Commissioner Of Income-Tax, Bombay... vs Navinchandra Mafatlal

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: supreme-court

Case Number: Not extracted

Decision Date: 10 January 1961

Coram: J.C. Shah, M. Hidayatullah

The case styled Commissioner of Income‑Tax, Bombay … vs Navinchandra Mafatlal was listed for hearing on 10 January 1961 before the Supreme Court of India. The bench for the occasion consisted of Justices J. C. Shah and M. Hidayatullah, and the judgment was delivered by Justice Hidayatullah.

This proceeding represented an appeal filed by the Commissioner of Income‑Tax for the City of Bombay against a certificate that had been issued by the High Court of Bombay. The certificate had been granted in respect of the High Court’s judgment and order dated 18 March 1954. In that earlier judgment the High Court had answered three questions that had been referred to it by the Income‑Tax Appellate Tribunal, and it had done so in favour of the assessee. The assessee in the matters under consideration was Mafatlal Gagalbhai. The legal representative of the deceased Mafatlal Gagalbhai had been Navinchandra Mafatlal, who had also since died; consequently, the present respondents before this Court were the legal representatives of Navinchandra Mafatlal.

The matters that this Court was asked to consider concerned the assessment of the income of Mafatlal Gagalbhai for the accounting years 1941 and 1942, which corresponded respectively to assessment years 1942‑43 and 1943‑44. For those two years the Commissioner had assessed Mafatlal Gagalbhai under section 23(3) of the Income‑Tax Act on a total income of Rs 3,76,539 for the first year and Rs 4,42,693 for the second year. No appeal was filed against the assessment for the year 1941; however, for the year 1942 the assessee had appealed both to the Appellate Assistant Commissioner and to the Tribunal, and both of those appeals had been dismissed.

During the accounting year 1941 Mafatlal Gagalbhai owned twelve thousand four hundred and eighty‑five ordinary shares and two thousand five hundred preference shares in Gagalbhai Jute Mills Ltd., a company situated in Calcutta. In the subsequent accounting year 1942 his holding of ordinary shares decreased by three hundred, while his holding of preference shares remained unchanged at two thousand five hundred. At the general meetings of the company for the financial years ending 31 March 1941 and 31 March 1942, no dividend was declared on either the ordinary shares or the preference shares. On 20 February 1947 the Income‑Tax Officer issued an order applying section 23A of the Act to Gagalbhai Jute Mills Ltd., holding that a sum of Rs 5,71,072 for assessment year 1941‑42 and a sum of Rs 10,00,411 for assessment year 1942‑43 must be deemed to have been distributed as dividend to the shareholders of the company. As a consequence of those findings the Officer reopened the assessments of Mafatlal Gagalbhai for the two years and added to his taxable income Rs 4,48,502 for the first year and Rs 7,96,082 for the second year, treating those amounts as deemed dividends on his ordinary shares. The reopening of the assessments appeared to have been effected under the authority of section 34 of the Income‑Tax Act.

The company contested the order made under section 23A by filing an appeal to the Appellate Assistant Commissioner, who upheld the Income‑Tax Officer’s determination. The legal representative of the assessee also appealed to the same Appellate Assistant Commissioner against the demand for tax on the additional sums, but the Commissioner’s order was again confirmed. Unsatisfied, the company proceeded to lodge a further appeal before the Tribunal against the order under section 23A. By its order dated 29 July 1948, the Tribunal held that the undistributed profits had not been properly allocated; it held that the first step should have been a distribution among the preference shareholders, and that any balance thereafter should be deemed to have been distributed among the ordinary shareholders. The respondent also had

The assessee appealed to the Tribunal against the order of the Appellate Assistant Commissioner. However, after reviewing the Tribunal’s decision in the company’s appeals, it became clear that pursuing those appeals would lead to an additional tax levy if the matter were sent back to the Department in line with the company’s appeal outcomes. Consequently, the legal representative of the assessee withdrew the appeals, obtaining the Tribunal’s permission to do so. When the matter was returned to the Department pursuant to the Tribunal’s order in the company’s appeals, the Income‑Tax Officer reopened the assessment of Mafatlal Gagalbhai without issuing a notice under section 34 of the Income‑Tax Act. The Officer reassessed Gagalbhai’s income, reducing the amounts that had previously been deemed distributed in respect of the ordinary shares and adding dividends that he considered to be deemed distributed in respect of the preference shares. In the assessment order he included a note stating that this action was undertaken to implement the Tribunal’s directions, and he subsequently issued a notice of demand.

Following this, the legal representative of Mafatlal Gagalbhai filed an appeal to the Appellate Assistant Commissioner. The Commissioner held that no appeal lay under section 30 of the Income‑Tax Act and dismissed the appeal. The Tribunal affirmed the Commissioner’s view, but at the request of Gagalbhai’s representative it framed several questions and referred them to the High Court under section 66(1) for determination. The questions were: (1) whether the Income‑Tax Officer’s orders dated 23 January 1950 were appealable; (2) whether the Officer was required to act under section 34 of the Income‑Tax Act before revising the assessment on that date; and (3) if the answer to the second question was affirmative, whether the limitation bar in section 34 would apply to the inclusion in a shareholder’s total income of a dividend deemed distributed under section 23A(1). The reference was heard by Chief Justice Chagla and Justice Tendolkar. Although the two judges offered different reasons, both concluded that section 23A functioned as a procedural or computational provision and did not empower the Department to make an assessment. In reaching this conclusion they relied on an earlier High Court decision in S. G. Cambatta v. Commissioner of Income‑Tax, which described section 23A as a mandatory provision setting out the rules for computing a shareholder’s total income.

In this case the Court recorded that a learned judge had observed, “In my opinion looking at the scheme of the Act, section 23A is a procedural section and not a charging section”. The Court then pointed out that the Tribunal, in an earlier order, had stated that when an order is issued under section 23A(I) of the Indian Income‑tax Act concerning a company, it is not necessary to invoke section 34 of the Act for the purpose of revising the assessment of a shareholder. The Tribunal further explained that the mere fact that section 34 had been employed in the past does not compel its use under the present law. It reproduced the relevant wording of section 23A(I), which provides that the proportionate share of each shareholder shall be included in that shareholder’s total income for the purpose of assessing his total income, and emphasized that this provision is mandatory and unrelated to the provisions of section 34 of the Act. The Court noted that the High Court had been of the opinion that action under section 34 was indispensable, and that because a notice under section 34 was a condition precedent, the Income‑tax Officer’s act of charging the income without first issuing such a notice was illegal. The Commissioner of Income‑tax who filed the present appeal confined his arguments to the validity of the assessment made by the Income‑tax Officer without resort to section 34 and without a prior notice. He maintained that section 23A is a self‑contained provision that brings to charge dividends deemed to have been distributed and, consequently, does not require any other assessment proceedings under either section 23 or section 34 of the Act. The Court observed that this issue could no longer be argued because of the earlier ruling of this Court in Sardar Baldev Singh v. Commissioner of Income‑tax. In that decision the Court had observed that the Tribunal’s view was wrong, that the Solicitor‑General had conceded this point, and that an assessment could not be made under section 23A because that section does not authorize an assessment; it merely provides for the inclusion of fictional income in the shareholder’s total income, thereby requiring the assessment to be made under other provisions such as section 34. The Court rejected the contention that the passage was merely obiter dictum and not applicable, and also dismissed the argument that it rested solely on a concession by the Solicitor‑General. In the Court’s view both submissions lacked foundation, even though the Solicitor‑General had indeed conceded the point, because the Court proceeded to express its own independent view on the matter.

The Court observed that the matter and the specific question involved had already been duly raised before it and that a clear answer had been provided. In light of the unmistakable pronouncement previously made by this Court, it was the view of the Court that the judgment rendered by the High Court, which was the subject of the present appeal, must be regarded as correct and binding. Consequently, the Court held that the appeal could not succeed and therefore ordered that the appeal fail. In addition, the Court directed that the appellant be ordered to pay the costs of the proceedings. Finally, the Court affirmed that the appeal was dismissed, thereby confirming the validity of the High Court’s decision.