TMI Blog1962 (2) TMI 112X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment year 1957-58, according to its profit and loss account, was ₹ 65,473. The first petitioner returned a sum of ₹ 74,102 as its income for that assessment year. The Income-tax Officer added to the income returned four amounts: (1) ₹ 12,500 on account of excessive expenditure in respect of stores and spare-parts and overtime wages which were disallowed and certain receipts which were treated as income; (2) ₹ 8,746 on account of excessive managing agency commission which was disallowed; (3) ₹ 13,129 on account of excessive depreciation; and (4) ₹ 10,921 on account of certain other expenses which were disallowed. The Income-tax Officer thus determined the assessable income of the first petitioner at ₹ 1,10,769. The first petitioner appealed against this assessment, but the appeal was unsuccessful. The general meeting of the company for passing the accounts for the accounting year 1956-57 which was the previous year for the assessment year 1957-58 was held on 4th December, 1957, and at this meeting a dividend of ₹ 8,767 was declared. Since this dividend of ₹ 8,767 was less than 60 per cent. of the assessable income of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which, in his submission, the petition should be dismissed. There were two grounds set out in the petition challenging the legality of the proceedings under section 23A and both the grounds were pressed before us by Mr. Kaji on behalf of the petitioners. The first ground was that by reason of the provisions of section 34(3) the proceedings under section 23A were barred. That was the main ground debated before us and we shall discuss it in some detail a little later but a subsidiary ground- which was the second ground-was also advanced and that ground was that the first petitioner had no commercial profits in respect of which it could be asked to make a further distribution and that if such further distribution was ordered, it would amount to distribution of capital which would be contrary to law. Now whatever be the merits of this ground, we do not see why we should entertain it on this petition. The Inspecting Assistant Commissioner has not yet given his approval. It may be that he may accept the validity of the contention of the first petitioner and refuse to give his approval. Even if the Inspecting Assistant Commissioner gives his approval, the first petitioner would still h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he commencement of the judgment, namely, whether an order under section 23A can be made at any time or whether it is governed by the period of limitation prescribed by section 34(3). Now in order to answer this question it is necessary first to consider the terms of section 34(3). The section reads as follows : 34(3) No order of assessment or reassessment, other than an order of assessment under section 23 to which clause (c) of sub-section (1) of section 28 applies or an order of assessment or reassessment in cases falling within clause (a) of sub-section (1) or sub-section (1A) of this section shall be made after the expiry of four years from the end of the year in which the income, profits or gains were first assessable : Provided that where a notice under clause (b) of sub-section (1) has been issued within the time therein limited, the assessment or reassessment to be made in pursuance of such notice may be made before the expiry of one year from the date of the service of the notice even if at the time of the assessment or reassessment the four years aforesaid have already elapsed : Provided further that nothing contained in this section limiting the time withi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of assessment. If an order under section 23A is an order of assessment in the sense that it results in the imposition of tax liability on the assessee, it would be governed by the period of limitation set out in section 34(3). The question which would, therefore, require to be considered is : What is the nature of an order made under section 23A. Does it involve the process of assessment resulting in imposition of tax liability on the assessee ? Now when we examine this question it is necessary to bear in mind that section 23A has not always been the same as we find it at the material time. Section 23A as it stood prior to its amendment by the Finance Act, 1955, was radically different from the section as it stood after the amendment and the section with which we are concerned in this petition is the section as it stood after the amendment, for the question that is required to be considered has arisen in regard to the assessment year 1957-58. It is however necessary to consider the position as it obtained when section 23A was unamended because there are two decisions of the Supreme Court which have taken the view that an order under section 23A as unamended could be made at a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is to be 'deemed to have been distributed as dividends amongst the shareholders as at the date of the general meeting', being the meeting at which the accounts for the year concerned were passed, and 'thereupon, the proportionate share thereof of each shareholder shall be included in the total income of such shareholder for the purposes of assessing his total income'. The section creates a fictional income arising as on a specified date in the past and it does so for the purposes of that income being included in the income of the shareholders for assessment of their income-tax. The income must, therefore, be deemed to have been in existence on the date mentioned for the purpose of assessment to tax . .. We are unable to agree that an assessment could be made under section 23A. That section does not provide for any assessment being made. It only talks of the fictional income being included in the total income of the shareholders 'for the purpose of assessing his total income'. The assessment, therefore, has to be made under the other provisions of the Act including section 34, authorising assessments. In our view, the assessment in this case had been properly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al income created by the order under section 23A, the revenue had to proceed under section 23 or section 34 and if the assessment under either of the two sections was barred, such fictional income could not be brought to tax. This was the position as it obtained in regard to the unamended section 23A. The question is : Has the amendment of section 23A made any difference to this position ? Mr. Kaji contended that whereas prior to the amendment section 23A was merely a computation section, it has now become an assessment section and an order under section 23A is an order of assessment of a company to super-tax in certain cases specified in the section. The contention of the department in relation to the unamended section 23A, namely, that section 23A was a self-contained section providing for making of an assessment on the shareholders, which was negatived by the Supreme Court, now holds good in regard to the amended section 23A and the amended section 23A is, argued Mr. Kaji, a self-contained section imposing liability to super-tax and also providing for its computation and determination and that when an order under the amended section 23A is made, it is an order determining the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the amounts specified in sub-section (1) of section 23A and since such locus penitential was given to the company, the legislature might have thought it appropriate not to use the word penalty but to use the word super-tax . This explanation does not in our opinion give any convincing reason why the legislature should not have used the word penalty and should have instead used the word super-tax . Even when a penalty is sought to be imposed, a locus penitentiae may be given to the defaulting party. There is nothing inconsistent between the imposition of a penalty and giving of an opportunity to the defaulting party to make good the default if it wants to escape the penalty. Moreover, according to the submission of the learned Advocate-General, the imposition or levy under section 23A though described as super-tax was in fact a penalty and if, notwithstanding the imposition of penalty, a locus penitentiae was given to the company, there is no reason why the word penalty should not have been used by the legislature. The second explanation suggested by the learned Advocate-General was that perhaps the legislature used the word super-tax and not penalty because under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the section and the section does authorize assessment of companies to super-tax on undistributed income in the cases specified in the section. Another circumstance to which we may also refer is the provision in clause (a) of sub-section (1) of section 23A excluding the amount of super-tax payable under the section in computing the amount of income-tax and super-tax payable by the company by which the total income of the company is required to be reduced for the purpose of calculation of the statutory percentage. This provision would indicate that but for it super-tax payable under the section would have been included in the expression super-tax payable by the company and it was, therefore, necessary to exclude it. But if this be so, it is evident that super-tax payable under the section cannot be a penalty but must be a tax like other super-tax payable by the company. This is of course a very slight circumstance and we do not place much reliance on it but it is certainly a circumstance which cannot be ignored. Apart from these circumstances there is inherent evidence in section 23A itself to show that the imposition or levy made by the section is a tax and not a penalty. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of their income and thereby securing instead of dividends the benefit of the profits of the company. The legislature by the unamended section 23A invested the Income-tax Officer with power, in certain contingencies prescribed in the section, to order that the undistributed balance of the assessable income reduced by the amount of taxes shall be deemed to have been distributed at the date of the general meeting. 'The legislature enabled the Income-tax Officer to create the fiction of distribution so that super-tax which the shareholders would have been liable to pay, had the income of the company been distributed, can in any event be recovered by the revenue from the shareholders. The object was to strike at the avoidance of super-tax by collecting from the shareholders super-tax which they might otherwise succeed in avoiding. The provision in the unamended section 23A was thus a fiscal provision and not a penal provision. It sought to get at super-tax which might otherwise have been avoided. The legislature, however, it appears, felt that rather than create a fictional distribution and then tax the shareholders on such fictional distribution, it would be better to collect ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s condition is fulfilled. This provision cannot be regarded as so contradictory of the process of assessment of tax that from it we can infer that what is imposed by section 23A is not tax but penalty. As a matter of fact when we turn to sections 10(4A) and 13, we find that even in what is admittedly a process of assessment, questions are left to the opinion of the Income-tax Officer, the correctness of which opinion can be tested in appeal before the Appellate Assistant Commissioner and the Tribunal. The learned Advocate-General also relied on the fact that by sub-section (8) of section 23A the previous approval of the Inspecting Assistant Commissioner is made a condition precedent to the making of an order under the section and the Inspecting Assistant Commissioner is required before giving his approval to give the company an opportunity of being heard. This provision is, however, in our opinion, quite a neutral provision. Since section 23A provides for imposition of additional super-tax on a company which has already been assessed to income-tax and super-tax, the legislature might have thought it fit that some check should be put upon the Income-tax Officer and that he should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to take would result in this anomaly that in the case of a company whose income might be reassessed under section 34(1)(a) or section 34(1)(b) after the expiration of a period of four years from the end of the assessment year, it would not be possible to make an order under section 23A even though such reassessment may reveal that the provisions of section 23A were applicable to the company. Mr. Kaji tried to point out that such would not be the position because in that event the revenue would be entitled to pass an order under section 34 read with section 23A. It is not necessary to enter into a consideration of these rival views and to decide which of them is correct. It may be that an order under section 23A can be passed by the revenue by taking resort to section 34 or it may be that no such order can be passed by the revenue. But that is not a consideration which should deter us in placing upon the language of the section the construction which it must necessarily bear. If any hardship is caused to the revenue, the appeal must be to the legislature and not to the court. If what is imposed by section 23A is a tax and not a penalty, it is clear that an order under the sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expiration of a period of four years from the end of the assessment year should now be able to strike after an indefinite length of time ? When there is a period of limitation provided for taking action under section 34(1)(a) in cases where the escaped income does not exceed ₹ 1,00,000 could the legislature have intended that there should be no period of limitation at all for an order under section 23A which is an order of assessment to additional super-tax and that the threat of such an order should continue to be present up to the end of all time. Is it not reasonable to assume that as section 34(3) provided a general period of limitation for all assessment orders and section 23A was converted from a machinery section into an assessment section, the legislature did not think it necessary to provide a separate period of limitation in respect of an order under section 23A, for the general period of limitation specified in section 34(3) applied to such an order ? In this view of the matter we are of the opinion that an order under section 23A after its amendment by the Finance Act, 1955, is an order of assessment to which the period of limitation prescribed in section 34( ..... X X X X Extracts X X X X X X X X Extracts X X X X
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