1. Deemed distribution of dividends under Section 23A(1) of the Income-tax Act — Challenge to the validity of assessment notices issued under Section 34(1)(b) regarding limitation periods. (Para 1 , 2 )
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1962 Supreme(SC) 371
SUPREME COURT OF INDIA
A.K.Sarkar : J.L.Kapur : M.Hidayatullah : Raghubar Dayal : S.K.Das
Commissioner Of Income Tax, Bombay
Versus
Robert J.Sas
Case No. : 136 , 137 , 138 of 1962
Date of Decision : 11/16/62
Advocates Appeared: Dadachanji J.B. : Kolah R.J. : Krishnan R.Gopal : Mathur O.C. : Narain Ravindra : Sachthey R.N. : Singh Gopal
Deemed dividends under Section 23A(1) of the Income-tax Act are treated as distributed on the date of the general meeting. Assessment requires a notice under Section 34, which must be served within four years from the end of the relevant assessment year.
Headnote:(A) Income-tax Act - Sections 23A(1) and 34 - Deemed dividends under Section 23A(1) are treated as receipts on the date of the general meeting. Assessment of such deemed income must be carried out under Section 34. (Para 9)
(B) Limitation Period - Notice under Section 34(1)(b) must be served within four years from the end of the assessment year. If the notice is served beyond this period, the assessing officer lacks jurisdiction to take action. (Para 9)
Facts of the case:
A private limited company earned profits in a calendar year but did not declare dividends at the general meeting. An order was passed deeming the undistributed profits as dividends distributed among shareholders. Notices for assessment were served on the shareholders after the expiration of four years from the end of the relevant assessment year.
Findings of Court:
The deemed distribution of dividends occurs on the date of the general meeting. Consequently, the income is attributed to the assessment year corresponding to that date. The notice issued under Section 34(1)(b) was served after the expiration of the four-year limitation period from the end of the assessment year.
Issues: Whether the notice served under Section 34(1)(b) for taxing deemed dividends under Section 23A(1) was issued within the prescribed limitation period.
Ratio Decidendi: Section 23A(1) creates a fictional distribution of dividends deemed to have occurred on the date of the general meeting. Since assessment can only be made under Section 34, the limitation period of four years from the end of the assessment year applies. A notice served after this period is void for lack of jurisdiction. (Para 9)
Result: Appeals dismissed with costs.
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Table of Contents
2. Whether Section 23A orders are subject to limitation under Section 34(1)(b) and whether the deemed distribution date shifts the relevant assessment year. (Para 6 )
3. Section 23A does not provide for assessment, which must be done under Section 34; deemed distributions under Section 23A(1) occur on the general meeting date. (Para 5 , 7 , 9 )
4. Notices for taxing deemed dividends under Section 23A(1) must be served within the four-year limitation period from the end of the relevant assessment year under Section 34(1)(b). (Para 9 , 10 )
5. Appeals dismissed; assessment notices held to be out of time. (Para 11 )
6. Does Section 23A of the Income-tax Act provide for the actual assessment of income?
No, Section 23A does not make provision for an assessment to be made; assessment can only be conducted under Section 34 of the Act. (Para 5 )
7. When is income deemed to be distributed as dividends under Section 23A(1)?
Undistributed assessable income is deemed to have been distributed as dividends amongst shareholders as at the date of the general meeting where accounts for the previous year were laid. (Para 8 , 9 )
8. What is the limitation period for serving a notice under Section 34(1)(b) for deemed dividends?
The notice under Section 34(1) must be served within four years from the end of the relevant assessment year. (Para 9 , 10 )
J.L.KAPUR, J.
(1) 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 s. 23A(1) 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.
MR. PaulRouffart : Rs. 1,09,859.00 Mr. Paul Victor Hermans : Rs. 1,00,189.00 Mr. Robert J. Sas : Rs. 1,09,859.00
(2) THE Income-tax Officer issued notices under s. 34 of the Act and the notices were served on the respective respondents on April 1, 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 s. 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 s. 66(1) of the Act and the following two questions were referred to it:
(1) 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(1) 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, Bombay City 1 (1955) 27 I.T.R. 245 the notice served on April 1, 1954 was out of time ?
(3) THE second question was reframed by the High Court as follows : If the answer to question No. 1 is in the affirmative whether the notice served on April 1, 1954 was out of time ?
(4) BOTH the questions were answered in the affirmative and against the Commissioner of Income-tax. Against that Judgment and order he has come in appeal to this court by special leave.
(5) IN view of the decision of this court in Sardar Baldev SingJi v. Commissioner of Income-tax, Delhi and Ajmer (1) and Commissioner of Income-tax v. Navinchandra Mafatlal (2) in which it was held that an assessment cannot be made under s.23A of the Act because that section does not make provision for an assessment to be made and assessment can only be made under s. 34: of the Act, the first question no longer survives for decision and was rightly not argued before us.
(6) THE only question that remains for decision is the second question i. e., whether the notice served on April 1, 1954, was out of time. Counsel for the appellantCommissioner of Income-taxargued (1) that there was no limitation prescribed in regard to the order to be made under s. 23A of the Act and if the period mentioned in s. 34 (1) (b) is made applicable to orders under s. 23A then that section (s. 23A) would become unworkable; (2) that as under s. 23A(1) there was a pe
