FACTS
1. The Following questions of law were referred to the High Court:
(1) Whether the orders of the Income-tax Officer, dated 23-1-1950 are appealable?
(2) Whether it was incumbent on the Income-tax Officer to take action under S. 34 of Indian Income-tax Act before he revised the assessments on 23-1-1950?
(3) If the answer to question No. 2 is in the affirmative, whether the bar of limitation specified in S. 34 of the Indian Income-tax Act would apply to the inclusion in the total income of a shareholder the dividend which is deemed to have been distributed under S. 23A(1) of the Act?
Chagla, C.J.
2. This reference raises a very important and a very interesting question as to the interpretation of Section 23-A, Income-tax Act. The facts leading up to the reference may be briefly stated. The assessee is the legal representative of Mafatlal Gagalbhai and he has been assessed in that capacity. The assessment order against him for the assessment year 1942-43 was passed on 28-2-1946, and with regard to the assessment year 1943-44 it was passed on 23-8-1946. It appears that Mafatlal was a share-holder in the Gagalbhai Jute Mills, Ltd., and as such share-holder he held 12,185 ordinary shares and 2,500 preference shares. The Income-tax Officer made an order in respect of this company under Section 23A on 20-2-1947, and by that order he directed that Rs. 5,71,072 and RS. 10,00,411 for the two respective years ending on 31-3-1941, and 31-3-1942, should be distributed as dividend to the share-holders who were share-holders at the date when the relevant general meeting of the company was held.
In consequence of this order the Income-tax Officer reopened the assessment of the assessee for the assessment year 1942-43 and 1943-44 and he included in the assessment year 1942-43 a sum of Rs. 4,48,502 and in the year 1943-44 a sum of Rs. 7,96,082 as attributable to the dividends which had been distributed under the order made under Section 23-A. Against the order made by the Income-tax Officer under Section 23-A Gagalbhai Jute Milk, Ltd., preferred an appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. The company then went in appeal to the Appellate Tribunal and the Appellate Tribunal took the view that the undistributed dividends had not been properly distributed among the various classes of shareholders.
Under the order of the Income-tax Officer the dividend had only been distributed among the ordinary share-holders. Therefore, the Appellate Tribunal directed that the undistributed profits should first be distributed amongst the preference share-holders and the balance should then be distributed amongst, the ordinary share-holders. The assessee also appealed against the order made by the Income-tax Officer reopening the assessment for the years 1942-43 and 1943-44, which order had been made under Section 34 of the Act. The Appellate Assistant Commissioner dismissed his appeal and he then appealed to the Appellate Tribunal.
After the decision of the Tribunal was given in the appeal of the mills it was realised that if the assessee proceeded with his appeal, the result would have been that his assessment would have to be enhanced, and as the Department had not appealed against the order of the Appellate Assistant Commissioner, the Tribunal had no jurisdiction to enhance the assessment of the assessee in his appeal. The Tribunal, therefore, gave leave to the assessee to withdraw his appeal and accordingly the appeal was withdrawn on 16-3-1949. It may be mentioned that the order of the Tribunal in the appeal of the mills was passed on 29-7-1948. Pursuant to the directions given by the Tribunal, the Income-tax Officer again reopened the assessment of the assessee for both the assessment years 1942-43 and 1943-44 and included in the income the dividends in accordance with the direction given by the Tribunal.
In doing so the Income-tax Officer did not proceed under Section 34. No notice to show cause was given to the assessee. The Income-tax Officer on his own initiative reopened the assessment, determined the income, determined the tax that had to be paid, and served upon the assessee a notice of payment. Against this order of the Income-tax Officer, the assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner dismissed the appeal holding that the appeal did not lie as the order of the Income-tax Officer was not appealable under Section 30. The assessee then went in appeal to the Appellate Tribunal and the Appellate Tribunal confirmed the view of the Appellate Assistant Commissioner that no appeal lay and dismissed the appeal of the assessee. The assessee now has come on this reference before us.
3. Now, in order to decide whether an appeal lies, we must first look to Section 23-A and place a proper construction upon that section. That section is headed, 'Power to assess individual members of certain companies', and gives the authority to the Income-tax Officer, if the conditions laid down in that section are satisfied, to make an order in writing that the undistributed portion of the assessable income of the company of the previous year shall be deemed to have been distributed as dividends among the share-holders as at the date of the relevant general meeting, and thereupon the proportionate share thereof of each share-holder shall be included in the total income of such share-holder for the purpose of assessing his total income.
It will be noticed that this section creates a notional income, which income comes into existence when the order is made by the Income-tax Officer and the income consists of the undistributed profits of a company and those undistributed profits are deemed to be dividends having been distributed at the date of the general meeting referred to in that section, and the section provides that the proportionate share of each share-holder in these dividends shall be included in his total income for the purpose of assessing his total income.
The view taken by the Tribunal is that the expression 'thereupon the proportionate share thereof of each share-holder shall be included in the total income of such share-holder for the purpose of assessing his total income' casts an obligation upon the Income-tax Officer not only to include this amount in the total income of the assessee, but also to assess it to tax and that no formal order of assessment is necessary. In other words, according to the Tribunal the expression 'thereupon' emphasises the fact that the inclusion in the total income and the assessment to tax is consequential upon the order made by the Income-tax Officer under Section 23A and that consequential order is not made appealable under Section 30 of the Act.
4. Now, it is the basic principle of the Income-tax Act that there is no liability to pay tax upon an assessee unless there js an order of assessment. 'Assessment', as has been often pointed out, has been used in the Income-tax Act in more than one sense. Assessment may mean merely the computation of the total income of an assessee, or it may mean the whole process beginning with the computation of the total income and ending with the order calling upon the assessee to pay a tax which he is liable to pay on his total income.
It is possible to take one of two views of Section 23A, but the view taken by the Tribunal cannot be accepted in either of these two views. One view is that Section 23A is a self-contained section and the order referred to at the end of Sub-section (1) is itself an order of assessment and no further order of assessment is necessary. The other view is that Section 23A is merely a procedural section and it provides for computation of total income and gives a direction that a particular notional income should be included in the total income of the assessee. In that view of the case an assessment order would be necessary under some provision of this Act in order to make the assessee liable to pay tax.
In our opinion, much can be said for either view, but there are certain important considerations which have led us to the conclusion that we must not look upon the order made under Section 23A as itself an order of assessment, but that a proper order of assessment after following the machinery laid down in the Act is necessary before an assessee can be made liable to pay tax.
5. Now, the first and the most important consideration is that Section 23A does not contemplate any notice being given to the share-holder. It is an elementary principle of natural justice, a principle which has been rigorously adhered to in all other provisions of the Act, that if a prejudicial order is to be made against an assessee, such an order should not be made unless he has been given an opportunity to show cause. Under Section 23A an order is made against the company in respect of its undistributed profits and the effect of the order is that the share-holder becomes liable to pay tax in respect of the proportionate dividend which comes to his share and yet such an order could be made without the Legislature requiring any notice to be served upon the assessee.
In this connection reference might be made to Section 35 which gives power to the Commissioner and the other Income-tax Officers to rectify mistakes which are apparent on the face of the record, and even in a section which does not involve any assessment or re-assessment and which is confined to mere rectification of mistakes, the section provides that no such rectification shall be made having the effect of enhancing an assessment or reducing a refund unless the Commissioner, the Appellate Assistant Commissioner or the Income-tax Officer, as the case may be, has given notice to the assessee of his intention so to do and has allowed him a reasonable opportunity of being heard.
The other important consideration is the question of appeal. An order under Section 23A may be made while the assessment of the share-holder for the relevant year is still pending under Section 23 or it may be made after the assessment is closed. If the order is made while the assessment under Section 23 is pending, the share-holder has a right to appeal with regard to the whole of his assessment including the assessment made with regard to dividends under Section 33A.
The only qualification of his right to appeal is provided in the proviso to Section 30 and that qualification is that a share-holder in a company in respect of which an order under Section 23A has been passed by an Income-tax Officer may not in respect of matters determined by such order appeal against the assessment of his own total income. As Section 30 gives the right to the company to appeal against the merits of the order under Section 23A, that right has not been given to the share-holder, but he can appeal in respect of the assessment under Section 23A on any other ground except on the grounds mentioned in the order and determined by the order under Section 23A.
But this curious result will follow that while a share-holder may challenge a decision under Section 23A to the extent that it affects his rights or interests if an assessment is pending, that right is denied to him if the order under Section 23A were to be made after the assessment was completed. In this very case the assessment of the assessee was completed and then the order under Section 23A was made, and if the view taken is correct that the order under Section 23A itself constitutes an order of assessment, then the assessee would be deprived of his right of appeal.
6. It was suggested by Mr. Joshi that any appeal by a share-holder would be futile if he could not appeal with regard to the merits of the order under Section 23A, and Mr. Joshi says that as the Legislature has provided for a right of appeal to the company, the merits of the order under Section 23A could be agitated in that appeal and therefore the Legislature advisedly did not give the right of appeal to the share-holder. Now, there are two answers to this contention. The first is that the proviso we have just referred to itself contemplates a limited right of appeal by the share-holder. Therefore, there is no point in urging that an appeal by a share-holder would in all cases be a futile appeal.
We can imagine two cases where a share-holder may legitimately appeal without challenging the merits of the order under Section 23A. One curious case came to this very Court and that was the case of -- 'Combata v. Commissioner of Income-tax, Bombay', AIR 1947 Bom 264 at p. 266 (A). In that case an order was made under Section 23A. Now, it is only the share-holder who is a share-holder on the register of the company at the date when the general meeting is held who is liable to pay tax on this notional income, and what the Department did in that case was that although the share register showed Mr. and Mrs. Cambatta as the share-holders the Department proceeded to assess Cambatta as the share-holder holding that Canibatta was the beneficial owner of the shares.
Mr. Cambatta came to this Court on a reference challenging that decision and we upheld the challenge and held that it was not Cambatta who was assessable under Section 23A but Cambatta and his wife as an association of persons, they being the persons recognised as share-holders in the register of the company. In that case Cambatta was not challenging the order on its merits, but he was challenging his own liability to pay tax determined by Section 23A.
The other conceivable case where a share-holder may challenge the order under Section 23A would be the basis of taxation on the total income of the assessee when these dividends would be included in his total income. Ordinarily, dividends are put under the head 'other sources', but shares may be held by an assessee as a stock-in-trade, in which case he may justifiably claim the income to be put under the head of 'business' and not under the head of 'other sources'. In certain cases it may be of vital importance as to whether an income is put under one head or another head, for instance, if a question of set off arises, and therefore Mr. Joshi is not right that there is no conceivable case where a share-holder may wish to exercise his right of appeal against an order made under Section 23A.
7. Mr. Joshi has urged upon us to look to the heading of the section which is 'Power to assess individual members of certain companies', and Mr. Joshi says that this heading makes it clear that when the Income-tax Officer makes an order he really exercises the power to assess and assesses the individual members of the company. In my opinion the heading 'power to assess' refers to the power conferred upon the Income-tax Officer. It does not refer to the mode of assessment; the mode of assessment still remains to be determined.
Undoubtedly by Section 23A the Income-tax Officer by passing the order exercises his power and determines that certain income shall be deemed to be part of the total income of the share-holder.
But irrespective of the heading of Section 23A and irrespective of what is contained in Section 23A, we have yet to determine what is the mode of assessment which has got to be followed in order that a proper and valid assessment order should be made against a share-holder. I may point out that in -- 'Combatta's case (A)', to which reference has just been made and which was decided by Sir Leonard Stone, Chief Justice, and myself, we both took the view that Section 23A was a computation section.
This is what I said in my judgment at p. 267:
'......Section 23A is a mandatory section and lays down rules of computation in computing the total income of the share-holder referred to in that section.'
And Sir Leonard Stone at p. 266 says:
'In my opinion, looking at the scheme of the Act, Section 23A is a procedural section and not a charging section. It creates a notional income, which is wholly artificial, and which does not in fact exist in the pocket of any share-holder.'
8. Mr. Joshi has drawn our attention to other Sub-sections of Section 23A, and the relevant Subsection to which attention might be drawn is Sub-section (3)(ii) which makes the company liable to pay tax if the Department fails to recover the tax from the share-holder. Therefore, this Sub-section makes it clear that the primary liability to pay tax under Section 23A is upon the share-holder and a secondary liability is cast upon the company on the failure of the share-holder to pay tax. Then Clause (iii) of Sub-section (3) provides for a notice of demand where tax is recoverable from a company.
If it has any significance at all, what may be noted is that no provision is made for a notice of demand to be served upon the share-holder if tax has to be recovered from him under Section 23A, although the answer may well be, as given by Mr. Joshi, that Section 29 provides for notice of demand and it was unnecessary to provide for any such notice under Section 23A, although it may again be pointed out that in Section 35 there is a specific provision for notice of demand by Sub-section (4). Subsection (4) of Section 23A gives exemption to the shareholder from paying tax in respect of the undistributed profits 'when they are actually distributed by the company, and what is relied upon is the expression 'when tax has been paid' and it is urged that this expression makes it clear that tax has got to be paid under Section 23A.
In my opinion the expression merely indicates the liability in respect of which tax has been paid. It makes no reference to the mode of payment of the tax or the process of assessment that has to be followed before a liability arises to pay the tax. In my opinion this expression is of no assistance whatsoever in construing Section 23A.
9. If, therefore, the order under Section 23A does not constitute an order of assessment, we have still to determine the question as to whether there is any other section of the Act under which a proper order of assessment can be made. It may be pointed out that for the last many years the practice adopted by the Department in cases falling under Section 23A was to make an order of assessment under Section 34 read with Section 23, and in this very case, as I have already pointed out, the first order upon the share-holder was made under Section 34.
Mr. Joshi has contended that notwithstanding the practice of the Department, the language of Section 34 makes it inapplicable to the fets obtaining under an order made under Section 23A. Now, the only part of Section 34 which can be applicable is Section 34(1)(b), and the question is whether the Department was right in the practice it followed for several years past. Whereas Clause (a) of Section 34(1) refers to an omission or failure on the part of an assessee to disclose his income, Clause (b) refers to an income which has escaped assessment although there has been no omission or failure on the part of the assessee.
All that Clause (b) requires is that an Income-tax Officer must receive information and in consequence of that information he must have reason to believe that certain income, profits or gains has escaped assessment. It is possible to take the view, though I must confess that it is slightly straining the language of the section, that as soon as the order was made under Section 23A the Income-tax Officer received information that under that order the assessee must be assessed to tax in respect of certain dividends which by that order were made his notional income to be included in the total income of a relevant year, and as the assessee had not paid tax on that notional income it could be said that that income had escaped assessment, and acting on that information and seeking to bring the escaped income to tax he proceeds to act under Section 34.
If we do not place this interpretation upon Section 34, one of two results must follow, either of which would be most unfortunate. One would be to take the view which has already been suggested and rejected that under Section 23A the order itself is an assessment order and no further assessment is necessary although such an order, as pointed out, could be made without notice to the assessee and in certain cases depriving the assessee of a right of appeal. The other result would be even more unfortunate from the point of view of the Department that if Section 34 did not apply there would be no machinery provided by the Act itself for assessment in cases where notional income created by Section 23A had to be assessed in the hands of a share-holder.
It is open to an assessee to contend that the Court must not uphold an assessment if the Court is satisfied that the Legislature has overlooked to provide the necessary machinery for assessment. But I would be reluctant to take that view especially as Section 34 is capable of the interpretation I have put upon it and it is supported by the past practice on the part of the Department. We do not always approve of the past practice of the Department, but in this particular case we must say that the practice followed by the Department is well founded in law and the Department was right in taking the view that it was not sufficient that an order under Section 23A should be made, but that it should be followed up by a proper order of assessment under Section 34.
10. There is one serious difficulty which was presented to us in placing this construction upon Section 23A, and the difficulty was caused by a decision of this Court in -- 'Sir Kasturchand, Ltd. v. Commr. of I. T., Bombay', : AIR1950Bom1 . That was a case where the company itself came on a reference against an order made under Section 23A. What was argued in that case was that the order of the Income-tax Officer was barred under Section 34(2), Income-tax Act. We repelled that argument taking the view that the order was not made in course of assessment under Section 23, but it was made under the special powers given to the Income-tax Officer under Section 23A, and there is no provision in the Income-tax Act which lays down the period of limitation after which no order can be made under Section 23A and therefore the order under Section 23A was not barred.
Now, what has been pressed upon us by Mr. Joshi is that if an order under Section 23A is not barred, then if a separate assessment order has to be made against a share-holder that order may conceivably be barred under Section 34(2), and the result would be that although an order could be made under Section 23A the order would be infructuous if the order could not be enforced against the share-holders against whom it was primarily intended to be enforced. We ourselves felt that we should hesitate to give an interpretation to Section 23A which would nullify its main provisions and make the order made under it an unworkable order.
When -- 'Kasturchand's case (B)' was decided, Section 34 had not been amended, and we must now look at the provisions of the amended section in order to decide what is the effect of limitation upon an order made under Section 23A.
The present Sub-section with regard to limitation as Sub-section (3) of Section 34 and that provides:
'No order of assessment under Section 23 to which Clause (c) of Sub-section. (1) of Section 28 applies or of assessment or re-assessment in cases falling within Clause (a) of Sub-section (1) of this section shall be made after the expiry of eight years, and no order of assessment or re-assessment in any other case 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.'
The last part of Sub-section (3) refers to all orders of assessment or re-assessment which do not fall within the category first enumerated and the period of limitation laid down is four years and the point from which limitation begins to run is the end of the year in which the income, profits or gains were first assessable.
11. Mr. Palkhivala's contention is that by reason of Section 23A the dividends were made notional income in the assessment years 1942-43 and 1943-44 and for the purpose of limitation those are the relevant years and limitation would begin to run in one case from the end of the assessment year 1942-43 and in the other case from the end of 1943-44. Therefore, according to Mr. Palkhivala the efficacy of an order under Section 23A would depend upon when that order was made. If it was made at a time when the assessment would have to be opened four years after the end of that relevant assessment year, then the order would be infructuous.
If we were to accept Mr. Palkhivala's contention, we would find ourselves faced with this anomalous situation that although the Legislature provided for no period of limitation under Section 23A and although the Legislature intended that such an order can be made at any time, still it would not be efficacious if it was made four years after the end of the year in which the dividend income was to be assessed. In my opinion, Sub-section (3) of Section 34 is not capable of that interpretation, We must first look at the plain natural language used by the Legislature, and unless there is any special canon of construction which prevents us from doing so, we must give to the plain natural words their obvious and correct meaning.
The controversy centres round what the expression 'were first assessable' means. In my opinion the expression 'first assessable' means that there was an income in existence which could have been assessed or was capable of being assessed but in fact was not assessed and was assessed subsequently and limitation begins to run from the time when such income could be assessed. Now, could it be said of the dividends deemed to be the income of the share-holder under Section 23A that they could have been assessed or were capable of being assessed in the year 1942-43 or 1943-44? This income did not exist, and if it did not exist, obviously it could not have been assessed to tax. This income came into existence for the first time by an order made by the Income-tax Officer under Section 23A on 20-2-1947, and having come into existence at that date, it could only have been first assessed at that date.
Prior to 20-2-1947, it was incapable of being assessed. Before an income can be assessed it need hardly be said that it must have an existence. It may not have an existence as the income of the assessee, but it must have an existence even independently of that. In this case the dividend income did not have any existence at all till it was created, as it were, or brought into existence by the order made by the Income-tax Officer under Section 23A.
Therefore, in my opinion, applying Section 34(3) to a case under Section 23A, limitation with regard to the share-holder who is sought to be assessed begins to run from the end of the year in which the order under Section 23A is made. Therefore, applying that test to the present case, the position is that as the order was made on 20-2-1947, limitation would begin to run from 31-3-1947, and it would be open to the Income-tax Officer to make an order of assessment in time till 31-3-1951.
12. Mr. Palkhivala says that Section 23A creates 'a legal fiction and the legal fiction is that a certain income should be deemed to be in existence at a particular time and we must give full effect to the legal fiction, and according to Mr. Palkhivala we are not giving full effect to the legal fiction when we are construing Section 34(3) in relation to Section 23A by holding that 'first assessable' means not in the year when the income is deemed to have been earned, but 'first assessable' means when the income was brought into existence by an order under Section 23A. We fully agree with Mr. Palkhivala that when a statute creates a legal fiction and declares something to be in existence when in reality it is not, the legal fiction must be worked out in all its implications, but in my opinion we are in no way impairing the legal fiction created by Section 23A by putting upon Section 34(3) the construction which we are placing.
The only legal fiction under Section 23A is that certain income is deemed to be the income of the assessee for a particular year. Section 23A does not create any legal fiction with regard to the assessment of that income or when it was assessable. In fact Section 23A does not deal with that topic at all. I accept the legal fiction with all its implications that the dividend income referred to in Section 23A accrued to the share-holder or was received by the share-holder in the particular year of assessment.
But accepting that fiction, we have still to ask the question, 'When was that income first assessable?' and when we answer that question by saying that that income was first assessable when the order under Section 23A was made, we do not in any way circumvent the legal fiction created by the statute, but we construe an entirely different concept contained in Section 34(3) with regard to which concept no fiction is created by Section 23A.
13. Therefore, in my opinion, on the question of limitation which has been expressly referred to its by the Tribunal, I am of the opinion that limi-tion under Section 34(3) applies to an order under Section 23A against a share-holder, but it applies in the sense in which I have indicated in the judgment.
14. Mr. Joshi also drew our attention to the second proviso to Sub-section (3) of Section 34 which is to the following effect:
'Provided further that nothing contained in this Sub-section shall apply to a re-assessment made under Section 27 or in pursuance of an order under Section 31, Section 33, Section 33A, Section 33B, Section 66 or Section 66A.'
15. Mr. Joshi wanted to contend that no question of limitation could arise in this particular case because what the Income-tax Officer was doing was to carry out a direction contained in the order of the Tribunal given under Section 33 and he wasre-assessing pursuant to that direction. As againstthat Mr. Palkhivala's contention was that this proviso only enabled a re-assessment to be made whenthere was an appeal by an assessee and the direc-tion was given in that appeal.
Mr. Joshi further relied on a further amendment that has been made to Section 34 which removes even that suggested difficulty from the way of the Department 'according to Mr. Joshi, and that further amendment is to the following effect:
'Provided further that nothing contained in this. section limiting the time within which any action may be taken or any order, assessment or reassessment may be made shall apply to a reassessment made under Section 27 or to an assessment or re-assessment made on the assessee or any person in consequence of or to give effect to any finding or direction contained in an order under Section 31, Section S3, Section 33A, Section 33B, Section 66 or Section 66A.'
Mr. Joshi says that the case would fall directly within this proviso because in giving effect to a direction given by the Tribunal an order of assessment or re-assessment has to be made on a shareholder, and according to Mr. Joshi even though the shareholder may not be the assessee who appealed to the Tribunal the re-assessment may be made not only on the assessee but on any person. Mr. Palkhivala is not prepared to accept this interpretation of the proviso placed by Mr. Joshi. Now, inasmuch as I have held that the order of 23-1-1950, was not a proper order of assessment under Section 34, this question can only arise if the Income-tax Officer passes a fresh order of assessment after following the machinery laid down in Section 34 and Section 23.
Then would be the time to consider whether an order of assessment made was bad by reason of limitation or whether the order was saved by the new proviso added to Section 34 by the recent amendment. Mr. Palkhivala does not want us to express any opinion because according to him it is a very important question of law which must be considered in all its bearing as it might affect not only the case of this assessee but other assessees also. We express no view on this aspect of the case except indicating the rival contentions put before us by Mr. Joshi and Mr. Palkhivala.
16. Therefore, broadly, the position on the reference is this. An order was made by the Income-tax Officer on 23-1-1950. If that order was a valid or proper order, it was made within the period of limitation. But this order, as already pointed out, was not made under Section 34. Now, if an order is made by an Income-tax Officer and even though he may state that he has not made it under any particular section of the Income-tax Act, or even if he may state that he has made it under a particular section, it is for us to decide which is the proper provision of the law under which such an order should have been made.
The Income-tax Officer has not purported to make | this order under Section 34. But in my opinion, as already indicated, an order under Section 23A imposing a liability upon a shareholder to pay tax can only be made under Section 34, and therefore I must look upon the order o 23-1-1950, as having been made under Section 34. If it was made under Section 34, then it is clearly bad as it was made without notice to the hisses-see, as it is clear that notice under Section 34 is a condition precedent to the making of a valid order. Strictly, all that we have been asked to decide is whether the order of the Income-tax Officer of 23-1-1930, was appealable.
If the order was made under Section 34, it is clearly appealable, because it is made appealable under Section 30. It would then be for the Tribunal on appeal to decide whether the order was a good order or a bad order. I have already indicated that in my opinion the order is bad, and the parties told us that they wanted to avoid multiplicity of litigation by taking our opinion as to the nature of the order. But if the parties desire that a formal order should be obtained from the Tribunal after we have held that the order is appealable, it would be open to the parties to ask the Tribunal to pass the proper order on the appeal against the order of the Income-tax Officer preferred by the assessee.
17. The second question referred to us is:
'Whether it was incumbent upon the Income-tax Officer to take action under Section 34, Indian Income-tax Act, before he revised the assessments on 23-1-1950?'
That question I must answer in the affirmative for the reasons given by me in my judgment.
The third question is:
'If the answer to question No. 2 is in the affirmative, whether the bar of limitation specified in Section 34, Income-tax Act, would apply to the inclusion in the total income of a shareholder the dividend which is deemed to have been distributed under Section 23A(1) of the Act?'
The answer to that question would be in the affirmative to the extent and in the manner indicated in my judgment.
18. Commissioner to pay the costs.
Tendolkar, J.
19. I agree and would like to add a few observations.
20. The arguments as to whether Section 23A is a self-contained section for assessment of a shareholder, or merely a section for computing the total income and not for determining the tax on it, are in my opinion so evenly balanced that it is not without hesitation that I have come to the conclusion that Section 23A is merely a computation section. The operative part of the section empowers the Income-tax Officer under certain circumstances to pass an order that the undistributed income of a company 'shall be deemed to have been distributed as dividend amongst its shareholders', and it provides for the consequence of such an order in the following terms: 'and thereupon the proportionate share thereof of each shareholder shall be included in the total income of such shareholder for the purpose of assessing his total income'.
The dispute centres round the meaning to be attached to the word 'assess' in this section. It is a matter of common knowledge that the words 'assess' and 'assessment' have been used in the Income-tax Act in somewhat different senses in different places. The word has sometimes been used as meaning computing the income only, on other occasions as determining the tax payable only, and yet in other places as comprising the entire procedure involved in the process of assessment. Mr. Joshi contends that the word is used in Section 23A in the sense of comprising the entire procedure for imposing tax liability on an assessee, while Mr. Pal-khivala contends that the word is used merely in the sense of computing the total income of the assessee.
In support of his contention Mr. Joshi relies on the heading of the section which is 'Power to assess individual members of certain companies', which indicates that the very object of the section is to assess the shareholder; and it appears to me to be difficult to hold that the word 'assess' in this heading means merely to compute the income. Although of course a heading need not necessarily govern the meaning of the section, the word as used in the heading obviously comprises the entire process of assessment. Therefore, Mr. Joshi urges that in the passage from Section 23A which I have reproduced above, the word must be read as having the same meaning, viz., as comprising the entire process of assessment from its inception to the ascertainment of the liability of the assessee.
As proof of the intention of the Legislature that such is the meaning to be assigned to the word 'assess' in this section, Mr. Joshi further relies on Sub-section (4) of the section which is in these terms:
'Where tax has been paid in respect of any undistributed profits and gains of a company under this Section, and such profits and gains are sub-sequently distributed in any year the proportionate share therein of any member of the company shall be excluded in computing his total income of that year.'
This Sub-section refers to tax payable 'under this section' and not to tax payable 'on income computed under this section', and this undoubtedly strengthens the argument of Mr. Joshi that the Legislature did not appear to contemplate a separate assessment outside the scope of Section 23A.
21. Mr. Joshi further points out that there is no period of limitation prescribed for an order under Section 23A as was held by a Division Bench of this Court in -- ' : AIR1950Bom1 '. Therefore, an order could be made under Section 23A at any time and the consequence of that order is that a proportionate share of the profits deemed to have been distributed as dividend shall be included in the total income of such shareholder for the purpose of assessing the income. If, however, the shareholder had to be separately assessed, then the period of limitation for passing such an assessment order may well have elapsed when the order under Section 23A is made and therefore the order under Section 23A would under those circumstances be rendered completely infructuous.
Now, apart from this last contention based on the period of limitation which is, as I will later point out, somewhat misconceived and based on a particular interpretation of the period prescribed by Section 34 which in my opinion is not tenable; the other contentions advanced by Mr. Joshi appear to me prima facie to be well founded; but there are weighty reasons why they should not prevail. Mr. Palkhivala on behalf of the assessee has pointed out that the only section which provides in terms for determining tax payable by an assessee is Section 23(3); and in any case falling within Section 34, since the provisions of the whole Act are made applicable to proceedings under Section 34, an order is ultimately made under Section 23(3).
The result in both cases is that the assessee has a right of appeal against the order to the Appellate Assistant Commissioner and from the Appellate Assistant Commissioner to the Tribunal, with a right of reference to the High Court in the manner provided by the Income-tax Act. Mr. Palkhivala's contention is that if we were to hold that Section 23A is a self-contained section for the entire process of assessment, then the result would be that the assessee, viz, the shareholder, would have no right of appeal against any assessment made on him, for under Section 30, Income-tax Act, the only right of appeal allowed against an order under Sub-section (1) of Section 23A is to the company and not to the shareholder.
Now, of course, it is not wholly correct to say that even if Section 23A was construed as a self-contained section, there would be no right of appeal in any case because it may be that at the date on which an order under Section 23A is made the assessment of the assessee has not been completed but is pending, in which case the assessment ultimately would have to be under Section 23{3) only. But there may also be a case where before an order under Section 23A is made the assessment is already concluded, and in that case only, if it were held that Section 23A was a self-contained section for assessment, the assessee would have to go without a right of appeal.
Now, the answer of Mr. Joshi to this contention is that even assuming there was a right of appeal, such right cannot confer upon the assessee any tangible benefit because proviso (3) to Section 30 enacts that a shareholder in a company in respect of which an order under Section 23A has been passed by an Income-tax Officer, may not in respect of matters determined by such order appeal against the assessment of his own total income. Incidentally, this proviso appears to enact that the Legislature contemplated that there could be appeals against orders which included the liability to pay tax in respect of dividends deemed to be distributed under Section 23A.
The proviso undoubtedly makes it clear that even if an appeal lay, the only thing that could be agitated in the appeal is questions not determined under the provisions of Section 23A, and Joshi's contention is that when a consequence order is made on the shareholder under Section 23A, (sic) that is done is to add to his income the prop (sic) tionate share of the dividends deemed to have been distributed. That, however, does not appear to be the test of closer scrutiny.
Although, broadly speaking, it is correct to s(sic)that in case of an assessment based on an ordermade under Section 23A, normally the shareholder c(sic)have little or nothing to urge as to why the (sic)come which is included in the total income as con-sequential upon the order under Section 23A being madeshould not be so included, he may have othergrounds to advance as to why he is not liable totax. Mr. Palkhivala has drawn our attention totwo possible cases. One is the somewhat excep-tional case which this Court determined in 'Cam-batta's' case, in which what was sought to be donewas that the beneficial owner of shares was soughtto be taxed in consequence of an order made underSection 23A. He challenged the order of assessmentsuccessfully before this Court and this Court held that it was only the registered holder of shares whowas liable to such a tax.
In a case such as this one, of course, if there wasno right of appeal, the assessee's interest wouldclearly be affected. Mr. Palkhivala also drew att-tion to another possible case, viz., where the sharesare held by an assessee as his stock-in-trade. Inthat case the income from dividends may possiblybe included as income from business under (sic)head 'business'; and if it were, it would be possible for the assessee to urge that any losses carried (sic)ward from previous years or any losses incu(sic)during the year of assessment were liable to be (sic)of against such dividend income before the divid (sic)was brought to tax.
Therefore, there may conceivably be cases who (sic) the absence of a right of appeal may affect (sic) assessee prejudicially, although such cases in (sic) very nature may be very few. It is no doubt (sic) that a right of appeal is always a creature(sic) statute and the mere fact that an assessee has(sic) a right of appeal conferred on him does not nece(sic) sarily enable a Court to come to the conclusion (sic) a section or section should be so construed (sic) confer upon him that right. But where, as in (sic) case, as I have pointed out at the very outset (sic) arguments on both sides are somewhat ev(sic) balanced, it becomes material, in determining which of the two rival contentions should be accept (sic) ro consider whether upon a particular constru (sic) a valuable right which might otherwise accrue the assessee would be lost.
22. Mr. Palkhivala next urges that if Section 23A (sic) taken to be a self-contained section, there is (sic) it no provision for notice to the assessee before (sic) assessment is actually made. It is an element (sic) principle of natural justice that nothing should done to the prejudice of a person without his been (sic) given an opportunity to show cause against (sic) (sic) be done; and no doubt when action is(sic) the prejudice of an assesses there are(sic) sections in the Income-tax Act which pro-(sic) for notice being given to the assessee before(sic) action is taken. But. Mr. Joshi's contention(sic) that the giving of such notice would serve nopose at all because it is not open to the assesseechallenge any matter determined under Section 23A(sic) can only be challenged by the company, and(sic) by the shareholder.
No doubt Mr. Joshi's contention that the share-(sic)er cannot challenge the quantum fixed under (sic) 3A is well founded, but he could in the cases (sic) I have drawn attention in reference to(sic) right of appeal raise the same points before the (sic) Officer if a notice was given to him to (sic) cause why an assessment should not be made (sic) basis of an order under Section 23A. Therefore, (sic)to me that if the result of upholding the (sic) entions of Mr. Joshi is to deprive the assessee(sic) right of appeal in certain cases and also to (sic) him of the elementary right of a notice (sic) given to him before any assessment is made (sic) him, the construction of the section being (sic) the Court would be inclined to construe(sic) favour of the assessee rather than in favour (sic) taxing department.
(sic) regard to Mr. Joshi's plea that an order (sic) Section 23A may be rendered infructuous if it was (sic) after the period of limitation prescribed for (sic) of an order of assessment under Section 34, (sic) Palkhivala concedes that it would be so on (sic) footing that the period of notice prescribed (sic) Section 34(3) is four years from the end of the (sic) in which the income, profits or gains were (sic) sable. The argument and the concession are (sic) made on the basis that the period of limita-(sic) starts from the end of the year in which the (sic) is to be taxed, but it appears to me that (sic) assumption is not justified by the language of (sic) (3).
(sic) section is in these words:
(sic) re order of assessment under Section 23 to which clausehas of Sub-section (1) of Section 2S applies or of assessment(sic) assessment in cases falling within clause (a) of(sic). (1) of this section shall be made after the(sic) of eight years, and no order of assessment(sic) in re-assessment in any other case shall be made(sic) the expiry of four year, from the end of(sic) year in which the icome, profits or gains(sic) first assessable.'
(sic) the section in its application to actual income(sic) edly provides that the period of limitation(sic) years shall be from the end of the year in(sic) that income is assessable to tax because the(sic) having been there it became assessable to(sic) that year. But the key words in the(sic) are 'the year in which the income etc. were(sic) ssessable'. It is true of an actual income to(sic) at it was assessable in the year next after the(sic) which the actual income arose because that(sic) be the assessment year for any actual in-(sic) arising in the preceding year.
But is it possible to say in respect of what is sought to be taxed under Section 23A that the income, profits and gains were first assessable in the year as of which they became assessable under Section 23A? The effect of an order under Section 23A no doubt is that the undistributed profits which are deemed to have been distributed as dividends-are assessable as income of the year in which the general meeting of the company was held. But it is one thing to say that they are assessable as the income of a particular year and quite another to say that they were first assessable in that year. They became first assessable when they became part of the income of the shareholder as a result of an order under Section 23A. Up to that time the income, profits or gains had no existence in fact and they had a notional existence only after an order under Section 23A is made.
Therefore, although they are assessable as of a previous assessment year, they did not become assessable in that year, but they were first assessable in the' year in which an order under Section 23A was first passed. The result, therefore, is that there never can be any question of an order made under Section 23A becoming infructuous by reason of the fact that at the date when the order is made the period of four years from the end of the year as of which the dividend is to be taxed has come to an end, for the starting point for the period of limitation for an assessment against the shareholder would be the end of the year in which the order under Section 23A has been made.
23. It has been urged by Mr. Joshi that the assessment of an income which is included in the income of the shareholder under Section 23A does not fall within the scope of Section 34 at all. It is well known that the practice of the Income-tax Department has been to assess that income under that section.
It is no doubt true that it is straining the language of Section 34 to a certain extent to include the dividend income referred to in Section 23A within the scope of escaped income. But none the less, as my Lord the Chief Justice has pointed out in his judgment, as there is no separate machinery for enforcing any assessment in respect of the income under Section 23A, the whole of Section 23A would be rendered nugatory if Section 34 did not apply, and as the Court would always be loath to give an interpretation to any section which would defeat the object of the statute, it appears to me that if the assessment has not already been completed when an order under Section 23A is made, the only procedure by which an assessment can be made in respect of the income under Section 23A would be under Section 34.
The position, therefore, that emerges is that if it is held that the word 'assess' in Section 23A means 'compute' consequential upon the order made that undistributed profits shall be treated as distributed by way of dividend amongst the shareholders, the proportionate share of the shareholder shall be included in the total income of the shareholder under Section 23A; but the Income-tax Officer Will proceed to determine the tax on the total income either under Section 23(3) if the assessment of the shareholder has not by then been completed or under Section 34 if the assessment has already been completed. In the latter case, the period of limitation mentioned in Section 34(3) begins to run from the end of the year in which an order under Section 23A has been made. This position appears to me to be fair alike to the taxing authorities and to the assessee.
It is moreover in accord with the decision of the Division Bench of this Court in -- 'AIR 1947 Bom 264 (A)', where their Lordships took the view that Section 23A is a merely computation section, a view with which I am in respectful agreement; and in any event as the construction of the word 'assess' in Section 23A is in my opinion not free from doubt, in would be but right to take the view more favour able to the assessee than to the taxing authorities I, therefore, agree with the answers proposed to the questions by the learned Chief Justice and to the order of costs made by him.
24. Answers accordingly.