Commissioner Of Income-Tax, Bombay vs Robert J. Sas

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

Court: Supreme Court of India

Case Number: Civil Appeals Nos.138 to 138 of 1962

Decision Date: 16 November 1962

Coram: KAPUR J.

In this matter the Supreme Court considered an appeal filed on 16 November 1962 by the Commissioner of Income‑Tax, Bombay, against the assessment of Mr Robert J. Sas. The appeal arose under the Indian Income‑Tax Act, 1922 (Act 11 of 1922), specifically sections 23A (1) and 34. The case concerned the question of whether a notice of assessment issued under section 34 could be served after the period of four years prescribed by subsection 34 (1) (b). The Commissioner sought to enforce a notice that the Income‑Tax Officer had issued after deeming the income of a private company to be distributed as dividend among its shareholders. Three separate appeals, each by special leave, were directed against the judgment of the Bombay High Court dated 19 March 1958 in Income‑Tax Reference No. 74 of 1957. Counsel for the Commissioner presented the appellant’s case, while counsel for each respondent represented the individual shareholders. An intervener’s counsel also participated. The judgment was delivered by Justice Kapur. The appeals were consolidated because the Commissioner was the common appellant, although each respondent was a different shareholder of the same private limited company.

The factual backdrop involved a private limited company, A.C.E.C. Private (India) Limited, which conducted business in India and earned substantial profits during the calendar year 1947. The company's accounting year corresponded to the calendar year ending 31 December 1948, and the relevant assessment year was 1949‑50. Despite the sizable profits, the company did not declare any dividend at the shareholders’ meeting held on 4 December 1948. On 29 March 1954, the Income‑Tax Officer issued an order under section 23A (1) of the Act, deeming that the company's income had been divided among its three shareholders as if a dividend had been declared. Subsequent to that order, the Officer issued notices of assessment to each shareholder under section 34, and those notices were served on 1 April 1954. The shareholders contended that the service of the notices occurred beyond the four‑year limitation period that ends at the close of the assessment year, as mandated by section 34 (1) (b). The Court examined whether the deemed distribution of dividend under section 23A (1) occurred on the date of the general meeting, 4 December 1948, which fell within the accounting year 1948 and the assessment year 1949‑50, rather than on 30 June 1949, the date by which a dividend should have been distributed. The Court concluded that the notices were served outside the prescribed four‑year window and therefore the Income‑Tax Officer lacked jurisdiction to assess the shareholders. The Court further held that it made no difference that section 23A (1) permits an order to be passed at any time, because the limitation period for issuing the notice remained fixed by section 34.

The Income‑Tax Officer treated the company’s earnings as having been distributed among its shareholders pursuant to section 23A(1) of the Act. Accordingly, the officer deemed that the following sums had been paid as dividends: to Mr Paul Rouffart, rupees 1,09,859; to Mr Paul Victor Hermans, rupees 1,00,189; and to Mr Robert J. Sas, rupees 1,09,859. On the basis of that determination, the officer issued notices under section 34 of the Act, and those notices were served on the three shareholders on 1 April 1954. After receipt of the notices, each shareholder lodged the required return of income, and the assessments against them were completed. Both shareholders subsequently filed appeals, first to the Appellate Assistant Commissioner and thereafter to the Income‑Tax Appellate Tribunal. One of the matters raised before the Tribunal was that the Income‑Tax Officer lacked jurisdiction because the notices had been served after the four‑year limitation period prescribed by section 34(1)(b) of the Act. The Tribunal accepted that contention. Consequently, the Commissioner of Income‑Tax instituted proceedings before the High Court under section 66(1), framing two questions for determination: (1) whether, considering the facts and circumstances, it was necessary for the Income‑Tax Officer to commence action under section 34 in order to tax the deemed dividend that had arisen from the order made under section 23A(1) in the case of A.C.E.C. Private (India) Limited; and (2) if the answer to the first question was affirmative, whether the notice served on 1 April 1954 was out of time, having regard to the observations of the Court in Navinchandra Mafatlal v. Commissioner of Income‑Tax. The High Court restated the second question in the form: if the answer to the first question was affirmative, was the notice served on 1 April 1954 served beyond the allowable period? Both questions were answered in the affirmative, thereby ruling against the Commissioner of Income‑Tax. The Commissioner appealed that judgment and order to this Court by way of special leave. In light of this Court’s earlier rulings in Sardar Baldev Singh v. Commissioner of Income‑Tax and Commissioner of Income‑Tax v. Navinchandra Mafatlal, which held that an assessment cannot be made under section 23A because that provision does not itself provide for assessment and that assessment may be made only under section 34, the first question no longer required determination and was not argued before us. The sole issue remaining for decision was whether the notice served on 1 April 1954 was served out of time. Counsel for the appellant‑Commissioner of Income‑Tax argued (1) that no limitation was prescribed for the order to be made under

The Commissioner contended that there was no limitation prescribed for an order made under section 23A of the Act. He argued that if the time‑limit mentioned in section 34(1)(b) were to be applied to orders issued under section 23A, then section 23A would become ineffective. He further submitted that, because section 23A(1) provides a six‑month period up to the end of which dividends may be distributed, the relevant accounting year in the present matter was 1949 and the assessment year was 1950‑51. Accordingly, the notice could have been served within four years of the conclusion of that accounting year, that is, up to 31 March 1955. Finally, the Commissioner urged that proviso (1) to sub‑section (3) of section 34 was applicable, and that because the notice had been issued within the four‑year period prescribed by section 34(1)(b), a further period of one year from the date of service of the notice was available for making the assessment or reassessment. He cited the decisions reported in [1961] 1 S.C.R. 482 and [1961] 42 I.T.R. 53 to support the view that the impugned order, being made within that one‑year window, was proper and valid.

The High Court, exercising its advisory jurisdiction, was asked to opine on the question presented to it. In doing so, it limited its consideration to the issue that arose from the Tribunal’s order and declined to entertain the question of whether proviso (1) to section 34(3) could be invoked, because that question did not address the point raised about the proviso to sub‑section (3) of section 34. The specific question framed by the High Court was whether the service of the notice under section 34(1)(b) was out of time. The Court explained that the proviso to sub‑section (3) of section 34 deals with the requirement to complete an assessment within a specified period when the notice is issued before the limitation period referred to in section 34(1)(b). Those two matters are distinct and one does not encompass the other. At the relevant date, section 23A, which empowered the Income‑Tax Officer to assess individual members of certain companies, read as follows: “Section 23A. Power to assess individual members of certain companies (1). Where the Income‑Tax Officer is satisfied that, in respect of any previous year, the profits and gains distributed as dividends by any company up to the end of the sixth month after its accounts for that previous year are laid before the company in a general meeting and are less than sixty per cent of the assessable income of the company of that previous year, as reduced by the amount of income‑tax and super‑tax payable by the company in respect thereof, he shall, unless he is satisfied that, having regard to losses incurred by the company in earlier years or to the smallness of the profit made, the payment of a dividend or a larger dividend than that declared would be unreasonable, make, with the previous approval of the Inspecting Assistant Commissioner, an order in writing that the undistributed portion of the assessable income of the company of that previous year as computed…”.

Section 23A(1) provides that, for the purposes of income tax, the portion of a company’s assessable income that remains undistributed after allowing for the amount of income‑tax and super‑tax payable by the company shall be treated as if it had been paid out as dividends to the shareholders on the date of the general meeting at which the company’s accounts for the relevant previous year were laid before the members. Consequently, each shareholder’s proportionate share of that deemed dividend is to be taken into account as part of the shareholder’s total income for the purpose of assessing his personal tax liability. The Income‑Tax Officer therefore possesses the authority to issue an order under this section that determines the amount of the undistributed balance when the company has paid out dividends amounting to less than sixty per cent of its assessable income for the previous year. Moreover, if the company has distributed less than the sixty‑per‑cent threshold by the end of the sixth month following the holding of the general meeting, the undistributed portion of the assessable income is to be deemed to have been distributed as a dividend among the shareholders as at the date of that meeting, and each shareholder’s respective share is to be included in his total income for assessment. In other words, whenever at the conclusion of the sixth‑month period after the general meeting the Income‑Tax Officer discovers that the dividends actually paid fall short of the sixty‑per‑cent limit, the officer shall deem that the shortfall was distributed in accordance with the resolution passed at the meeting, and the shareholders’ proportional shares of that deemed distribution are to be added to their respective total incomes. This provision creates a notional or “fictional” dividend that is treated as having been received by each shareholder even though no cash dividend was physically received; the deemed date of distribution is fixed as the date on which the previous year’s accounts were laid before the company at its general meeting. Applying this construction to the case at hand, the Income‑Tax Officer correctly determined the undistributed assessable income because the company had not distributed sixty per cent of its income by the end of the sixth month after the meeting held on 4 December 1948. Although Section 23A(1) requires that by 30 June 1949 the dividend should not be less than the statutory minimum, the effect of the deeming rule is that the distribution is treated as having occurred on the date of the general meeting, i.e., 4 December 1948, which falls within the accounting year 1948 and thus the assessment year 1949‑50. The provision further states that it is immaterial that the order may be made at any time; the assessment must still be made under Section 34(1)(b) of the Act, and where a notice is not served in accordance with that provision, the Income‑Tax Officer lacks jurisdiction to proceed.

The Court observed that the tax authority possessed no jurisdiction to institute any action against the shareholder. It reiterated that a notice required by section 34(1) of the Act must be served not later than four years after the conclusion of the assessment year to which the assessment relates. The Court referred to its earlier decision in First Additional Income‑tax Officer, Mysore v. H. N. S. lyengar, where it had held that the period of eight years or four years prescribed in sub‑section 34(1)(a) or 34(1)(b) respectively commences from the end of the assessment year. The Court further expressed that there was no persuasive reason for rendering section 23A(1) ineffective simply because the notice provision in section 34(1) imposes a time limit for initiating proceedings against undisclosed income, and it noted that no authority such as (1)[1962] Supp. 1 S.C.R.I. had been cited to support that contention. Accordingly, the Court concluded that the High Court’s answer to the second question was correct, holding that an assessment made under section 34(1)(b) after the expiry of the four‑year period following the relevant assessment year was plainly out of time. Since this was the only issue remaining for determination, the Court affirmed that the High Court’s decision on that issue was proper. Consequently, the appeals were dismissed with costs, and a single hearing fee was ordered.