TMI Blog1965 (11) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... nterested within the meaning of section 23A of the Income-tax Act, 1922. The petition relates to the assessment year 1956-57, the accounting period ending on 30th April, 1955. The petitioner-company returned an income of Rs. 5,58,265 for the year 1956-57. The regular assessment order under section 23 of the Act was passed on March 22, 1961, assessing the total income of the company at Rs. 8,44,653. The company filed an appeal and was partly successful there. The appellate order dated March 23, 1963, reduced its assessable income to Rs. 8,33,456. No further appeal having been preferred, this order became final. On this income, income-tax, super-tax and surcharge payable by the company was Rs. 3,62,032.45 leaving a balance of Rs. 4,71,434 which was distributable as dividend amongst the shareholders of the company. At the annual general meeting held on 30th December, 1955, a dividend of Rs. 1,89,000 only was declared. This declaration of dividend fell short of the statutory percentage mentioned in section 23A by more than five per cent. The Income-tax Officer issued a notice to the company on February 6, 1964, requiring it to show cause why an order imposing additional super-tax on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lone having been declared there was an undistributed balance of Rs. 2,82,424. He levied an additional super-tax on this balance at 25 nP. per rupee. He repelled the objection that the proceedings were barred by time and held that an order under section 23A prior to its amendment by the Finance Act, 1955, could be made at any time. There was no time-limit prescribed for it. The legislature having amended the section in 1955, has shifted the liability from the shareholders on to the company itself. An order under section 23A was not an order of assessment and the limitation prescribed in section 34(3) cannot apply to such an order. The petition challenges the legality of the proceedings on one ground only---that the proceedings are barred by time. The impugned order itself has not been assailed. The learned Advocate-General appearing for the petitioner has stressed that section 23A, after its amendment by the Finance Act, 1955, was a charging section and an order passed thereunder was an order of assessment to which section 34(3) was attracted. Section 34(3) provides that no order of assessment shall be made after the expiry of four years from the end of the assessment year. No s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the application of the machinery provided for assessment and imposition of tax liability notwithstanding the discontinuance of the business of the firm. The Supreme Court held that keeping this object of the legislature in view, the expression " assessment " in section 44 should be understood in its most comprehensive sense, so as to include proceedings for computation of income under section 23 as also for imposing liability to additional tax called penalty on the assessees guilty of fraud, gross negligence, dishonest or contumacious conduct. The construction of the word " assessment " was again raised before the Supreme Court in Commissioner of Income-tax v. Bhikaji Dadabhai Co. The Finance Act, 1950, repealed the Hyderabad Income-tax Act on the merger of that State with the Indian Union. Section 13(1) of this Finance Act kept the operation of the Hyderabad Income-tax Act alive in respect of levy, assessment and collection of income-tax and super-tax for the mentioned periods. It was argued that the word " assessment " in this section included the whole procedure for imposing liability upon the taxpayer but not the procedure for imposing penalty. The High Court accepted this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use of action for these proceedings is the accrual of income. The penal provisions of the Act are, on the other hand, designed not to bring any income to tax, but to facilitate the smooth functioning of that process, by threatening punishment for defaults and evasions. They are the necessary concomitants of the process of imposing tax liability, but are not intrinsically a part of that process. Their object and field of operation is different. The provisions of sections 18A, 25(2), 28, 44E(6), 44F(5), 46(1) are punitive in character. They operate when an assessee commits defaults in complying with the provisions of the Act, or is guilty of dishonest or contumacious conduct. In order to decide if a provision deals with " assessment ", as understood in section 34(3), the nomenclature given to that provision will not be decisive; its object and impact will afford a true guide. Sub-sections (6), (7) and (8) of section 18A do not use the term " penalty ", none the less they are penal in effect. They apply to assessees in default. The levy under section 28 has been held to be only an additional tax, though the section designates it as " penalty ". All these proceedings are admittedly n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conclusion. The first condition is that the company not being one in which the public is substantially interested, must have distributed as dividend less than sixty per cent. of its assessable income, after deduction of income-tax and super-tax payable by it. The taxing authority must then be satisfied that the payment of a dividend or of a larger dividend than that declared will, in view of losses incurred in earlier years or the smallness of the profits made, not be unreasonable. It then makes an order that the entire undistributed balance of the company's assessable income shall be deemed to have been distributed, and then, the proportionate share is liable to be included in the total income of the shareholders. In the case of Commissioner of Income-tax v. Gangadhar Banerjee Co. (Private) Ltd., the Supreme Court again analysed the nature and effect of section 23A. It held that this section was introduced to prevent exploitation of the juristic personality of a private company by the members thereof for purposes of evading higher taxation. Their Lordships observed: " The Income-tax Officer, acting under this section, is not assessing any income to tax; that will be assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chair not to find the taxable income of the company, but the commercial profits which reasonably should have been distributed as dividend, and to take punitive action in case such distribution has not been made by the company. Section 23A is a penal and not a fiscal provision. It does not involve the process of assessment. That process arises at a different stage. If, on receipt of a notice under section 23A, the company makes the required distribution as dividend, the proportionate share will become taxable in the hands of the shareholders. The proceedings taken in the case of individual shareholders will be assessment proceedings and will be governed by the limitation of section 34(3). Section 35 of the Income-tax Act, 1922, deals with rectification of mistakes. Sub-section (7) thereof provides that, where the assessment of a company in whose case an order under section 23A has been made is modified in appeal, revision, etc., the consequential recomputation of the shareholders' income may be made as if it was a rectification of a mistake apparent from the record. Sub-section (8) after its amendment by the Finance Act, 1956, states: " Where, as a result of proceedings initiate ..... X X X X Extracts X X X X X X X X Extracts X X X X
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