1. Deemed distribution of dividends under Section 23A(i) of the Income-tax Act — Challenge to assessment notices issued under Section 34(1)(b) on grounds of limitation. (Para 1 , 2 )
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1962 Supreme(SC) 374
SUPREME COURT OF INDIA.
S. K. DAS, J. L. KAPUR, A. K. SARKAR, M. HIDAYATULLAH and RAGHUBAR DAYAL JJ.
COMMISSIONER OF INCOME-TAX, BOMBAY CITY I
Versus
ROBERT J. SAS AND OTHERS.
S. SEETHAI ACHI : INTERVENER
Date of decision: 16/11/1962.
Civil Appeals Nos. 136 to 138 of 1962.
Appeals by special leave from the judgment and order of the Bombay High Court dated March 19, 1958, in Income-tax Reference No. 74 of 1957. The judgment of the High Court is reported as Commissioner of Income-tax v. Robert J. Sas [1958] 34 I.T.R. 222.
Advocates appeared:
Gopal Singh and R. N. Sachthey for the appellant.
R. J. Kolah and J. B. Dadachanji, O. C. Mathur and Ravinder Narain of J. B. Dadachanji and Co., for the respondents.
Important Points
Deemed dividends under Section 23A are treated as distributed on the date of the general meeting. Assessment of such income requires a notice under Section 34, which must be served within four years from the end of the relevant assessment year.
Subject
Tax Law - Income Tax
Act Referred
Headnote
(A) Income-tax Act - Sections 23A and 34 - Deemed distribution of dividends - Limitation period for serving notice - Notice served after four years from the end of the assessment year - Jurisdiction of Income-tax Officer - Section 23A(1) creates a fictional distribution of dividends deemed to have occurred on the date of the general meeting where accounts are laid - Such deemed income must be assessed under Section 34 - The limitation period for serving notice under Section 34(1)(b) begins from the end of the assessment year.
(B) Assessment - Scope - An order under Section 23A determining undistributed profits does not dispense with the requirement of serving a notice under Section 34 for the purpose of assessment - The limitation period prescribed for escaped incomes under Section 34(1) applies to the assessment of deemed dividends.
Facts of the case:
A private limited company earned profits during a calendar year but did not declare dividends at its general meeting. The tax authorities subsequently passed an order deeming the undistributed profits as dividends distributed to the shareholders. Notices for assessment were served on the shareholders on a date that fell after the expiry of four years from the end of the relevant assessment year. The shareholders challenged the jurisdiction of the tax officer on the grounds that the notices were time-barred under the statutory limitation period.
Findings of Court:
The deemed distribution of dividends under the statutory provision occurs on the date of the general meeting. Consequently, the assessment of such income must be conducted under the general assessment provisions, and the notice must be served within the statutory limitation period of four years from the end of the assessment year. Since the notice in this case was served after the end of the four-year period, the assessment was held to be out of time.
Issues: Whether the notice served under Section 34(1)(b) for taxing deemed dividends under Section 23A(1) was served within the prescribed limitation period, and whether the deeming provision under Section 23A(1) affects the calculation of the limitation period for assessment.
Ratio Decidendi: The deeming provision of Section 23A(1) fixes the date of distribution as the date of the general meeting, which determines the relevant assessment year. The subsequent assessment of this income is governed by the limitation period prescribed in Section 34(1)(b), which is four years from the end of the assessment year. The power to make an order under Section 23A does not override or extend the limitation period for assessment under Section 34.
Result: Appeals dismissed.
(B) Assessment - Scope - An order under Section 23A determining undistributed profits does not dispense with the requirement of serving a notice under Section 34 for the purpose of assessment - The limitation period prescribed for escaped incomes under Section 34(1) applies to the assessment of deemed dividends.
Facts of the case:
A private limited company earned profits during a calendar year but did not declare dividends at its general meeting. The tax authorities subsequently passed an order deeming the undistributed profits as dividends distributed to the shareholders. Notices for assessment were served on the shareholders on a date that fell after the expiry of four years from the end of the relevant assessment year. The shareholders challenged the jurisdiction of the tax officer on the grounds that the notices were time-barred under the statutory limitation period.
Findings of Court:
The deemed distribution of dividends under the statutory provision occurs on the date of the general meeting. Consequently, the assessment of such income must be conducted under the general assessment provisions, and the notice must be served within the statutory limitation period of four years from the end of the assessment year. Since the notice in this case was served after the end of the four-year period, the assessment was held to be out of time.
Issues: Whether the notice served under Section 34(1)(b) for taxing deemed dividends under Section 23A(1) was served within the prescribed limitation period, and whether the deeming provision under Section 23A(1) affects the calculation of the limitation period for assessment.
Ratio Decidendi: The deeming provision of Section 23A(1) fixes the date of distribution as the date of the general meeting, which determines the relevant assessment year. The subsequent assessment of this income is governed by the limitation period prescribed in Section 34(1)(b), which is four years from the end of the assessment year. The power to make an order under Section 23A does not override or extend the limitation period for assessment under Section 34.
Result: Appeals dismissed.
Legal Category Hierarchy
Advocates:
Gopal Singh, J.B.DADACHAN, O.C.MATHUR, R.GOPAL KRISHNAN, R.J.KOLAG, R.N.SACH, Ravindra Narayan
Gopal Singh, J.B.DADACHAN, O.C.MATHUR, R.GOPAL KRISHNAN, R.J.KOLAG, R.N.SACH, Ravindra Narayan
Table of Contents
JUDGMENT
KAPUR J.-These three appeals by special leave are brought against the judgment and order of the High Court of Bombay. The appellant in all the three appeals is the Commissioner of Income-tax, but in each of the appeals the respondent is different, i.e., one of the three shareholders of a private limited company, A. C. E. C. Private (India) Limited, which was carrying on business in India and made profits during the calendar year 1947. The accounting year is the calendar year ending December 31, 1948, and the relevant assessment year 1949-50. Although the company had earned large profits during the year 1947, it did not declare any dividend at the shareholders meeting held on December 4, 1948. On March 29, 1954, the Income-tax Officer passed an order under section 23A(i) of the Income-tax Act, hereinafter termed the "Act", whereby the income of the company was, in accordance with that provision, deemed to have been divided amongst the shareholders. By that order the following dividends were deemed to have been distributed amongst the three shareholders, each a respondent in one of the appeals.
Untitled Document
Mr. Paul Raouffart
... Rs. 1,09,859
Mr. Paul Victor Hermans
... Rs. 1,00,189
Mr. Robert J. Sas
... Rs. 1,09,859
The Income-tax Officer issued notices under section 34 of the Act and the notices were served on the respective respondents on April I, 1954. Thereafter the return of the income was submitted and the assessment was completed in regard to the shareholders. Appeals were taken first to the Appellate Assistant Commissioner and then to the Income-tax Appellate Tribunal. One of the points taken before the Tribunal was that the Income-tax Officer had no jurisdiction to take proceedings as the notices were served on the assessee-respondents beyond the period of four years allowed under section 34(1)(b) of the Act. This plea was accepted by the Tribunal and at the instance of the Commissioner of Income-tax a case was stated to the High Court under section 66(1) of the Act and the following two questions were referred to it:
" (i) Whether on the facts and circumstances of the case it was necessary for the Income-tax Officer to initiate action under section 34 of the Indian Income-tax Act in order to tax the deemed income distributed by virtue of the order under section 23A(I) of the Act made in the case of the A. C. E. C. Private (India) Ltd. ?
(2) If the answer to question No. 1 is in the affirmative whether having regard to the observations of their lordships in Navinchandra Mafatlal v. Commissioner of Income-tax {[1955] 27 I.T.R. 245.} the notice served on Ist April, 1954, was out of time ?"
The second question was reframed by the High Court as fellows :
" If the answer to question No. I is in the affirmative whether the notice served on Ist April, 1954, was out of time?"
Both the questions were answered in the affirmative and against the Commissioner of Income-tax. Against the judgment and order he has come in appeal to this court by special leave.
In view of the decision of this court in Sardar Baldev singh v. Commissioner of Income-tax {[1960] 40 I.T.R. 605 ; [1961] 1 S.C.R. 482.} and Commissioner of Income-tax v. Navinchandra Majatlal {[1961] 42 I.T.R. 53 (S.C.).} in which it was held that an assessment cannot be made under section 23A of the Act because that section does not make provision for an assessment to be made and assessment can only be made under section 34 of the Act, the first question no longer survives for decision and was rightly not argued before us.
The only question that remains for decision is the second question, i. e., whether the notice served on April I, 1954, was out of time. Counsel for the appellant-Commissioner of Income-tax-argued (I) that there was no limitation prescribed in regard to the order to be made under section 23A of the Act and if the period mentioned in section 34(i)(b) is made applicable to orders under section 23A then that section (section 23A) wou
