1. Dispute regarding the rectification of income tax assessments under Section 35 concerning deemed dividends from shares held benami for a registered firm. (Para 2 )
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1962 Supreme(SC) 81
SUPREME COURT OF INDIA
27th February, 1962
B.P. SINHA., C.J.I., K. SUBBA RAO, N. RAJAGOPALA AYYANGAR., J.R. MUDHOLKAR AND T.L., VENKATARAMA AYYAR, JJ.
Income-tax Officer, North Satara, (in all the four Appeals), Appellant
Versus
Arvind N. Mafatlal and others, Respondents.
Civil Appeals Nos. 502 to 505 of 1960.
Advocates appeared
M/s N.D. Karkhanis and P. D. Menon, Advocates, for Appellant (in all the four Appeals); Mr. S.T. Desai, Senior Advocate, (Mr. J.N. Shroff, Advocate, with him), for Respondents (In all four Appeals).
Advocates:
J.N.Shroff, N.D.Karkhanis, P.D.MENON, S.T.DESAI
J.N.Shroff, N.D.Karkhanis, P.D.MENON, S.T.DESAI
Only registered shareholders are entitled to tax credits under Section 18(5) and grossing up under Section 16(2) of the Income-tax Act. Section 35 cannot be used to logically extend a fundamental error in assessment rather than correcting the error itself.
Headnote:(A) Indian Income-tax Act - Sections 16(2), 18(5), 23A, 34 and 35 - Deemed dividend - Rectification of mistake - Only the registered shareholder is entitled to the benefit of the credit for tax paid by the company under Section 18(5) as well as the corresponding grossing up under Section 16(2) (Para 4).
(B) Section 35 - Scope of rectification - Jurisdiction under Section 35 is to rectify errors, but not to effect merely readjustment so as to avoid illogicalities in an error which is still permitted to continue (Para 4).
Facts of the case:
Undistributed assessable income of a private limited company was deemed to have been distributed as dividends among its shareholders. Three partners of a registered firm held shares in the said company. The assessing officer accepted the contention that the shares were held benami for the firm and treated the dividend as the income of the firm, apportioning it among the four partners. In the assessment, the officer included only the net dividend and allowed a deduction for the tax paid by the company. Subsequently, the officer issued a notice under Section 35 to rectify this by grossing up the dividend income (adding back the tax paid by the company). The High Court prohibited the enforcement of this rectification order.
Findings of Court:
The court found that the initial treatment of the registered firm as the owner of the shares was a fundamental error. The proceedings under Section 35 did not seek to correct this initial error but rather sought to carry it to its logical conclusion by removing an anomaly in the error. Such a readjustment to avoid illogicalities in a continuing error does not fall within the scope of rectification under Section 35.
Issues: Whether the assessing officer had jurisdiction under Section 35 to rectify an assessment by grossing up dividend income when the initial assessment was based on the erroneous premise that a firm, rather than the registered shareholders, was the owner of the shares.
Ratio Decidendi: Only the registered shareholder is entitled to the credit for tax paid by the company under Section 18(5) and the corresponding grossing up under Section 16(2). Rectification under Section 35 cannot be used to perpetuate or logically extend a fundamental error in assessment; it is for the correction of errors, not for readjustments to resolve illogicalities arising from an uncorrected error.
Result: Appeals dismissed.
Legal Category Hierarchy
Table of Contents
2. Whether the distribution of deemed dividends from a firm to its partners constitutes dividend-income under Section 16(2) of the Income-tax Act. (Para 3 )
3. The Income-tax Officer erred by treating the firm as the shareholder and attempting to rectify an anomaly within that error under Section 35. (Para 4 , 5 )
4. Only registered shareholders are entitled to tax credits under Section 18(5) and corresponding grossing up under Section 16(2) of the Income-tax Act. (Para 4 )
5. Appeals dismissed. (Para 6 )
6. Who is entitled to the benefit of tax credit for tax paid by a company under Section 18(5) and grossing up under Section 16(2)?
Only the registered shareholder is entitled to the benefit of the credit for tax paid by the company under Section 18(5) and the corresponding grossing up under Section 16(2). (Para 4 )
7. Can Section 35 of the Income-tax Act be used to rectify an anomaly resulting from a fundamental error in assessment?
No, jurisdiction under Section 35 is for rectifying errors, not for effecting readjustments to avoid illogicalities in a fundamental error that is permitted to continue. (Para 4 )
8. What is the legal effect of treating a firm as the owner of shares held benami by partners for tax credit purposes?
Such treatment is an error because tax benefits under Section 18(5) and Section 16(2) are strictly reserved for the registered shareholders, not the benami owners. (Para 4 , 5 )
Judgment
AYYANGAR, J. : These four appeals are pursuant to certificates granted by the High Court of Bombay under Art 133(1)(c) of the Constitution and raise identical questions for consideration.
2. The respondents in these four appeals are each of the four partners in a firm constituted under the name of Mafatlal Gagalbhai & Sons and which was composed of Navinchandra Mafatlal, Arvind N. Mafatlal, Yoginder N. Mafatlal and Hemant Mafatlal with share of 5/16, 3/16, 3/16 and 5/16 respectively in that firm (It has to be mentioned that Navinchandra died subsequent to the decision of the High Court and his legal representatives have been brought on record in Civil Appeal No. 502 of 1959 but this circumstance being irrelevant we are ignoring it for the purposes of these appeals). The firm was registered under the Indian Income-tax Act. There was a private limited company named Mafatlal Apte and Kantilal Limited registered under the Phaltan State Companies Act. Ten shares in this private company stood in the name of Navin Chandra, 10 in the name of Arvind and 20 in the name of Hemant. For the account year of the company ending September 30, 1945, the company disclosed a net profit of Rs. 1,09,165. The company, however, did not declare any dividend out of these profits but paid income-tax and super tax thereon. After the merger of the Phaltan State in the Indian Union and the extension of the provisions of the Indian Income-tax Act thereto, the Income-tax Officer who had jurisdiction over the assessment of the company, issued notice to it under S.34 of the Indian Income-tax Act and acting under the provisions of S.23A thereof directed that the undistributed assessable income of the company which amounted to Rs.68,228 should be deemed to have been distributed as dividend among the shareholders as on the date of the General Body Meeting of the company(i.e. on March 11,1946). Before the date of this order the assessment of the firm of Mafatlal Gagabai & Sons and the individual assessment of its four partners had been computed. In order to bring to tax the undistributed dividend "deemed to be declared under S. 23A among the shareholders of the company notices were issued to the four partners under S.34 of the income-tax Act. In response to the notice the partners appeared and it was stated in their behalf that the 40 shares held by three of the partners in the company were in fact the property of the Registered firm and were held by them benami for the firm This contention was accepted by the Income-tax Officer who thereupon treated the dividend attributable to the 40 shares as the dividend-income of the firm and proceeded to apportion the said income among the four partners in the proportion of the shares which each of them held in the firm and add this to the income already assessed. In doing so however, the Income-tax Officer committed an error. In recomputing the total income of each of these four assessees he included only the net dividend "deemed to be received by each but as against this addition he allowed a deduction of the tax paid by the company attributable to such dividend. There was no appeal against these assessment orders which became final. Subsequently this mistake was discovered and thereupon the Income-tax Officer issued notices to the four partners on April 13, 1954. pointing out the error in including in the income the net dividend without being grossed up, while at the same time allowing credit for the tax deemed to have been paid thereon. He averred that this was a mistake apparent from the records and stated that he intended to rectify the same under S.35 of the Income-tax Act. The four assessees objected to the rectification, but almost the entirety of the grounds on which the objection was based related to the legality of the original assessment and the assessees desired that if any rectification was to be made it must be in relation to those items and not in regard to that for which notice had been served. The I
