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Judgment
Veeraswami, J.—This is a consolidated reference relating to assessment years 1953-54 and 1954-55. The assessee has been described to
be a public limited company, carrying on business in General Insurance. In respect o� the said years, the Income Tax Officer originally allowed
rebates in the sums of Rs. 4,989-84 and of Rs. 7708-11-0 at the rate of one anna in the rupee on the undistributed profits of the company. On 8-
3-1958 the Income Tax Officer, however, passed orders u/s 23-A (1) by which the entire undistributed profits were deemed to have been
distributed as dividends to the shareholders. As a consequence, the assessment orders were reopened u/s 34 with the result the rebates granted
earlier were withdrawn. The assessee was unsuccessful before the Revenue as well as the Tribunal in his challenge as to the propriety of the order.
The Tribunal''s view was that Section 23-A created a fiction in respect of distribution of deemed dividends and it was, therefore, clear that the
order passed u/s 23-A on 8-3-1958 related back to the anterior period and that further a logical extension of this view would be that at the time of
the original assessment, an order u/s 23-A (1) had been passed and so the grant of rebate was improper. The assessee has moved for this
reference u/s 66(1) of the Indian Income Tax Act on the following question-
Whether, by reason of an order passed on 8-3-1958, u/s 23-A (1) on the assessee company subsequent to the original assessment made on the
company, for the years 1953-34 and 1954-55, the rebate of one anna in the rupee on the undistributed profits granted in the original assessment in
accordance with Schedule I Part B, Proviso (1) of the Finance Act, 1951 could"" be withdrawn by a revised assessment?
We may at the outset state that we do not accept the correctness of the reasoning of the Tribunal above referred to. Nevertheless, we are of
opinion that its conclusion should be sustained, though entirely for different reasons. In arriving at that decision, our minds have to a certain extent
oscillated from one end to the other, but at the end, we are firmly of the view, that the order of the Income Tax Officer reopening the assessment
and withdrawing the rebate was competent and in order.
Mr. Swaminathan''s argument which undoubtedly has been persuasive, is that grant of rebate under proviso (1) to Part B in Schedule I of the
Finance Act postulates that the requisite conditions therefore have, in the opinion of the Income Tax Officer, been satisfied and that if therefore, he
proceeded on the basis that there has been no order made u/s 23-A, it was to that extent, conclusive and could not be reopened or reviewed in
exercise of his powers u/s 34, Learned counsel urges that Section 23-A does not belong to the realm of assessment, unlike Section 34, and it
followed, therefore, that when rebate was granted, the decision of the Income Tax Officer that there has been no order u/s 23-A should stay,
whatever may be the validity of an order passed subsequently u/s 23-A. He adds that such a subsequent order will be entirely innocuous for
purposes of reopening the assessments u/s 34 and will be futile in withdrawing the rebate. On the other hand, the Revenue, equally persuasively,
contends that the application of the proviso in Part B of Schedule I entirely covers the realm of assessment and, therefore, the whole range of it is
within the purview of Section 34. On that basis, Mr. Balasubramaniam contends that, if the Income Tax Officer on a wrong view of the proviso
proceeded merely on the physical fact of there being no order u/s 23-A when he? passed the assessment order, and later on he found that he was
wrong in doing so and actually made an order u/s 23-A. that is a matter which could be reopened u/s 34. In applying Section 34, to such a
situation, the Income Tax Officer is not to be taken as interfering with any order passed u/s 23-A.
In order to assess the rival contentions, it is first necessary to notice what precisely is the scope of the proviso. Its particular objective appears
to be to encourage retention with the company of the amount that remains of the total income as reduced by the outgoings in the nature of taxes
and dividends declared, without that amount also being distributed as dividends, by granting a rebate of one anna in the rupee. Where, however,
such amount has also been distributed as dividend, the second clause of the proviso charges additional tax subject to certain limits. In our view this
objective should be kept in mind in delimiting the scope and applicability of the proviso. The body of the proviso visualises that before the question
of allowance of rebate is considered, the company concerned has made the prescribed arrangements for the declaration and payment of dividends
payable out of the relative profits and has deducted super tax from the dividends in accordance with the provisions of Sub-section (3-D) or (3-E)
of Section 18 of the Act. It is then one can examine whether the conditions for allowance or rebate in Clause (1) of the proviso have been satisfied.
The conditions are two-fold:
(1) The total income as reduced by seven annas in the rupee and the amount exempt from Income Tax exceeds the amount of dividends declared
in respect of the whole or part of the previous year and (2) no order has been made under Sub-section (1) of Section 23-A of the Income Tax
Act.
It is on the second condition, the argument on either side has centered. It seems to us to be obvious that this condition very really bears on the
quantum of the total income with reference to which rebate is allowed. Whether or not sixty per cent of the total income as reduced by the
reductions permissible u/s 23-A has been distributed as dividends, the absence of an order under the provision in the particular circumstances
leads to precise data by which the amount eligible for rebate is fixed. It stands to reason, therefore, that a rebate may be allowed only after the
Income Tax Officer has considered the applicability of Section 23-A and of the propriety of making an order under that section. The words ""no
order has been made under Sub-section (1) of Section 23-A"" do not merely mean the physical fact of there being no order under that provision in
existence.
In Commissioner of Income Tax v. Afco (Pvt) Ltd., (1963) 48 ITR 7, the Supreme Court in considering the proviso has made certain
observations which appear to support our view:
The right to rebate arose under those Finance Acts if no order u/s 23-A was made. The Income Tax Officer had therefore to decide even before
completing the assessment of the company whether the circumstances justified the making of an order under Sec, 23-A and unless an order u/s
23-A was made the assesses became entitled automatically to the rebate of one anna in the rupee. Such a provision led to delay in the disposal of
assessment proceedings and caused administrative inconvenience. It appears that the legislature modified the scheme of granting rebate in enacting
the Finance Act of 1955, with a view to simplify the procedure and avoid delays"".
Pitching himself on that position, Mr. Swaminathan urges that once rebate has been granted, it presupposes that a decision has been arrived at
by the Income Tax Officer earlier or simultaneously u/s 23-A of the Income Tax Act and if that be so, there is no power vested in him under the
Act to go back upon that view.
The assessment order for the assessment year 1953-54 began by stating that the assesses was a public limited company carrying on business of
accident insurance. It was evidently on this view which is not now maintained, the Income Tax Officer thought that Section 23-A was inapplicable
and, therefore, took it for granted that no order has been passed under that proviso. We are inclined to think that if the Income Tax Officer made a
mistake in assuming that the physical fact of there being no order will suffice or because of the character of the company as he thought it to be that
provision would be inapplicable, it would not disentitle him from reopening the assessment on the view that it had been made at too low a rate. As
has been held by the Supreme Court in Sundaram and Company (P.) Ltd., Madurai Vs. Commissioner of Income Tax, Madras, where by reason
of wrong allowance of rebate, there has been escapement of tax, it may be considered that the assessment had been at too low a rate and Section
34 would be available in such a case.
But Mr. Swaminathan invites our attention to P. S. SUBRAMANYAN, Income Tax OFFICER, COMPANIES CIRCLE 1(1), BOMBAY,
AND ANOTHER Vs. SIMPLEX MILLS LTD., , and contends that the order made u/s 23-A subsequent to the assessment orders would not
and could not relate back to the time when the assessments were made and led to an assumption that dividends had been declared to the extent of
the amount with reference to which rebate had been given. On that reasoning, he says that Section 34 would not be attracted to the situation. We
do not think that the authority cited supports him. All that was held in that case was that excess interest paid by the Revenue could not be
recovered by an order u/s 34 on the strength of an amendment with retrospective effect because it did not relate to a charge of the income and,
therefore to an assessment of the income. We do not think that the analogy has application to the instant case. Section 34 is invoked in the present
case not to reopen or reconsider an order u/s 23-A but to set right an assessment which has been made at too low a rate. If the Income Tax
Officer had applied his mind to the conditions necessary for making or not making an order u/s 23-A and then allowed a rebate, whether the
position would be different, we are not called upon to consider in this case. There is nothing in the record to show that the Income Tax Officer,
before or at the time of making the assessment order applied his mind to the provisions of Section 23-A in order to make an order under that
provision. It is no doubt true that he proceeded on the basis that the assessee was a public limited company which possibly weighed with him in
taking it for granted for purpose of the proviso that there has been no order u/s 23-A. But so long as the Income Tax Officer had not applied his
mind to the question whether it would not be unreasonable to call upon the company to declare a further dividend, but nevertheless he granted
rebate under the proviso, it would be a case where he wrongly understood the scope of the proviso in relation to that matter or ignored the
requirement of his applying his mind and took it merely for granted that there has been no order u/s 23-A in a physical sense, and this resulted in
assessing the income at too low a rate. Such a case will, in our opinion, squarely fall within the ambit of Section 34.
We may add that in view of the decision in Commissioner of Income Tax, Bombay City I, Bombay Vs. Jubilee Mills Ltd., Bombay, , there is no
substance in the preliminary objection raised by the Revenue to the competence or validity of the reference.
In this view, we answer the question against the assessee with costs. Counsel''s fee Rs. 250.