SINHA, C.J.I., S.J. IMAM, A.K. SARKAR, K. SUBBA RAO, AND J.C. SHAH, JJ.
Baldeo Singh, Appellant
Versus
Commissioner of Income-tax Delhi and Ajmer, Respondent.
Civil Appeal No. 317 of 1955.
Advocates appeared
Mr. A. V. Viswanatha Sastri, Senior Advocate (Mr. S. C. Mazumdar, Advocate, with him), for Appellant; Mr. C. K. Daphtary, Solicitor General of India and Mr. K. N. Rajagopal Sastri, Senior Advocate (M/s. R. Ganapthy Iyer, R. H. Dhebar and D. Gupta, Advocates, with them), for Respondent. 738
A.V.VISHWANATHA SASTRI, C.K.DAFTARY, D.GUTPA, K.N.RAJAGOPAL SASTRI, R.Ganapathy Iyer, R.H.Dhebar, S.C.MAJUMDER
Section 34 of the Income-tax Act applies to income deemed to have been distributed under Section 23A, as such fictional income, if not assessed, is considered to have escaped assessment. Anti-evasion provisions are within the legislative competence of the authority empowered to tax income.
Headnote:(A) Income-tax Act - Sections 23A, 34 and 64 - Government of India Act, 1935 - Entry 54, List 1 - Deemed dividend - Escapement of assessment - Jurisdiction - Legislative competence - The place where an assessment under Section 34 can be made is determined by Section 64. If an assessee resides in a particular jurisdiction, the officer of that jurisdiction is competent to initiate reassessment proceedings, regardless of where the original assessment was conducted. (Paras 8-9)
(B) Income-tax Act - Section 34 - Application to deemed income - Section 23A creates a fictional income deemed to have been distributed as dividends as of a specified date in the past. If such income is not included in the total income for the relevant assessment year, it is held to have escaped assessment, and therefore, the proceedings for reassessment under Section 34 are valid. (Paras 13-15)
(C) Constitutionality of Section 23A - Legislative Competence - A provision that deems undistributed profits of a company as dividends in the hands of shareholders to prevent tax evasion is within the legislative competence of the authority empowered to tax income. The power to impose a tax includes the ancillary power to enact measures that prevent the evasion of such tax. (Paras 20-22)
Facts of the case:
An assessee was originally assessed in one city. Following a change in residence and national partition, the assessee resided in another city. An order was passed under Section 23A of the Income-tax Act deeming a portion of a company's undistributed profits as dividends distributed to the assessee for a previous assessment year. The tax officer in the assessee's current city of residence issued a notice under Section 34 to reopen the assessment for that year to include the deemed dividend. The assessee challenged the jurisdiction of the officer, the applicability of Section 34 to deemed income, and the constitutionality of Section 23A.
Findings of Court:
The court held that the place of assessment for Section 34 proceedings is governed by Section 64, and since the assessee resided in the current city, the local officer had jurisdiction. It further held that the fiction created by Section 23A makes the income exist as of a past date; if not assessed, it has legally escaped assessment. Finally, it ruled that Section 23A is a valid exercise of legislative power intended to prevent tax evasion by controlling shareholders.
Issues: Whether the reassessment notice issued by the officer of the assessee's current residence was valid; whether income deemed to be distributed under Section 23A constitutes income "escaping assessment" under Section 34; and whether Section 23A is unconstitutional.
Ratio Decidendi: The court reasoned that Section 64 is the sole provision for determining the place of assessment, irrespective of where the original assessment occurred. Regarding Section 34, the fiction of Section 23A creates income that, if omitted, is legally "escaped." On constitutionality, the power to tax income under Entry 54 of the Government of India Act, 1935, includes ancillary powers to enact anti-evasion measures, such as taxing controlling shareholders on undistributed profits to prevent the use of companies as tax-saving devices.
Result: Appeal dismissed.
SARKAR, J. : In 1944, the appellant was a resident of Lahore. On October 14, 1944, he was assessed to income-tax by the Income-tax Officer, Lahore for the assessment year 1944-45 on an income of Rs. 49,047. As is well known in August 1947, India was partitioned and Lahore came to be included in the newly created Dominion of Pakistan and went out of India. After the partition, the appellant shifted to Delhi and was residing there at all material times.
2. The appellant held shares in a company called Indra Singh and Sons Ltd. which had its office at Calcutta. The other shares in that Company were held by Indra Singh and Ajaib Singh. The holding of all the shareholders were equal. An annual general meeting of this company was held on April 17, 1943, in which the accounts for year ending March 31, 1942, were placed for consideration. The accounts were passed at the meeting but no dividend was declared though the accounts disclosed large profits.
3. On June 11, 1947, an Income-tax Officer of Calcutta passed an order under S. 23A of the Income-tax Act that Rs. 14,23,110 being the undistributed portion of the assessable income of the company for the year ending March 31, 1942, after the deductions provided in the section, be deemed to have been distributed as dividend among the three shareholders on the date of the general meeting, that is, April 17, 1943. As a result of this order a sum of Rs. 4,74,370 being his share of the amount directed to be distributed, had under the section, to be included in the income of the appellant for the assessment year 1944-45. The validity of this order was never challenged.
4. The Income-tax Officer, Calcutta informed the Income-tax Officer, Delhi of the order made by him under S. 23A. Thereupon the Income-tax Officer, Delhi on April 10, 1948, issued a notice under S. 34 of the Act to the appellant then residing in Delhi, requiring him to file within thirty-five days, a revised return for the year 1944-45 as a part of his income for that year had escaped assessment. Obviously the notice was on the basis that the said sum of Rs. 4,74,370 had escaped assessment for the year 1944-45. On February 10, 1949, the appellant submitted a revised return under protest and included in it the said sum of Rs. 4,74,370. The Income-tax Officer, Delhi then reopened the earlier assessment and on March 25, 1949, made a fresh assessment order for 1944-45 assessing the appellant on an income of Rs. 5,23,417. The appellant appealed against this order to the Appellate Assistant Commissioner but his appeal was dismissed. He then appealed to the Income-tax Appellate Tribunal but was again unsuccessful. He has filed the present appeal with special leave of this Court against the judgment and order of the Income-tax Appellate Tribunal.
5. A preliminary point as to the maintainability of this appeal was taken by learned Solicitor-General appearing on behalf of the respondent Commissioner of Income-tax, that the appellant having been unsuccessful in availing himself of the other remedy provided in the Act should not be allowed the extraordinary remedy of approaching this Court with special leave. Now, under the Income-tax Act, the appellant could apply to the Tribunal to refer to a High Court any question of law that arose out of the former s decision. The Act itself gave no right of appeal at all from that decision, nor any other remedy against it. The appellant had applied to the Tribunal for an order referring certain questions arising out of its decision to the High Court at Calcutta but was unsuccessful in getting an order for reasons to be presently stated. The Tribunal was in Calcutta. The appellant who was in Delhi, asked a firm of Income-tax practitioners named S. K. Sawday & Co. in Calcutta, to move the Tribunal for an order of reference. Sawday & Co. had the necessary petition and papers prepared. They sent these to the appellant at Delhi by post on January 5, 1953, for his signature and the papers reached Delhi
