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1954 Supreme(Bom) 40
IN THE HIGH COURT OF BOMBAY
Chagla, C.J. and Tendolkar, J.
Appellants: Navinchandra Mafatlal
Vs.
Respondent: Commissioner of Income-tax, Bombay City
Decided On: 18.03.1954
Counsels:
For Appellant/Petitioner/Plaintiff: N.A. Palkhivala, Adv.
For Respondents/Defendant: G.N. Joshi, Adv.
An order under section 23A is not a self-contained order of assessment and a separate assessment order is necessary under some provision of the Act before an assessee can be made liable to pay tax. Section 34 applies to an order under section 23A against a shareholder and the period of limitation under section 34 (3) applies to an order under section 23A against a shareholder, but it applies in the same sense in which the Court has indicated in the judgment.
Headnote:
INCOME TAX - Section 23A - Power to assess individual members of certain companies - Whether an order under section 23A is a self-contained order of assessment or merely a computation section - Whether a separate assessment order is necessary under some provision of the Act before an assessee can be made liable to pay tax - Whether section 34 applies to an order under section 23A against a shareholder - Whether the period of limitation under section 34 (3) applies to an order under section 23A against a shareholder.
Fact of the Case:
The assessee was the legal representative of Mafatlal Gagalbhai and he had been assessed in that capacity. The Income-tax Officer made an order under section 23A on 20th February, 1947, and by that order he directed that Rs. 5,71,072 and Rs. 10,00,411 for the two respective years ending on 31st March, 1941, and 31st March, 1942, should be distributed as dividend to the shareholders who were shareholders at the date when the relevant general meeting of tea 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 1943-44 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.
Finding of the Court:
The Court held that an order under section 23A is not a self-contained order of assessment and a separate assessment order is necessary under some provision of the Act before an assessee can be made liable to pay tax. The Court further held that section 34 applies to an order under section 23A against a shareholder and the period of limitation under section 34 (3) applies to an order under section 23A against a shareholder, but it applies in the same sense in which the Court has indicated in the judgment.
Issues: 1. Whether an order under section 23A is a self-contained order of assessment or merely a computation section? 2. Whether a separate assessment order is necessary under some provision of the Act before an assessee can be made liable to pay tax? 3. Whether section 34 applies to an order under section 23A against a shareholder? 4. Whether the period of limitation under section 34 (3) applies to an order under section 23A against a shareholder?
Ratio Decidendi: 1. The Court held that an order under section 23A is not a self-contained order of assessment because: - Section 23A does not contemplate any notice being given to the shareholder, which is an elementary principle of natural justice. - An order under section 23A may be made while the assessment of the shareholder for the relevant year is still pending under section 23 or it may be made after the assessment is closed. If the order is made while the assessment under section 23 is pending, the shareholder has a right to appeal with regard to the whole of his assessment including the assessment made with regard to dividends under section 23A. The only qualification of his right to appeal is provided in the proviso to section 30 and that qualification is 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 matter determined by such order appeal against the assessment of his own total income. As section 30 gives the right to the company to appeal against the merits of the order under section 23A. But this curious result will follow that while a shareholder may challenge a decision under section 23A to the extent that it affects his rights or interests if an assessment is pending that right is denied to him if the order under section 23A were to be made after the assessment was completed. 2. The Court held that a separate assessment order is necessary under some provision of the Act before an assessee can be made liable to pay tax because: - Section 23A does not provide for any notice to be served upon the assessee. - An order under section 23A may be made while the assessment of the shareholder for the relevant year is still pending under section 23 or it may be made after the assessment is closed. If the order is made while the assessment under section 23 is pending, the shareholder has a right to appeal with regard to the whole of his assessment including the assessment made with regard to dividends under section 23A. The only qualification of his right to appeal is provided in the proviso to section 30 and that qualification is 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 matter determined by such order appeal against the assessment of his own total income. As section 30 gives the right to the company to appeal against the merits of the order under section 23A. But this curious result will follow that while a shareholder may challenge a decision under section 23A to the extent that it affects his rights or interests if an assessment is pending that right is denied to him if the order under section 23A were to be made after the assessment was completed. 3. The Court held that section 34 applies to an order under section 23A against a shareholder because: - The practice adapted by the Department in case falling under section 23A was to make an order of assessment under section 34 read with section 23, and in this very case, as the Court has already pointed out, the first order upon the shareholder was made under section 34. - Section 34 is capable of the interpretation the Court has put upon it and it is supported by the past practice on the part of the Department. 4. The Court held that the period of limitation under section 34 (3) applies to an order under section 23A against a shareholder, but it applies in the same sense in which the Court has indicated in the judgment because: - The expression "first assessable" means that there was an income in existence which could have been assessed or was capable of being assessed but in fact was not assessed and was assessed subsequently, and limitation begins to run from the time when such income could be assessed. - The dividends deemed to be the income of the shareholder under section 23A did not have any existence by the order made by the Income-tax Officer under section 23A on 20th February, 1947, and having come into existence at that date, it could only have been first assessed at that date. Prior to 20th February, 1947, it was incapable of being assessed.
Final Decision: The Court answered the questions referred to it as follows: 1. 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? Answer: In the affirmative. 2. Whether the bar of limitation specified in section 34 of the Indian Income-tax Act would apply to the inclusion in the total income of a shareholder the dividend which is deemed to have been distributed under section 23A (1) of the Act? Answer: In the affirmative to the extent and in the manner indicated in the judgment.
1. This reference raises a very important and a very interesting question as to the interpretation of section 23A of the Indian Income-tax Act. The facts leading up to the reference may be briefly stated. The assessee is the legal representative of Mafatlal Gagalbhai and he has been assessed in that capacity. The assessment order against him for the assessment year 1943-44 it was passed on 23rd August, 1946. It appears that Mafatlal was a shareholder he held 12,185 ordinary shares and 2,500, preferences shares. The Income-tax Officer made an order in respect of this company under section 23A on 20th February, 1947, and by that order he directed that Rs. 5,71,072 and Rs. 10,00,411 for the two respective years ending on 31st March, 1941, and 31st March, 1942, should be distributed as dividend to the shareholders who were shareholders at the date when the relevant general meeting of tea 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 1943-44 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., perfered an appeal to the Appellate Assistant Commissioner. 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 distribute amongst the preference shareholders and the balance should then be distributed amongst the ordinary shareholders. The assessee also appealed against the order made by the Income-tax Officer reopening the assessment for the years 1942-43 and 1943-44, which order had been made under section 34 of the Act. The Appellate Assistant Commissioner dismissed his appeal and he then appealed to the Appellate Tribunal. After the decision of the Tribunal was given in the appeal of the mills it was realised that if the assessee proceeded with the appeal, the result would have been that his assessment would have to be enhanced, and as the Department had not appealed against the order of the Appellate Assistant Commissioner, the Tribunal had no jurisdiction to enhance the assessment of the assessee in his appeal. The Tribunal, therefore, gave leave to the assessee to withdraw his appeal and accordingly the appeal was withdrawn on 16th March, 1949. It may be mentioned that the order of the Tribunal in the appeal of the mills was passed on 29th July, 1948. Pursuant to the directions given by the Tribunal, the Income-tax Officer again reopened the assessment of the assessee for both the assessment years 1942-43 and 1943-44 and included in the income the dividends in accordance with the direction given by the Tribunal. In doing so the Income-tax Officer did not proceed under section 34. No notice to show cause was given to the assessee. The Income-tax Officer on his own initiative reopened the assessment, determined the income, determined the tax that had to be paid, and served upon the assessee a notice of payment. Against this order of the Income-tax Officer, the assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner dismissed the appeal holding that the appeal did not lie as the order of the Income-tax Officer was not appealable under section 30. The assessee then went in appeal to the Appellate Tribunal and the Appellate Tribunal confirmed the view of th
