TMI Blog1949 (3) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... into a public company on the September 17, 1942, an order was issued by the Income Tax Officer pointing under Section 18(3A) and Section 18(3C) in respect of 69 shareholders who were non-resident shareholders inasmuch as he had failed to deduct Income Tax and super-tax from the dividends payable to these non-resident shareholders, and he thereupon passed an order under Section 18(7) of the Act and issued a demand notice under Section 29 of the Act calling upon the company to pay the tax to him. It is against these two orders that an appeal was preferred to the Appellate Assistant Commissioner who, under the Income Tax law as applied to the Phaltan State, constituted the final Court of Appeal. The Appellate Assistant Commissioner decided against the assessee company on both these points, and a reference was made to the Kolhapur High Court. There is not other point which has also been agitated and which might be dealt with straightaway and which was whether the Appellate Assistant Commissioner, Mr. R. R. Kaulgud, who decided the appeal, was competent to do so under the law. The Contention is that he has not been appointed by the Central Government as required under Section 5(3) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inafter provided is contained in clause (16) which provides that the Phaltan Durbar shall exempt the company in respect of its first sugar factory at Pimpalachiwadi from payment of Income Tax from the commencement of the company until the expiry of a period of ten years computed from the date of the regular manufacturing of sugar in the said factory. After the expiry of the said period the Phaltan Darbar may levy Income Tax at a rate not exceeding one anna in a rupee on the net profits of the said sugar factory. In calculating the net profits the usual deductions in respect of depreciation etc., permissible under the Income Tax Act for the time being in force in Phaltan State shall be allowed. Now, as I read these two clauses, all that they mean is that although there may be a liability on the company today tax under Income Tax Act, the Phaltan State agrees not to recover that tax from the assessee company for a period of ten years or, to put it in a different language, the company and the State agree that the company will not be liable to pay any tax for a period of ten years from the commencement of the company; and it is important to note that even after the expire of ten years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stribution of profits or that the distribution should be less than sixty per cent. of the assessable income of the company. Now, Sir Jamshedji says that this section cannot aptly because there is no assessable income of the company which can be distributed Here again there is a clear fallacy, because the income that this company earned was certainly assessable to Income Tax, and it could have been assessed to Income Tax. The only relief that the assessee company got was that by an agreement with the State it was not made liable to pay the tax. Assessability of income and liability to pay tax are two different conceptions altogether, and I fail to see why the income of this company of tax. Therefore once there was an assessable income and there is no distribution of profits at all, Section 23A would certainly come into operation. Then Sir Jamshedji points out that the assessable income of the company for the purpose of Section 23A is to be reduced by the amount of Income Tax and super-tax payable by the company and Sir Jamshedji argues that this shows that this section only applies to those companies which pay Income Tax. The expression used is payable by the company or, in oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar obligation to deduct super-tax; and Section 18(3D) deals with the specific case of a shareholder who is resident out of British India and casts an obligation upon the company to deduct super-tax in certain cases therein specified where dividend is payable to the shareholders resident out of British India; and the Income Tax Officer, as no Income Tax super-tax was deducted, proceeded against the company under Section 18(7), which makes the company an assessee in respect of the tax which it should have deducted and, therefore, the tax would be recoverable from the assessee company as if it was the assessee itself. Now, Sir Jamshedji says that the dividend which come to the hands of the shareholders was not liable to tax at all because the profit out of which dividends were paid were not liable to tax in the hands of the company, and Sir Jamshedji says that if an income bears a certain character, that character cannot be altered because it is transferred from the company shareholders. The principle which Sir Jamshedji enunciates is unexceptional, and I entirely agree with him that if the income bore a character which exempted it from payment of tax, then the mere fact that that inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt; bad it must be a notification in the Gazette. Now in this case we must substitute the Phaltan State for the Central Government. It is impossible to look upon the agreement entered into by the Phaltan State with the assessee company as a notification issued by it within the meaning of Section 60 and even the second condition, namely, that the notification has got to be published in the official Gazette, has not been complied with and, therefore, I cannot accept the contention put forward by Sir Jamshedji that we must treat the agreement between the Phaltan State and the assessee as a notification under Section 60 of the Act. The result, therefore, is that we must take the view that both the orders complained of are valid and proper orders. I will now proceed to answer the questions raised. References Nos. 24, 25 and 26 raise the same questions with regard to three consecutive accounting years. Question No. 1 - in the affirmative Question No. 2 - In the affirmative. As regard Reference No. 27 in which one question is raised, the answer is that it is not competent to the Court to consider the agreement. But if it is competent, then the question must be answered in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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