Pioneer Motors, Ltd. vs Commissioner of Income Tax

This is a reference by the Income- tax Appellate Tribunal. Madras, Bench ''B'' u/s 66(1) of the Income Tax Act 1922. The questions referred are:

(i) Whether the aforesaid dividend of Rs. 75000/- declared on 2-1-1951 purporting to have been out of the profits of the three accounting years 1132, 1123 and 1124 is apportionable at all?

(ii) If the answer to the above question is in the affirmative, is an order u/s 23A of the Indian Income Tax Act equal to Section 31 of the Travancore Income Tax A ct competent. for the previous year, 1123?

(iii) The original order being u/s 31 of the aforesaid Travancore Act, whether the order of the Tribunal directing an order u/s 23A of the Indian Act is Valid?

(iv) Whether the provisions of Section 23A of the Indian Income Tax Act are ultra vires of the Indian Constitution and accordingly inoperative?

The facts necessary to appreciate the question referred are few and can be briefly stated, the Assessee, the Pioneer Motors Limited, in a private limited company with two share-holders which was incorporated in November 1946 (1122 M. R) under the Travancore Companies Act, IX of 1124. The accounts of the year 1122 were laid before the company in general meeting on 22-7- 1949, of 1123 on 22-9-1950, of 1124 on 2-1-1951, and of 1125 on 31-12-1951. There was no declaration of any dividend at the meeting held on 22-7-1949, 22-9-iyao or on 31-12-1951.

In the report to the share-holders dated 28-12-1950 (Annexure B) the directors said:

The Company has not declared dividend for the period ended 31-12-1122 and 31-12-1123.

The profit for the year amounted to Rs. 56,350-6-5 after providing for all expenses. Tins ''together with Rs. 1,04,244-1-0 brought forward from previous years amounted to Rs. 1,60,594-7-(sic). Your directors propose to make the following appropriation.

Reserve for Taxation (already appropriated in accounts).... Rs. 35,000-0-0 Transfer to General.... Rs. 37,500-0-0 Reserve Dividena at 30 percent on paid-up, Capital.... Rs. 75,000-0-0 Balance forward to next year.... Rs. 13,094-7-5 --------------- RS. 160,594-7-5 ---------------

and at the meeting on 2-1-1951 it was resolved (Annexure A).

That a dividend of 30 per cent on the paid tip capital be paid to the share-holders as recommended by the Directors.

Annexure C is a specimen copy of the dividend warrants that followed and it is stated therein that the dividend was "for the year ended 1122, 1123 and 1124."

It is agreed that the company is not one in which the public are "Substantially interested" within the meaning of that expression as given in Section 31 of the Travancore Income Tax Act, 1121 (Section 23A of the Indian Income Tax Act 1922). It is also agreed that the mischief of the section is attracted if the company has distributed by way of dividends within the twelve months immediately following the expiry of the accounting year less than 60 per cent, of its total income of the accounting year as reduced by the amount of taxes payable by the company.

As stated in - SIR KASTURCHAND LTD. Vs. COMMISSIONER OF Income Tax, BOMBAY CITY., the position is the same "whether there is no distribution at all or whether there is distribution of less than 60 per cent, of the assessable income."

The profits of the company as reduced by the Income Tax and super tax payable amounted to Rs. 62,307/- in 1122, Rs. 52,698/- in 1123, Its. 53,912/- in 1124 and Rs. 66,515/- in 1125. The Income Tax Officer took the view that the dividend of Rs. 75,000/- declared at the meeting on 2-1-1951 should be distributed equally among the accounting years 1122, 1123 and 1124 (Annexure D) and that as on such distribution the minimum of (10 per cent, provided by the section was not available in respect of any of those three years, the mischief of the section was attracted as regards all of them.

The company appealed and the Appellate Assistant Commissioner accepted its contention that the said amount should be distributed not among the three accounting years 1122, 1123 and 1124 but only between the last two of them, viz., 1123 and 1124 (Annexure E). The Department then took up the matter before the Income Tax Appellate Tribunal and the Tribunal held by its order dated 21-12-1953 (Annexure F) that the dividend of Rs. 75,000/- declared at the annual general meeting on 2-1-1951 was not apportionable at all, that it "can only relate to the accounting year 1124 M. E. in respect of which the annual general meeting was held on that day" and that the accounting year 1124 alone escaped the mischief of the section.

The tribunal also directed that the action to be taken by the Appellate Assistant Commissioner in respect of the accounting year 1123 should be u/s 23A of the Indian Income Tax Act 1922, and not u/s 31 of the Travancore Income Tax Act, 1121.

It is common ground that no portion of the Rs. 75,000/- declared, as dividend at the annual general meeting on 2-1-1931 should be considered as relating to the accounting year 1122 and the only question, therefore, that arises for consideration is whether the Appellate Tribunal was right when it said that it should be confined to 1124 and that no portion of it can be considered as a declaration of dividend in respect of the accounting year 1123.

It is true that the annual general meeting held on 2-1-1951 at which the accounts of the year 1124 were considered and the- dividend of Rs. 75,000/- declared was within six months of 22-9- 1950, the date on which the accounts of the year 1123 were laid before the company in general meeting and great emphasis was placed on this fact by the counsel for the Assessee. We fail to understand, however, its relevancy to the matter at issue before us.

In order to avoid the mischief of the section there should be a distribution of dividend sufficient to satisfy the minimum prescribed "in respect of" the previous year concerned. That there was no declaration of dividend in respect of the accounting year 1123 at the meeting on 22-9- 1950 at which the accounts of that year were considered is admitted and in the light of Annexures B and A it is also impossible for us to accept the contention that there was a declaration of dividend in respect of the accounting year 1123 at the general meeting , held on 2-1-1951 when the accounts of the year 1124 alone came up for consideration.

In this view there has been no declaration of dividend in respect of the accounting year 1123 and it follows that question (1) has to be answered in the negative and that in view of the said answer, question (ii) does not arise for consideration.

As far as question (111) Is concerned It is conceded by the learned Counsel for the Department that by virtue of Section 13 of the Finance Act of 1950, the Travancore Income Tax Act,. 1121 should apply for all assessments in respect of accounting years ending on or before 31-3-1949. In this view the Tribunal''s direction to the Income Tax Officer to proceed u/s 23A of the Indian Income Tax Act, 1922, in respect of the accounting year 1123 which ended on 16.8.1948 is incorrect and we answer the question accordingly.

Question (iv) was raised in connection with the accounting year 1125, The accounts of that year were laid before the company in general meeting on 31-12-1951 and though the profits of that year as reduced by the Income Tax and supertax payable amounted to Rs. 66,515/- no dividend was declared at that meeting. In view of this the Income Tax Officer ordered (see order dated 31-3- 1952).

The total income of the company for 1951-52 is Rs. 1,17,596/-. The tax payable is Rs. 51,081/-. Balance available for distribution is Rs, 66,515/-. The accounts of the company were passed by the share-holders in the General Body Meeting held on 31-12-1951. As the company has not distributed any dividends within six months of the General Meeting the entire sum of Rs. 66,515/- is deemed to have been distributed between the share-holders as on 31-12-1951.

Prior approval of the Inspecting Assistant Commissioner has been obtained for the application of Section 23A.

The profits will be apportioned between the two share-holders as follows:

S. Nellippan 53212. N. Sastha 13303.

The Assessee appealed against the order to the Appellate Commissioner and he said (see order 28-5-1953).

This is an appeal .against the Income Tax Officer''s order u/s 23A of the Act. The learned advocate of the Appellant. Company agrees that he is unable to satisfy me that the order of the Income Tax Officer is unsound or defective in any respect. But he now seeks to go into a fresh ground of appeal, viz., that the provisions of Section 23A themselves are ultra vires of the Constitution of India.

I am not prepared to admit this fresh ground at this stage, since I am not satisfied that there was any reasonable cause for this ground not being specified in the form of appeal.

The Assessee then took up the matter before the Income Tax Appellate Tribunal. Madras Bench ''B'' and the Tribunal held (see order dated 21-12-1953):

The only ground taken in tins appeal is that the provisions of Section 23A of the Income Tax Act are beyond the competence of the Central legislature as it seeks to levy assessment on the shareholders on sums which are not distributed to them and are not their income.

The Appellate Assistant Commissioner before whom this ground was taken for the first time rejected the appeal before him on the ground that it was a fresh ground of, appeal not having been taken before the Income Tax Officer, or for the matter of that even is the grounds of appeal before him.

It is no doubt true that a point of law can be taken for the first time at any stage and the Assessee is not necessarily confined to taking it At the initial stage, but we cannot Bay that the assesses has been able to make out a good case for holding that Section 23A is ultra vires. We do rot think that Section 23A is ultra vires.

The learned Counsel for the Assessee (sic)marised his arguments on this point as follows:

It is not controvertible that the company is a legal person distinct from the share-holders and that no income accrues to, the share-holders till the moment when the company elects to part with its profits in the shape of dividends in favour of the share-holders. It must follow that there is no income accruing to the share-holders till a declaration of dividend takes place.

Section 23A however declares categorically that the income of the company should be deemed to have been distributed to the share-holders who are to be assessed upon that footing. This is v(sic)rturally assessing a person on income which never accrued to him but accrued to a different legal person.

The anomaly will become clear if we picture the instance of an Income Tax Act levying a tax not on the income but the debts of an Assessee and enaoting that the debts of an Assessee would be deemed his income, An analogous question has arisen with reference to the Vires of State Sales Tax Legislation which purported to levy a tax on what was deemed to be a sale but was not a sale within the meaning of that term as used in the Lists of the Constitution. - Budh Prakash Jai Prakash and Another Vs. The Sales Tax Officer and Others, and - Bharat Sabaigrass Ltd. Vs. The Collector of Commercial Taxes, may be kindly referred to.

The gist of the reasoning in these cases is that the State is not competent to levy a tax on a transaction which is not a "Sale" within the meaning of Entry 48 of List II of the Seventh Schedule of the 1935 Government of India Act corresponding to Entry 54 in List II of the present . Constitution. Similarly it is contended that (sic) within the meaning of Entry 82 of the Union List cannot be deemed to be ''income'' and taxed upon that footing.

Section 23A of the Indian Income Tax Act, -1922, has been completely recast by the Finance Act of 1955. It is with the section as it stood before the amendment that we are concerned in this case. Sub-section (1) as it stood then, omitting the Proviso and Explanation thereto, toads as follows:

Where the Income Tax Officer Is satisfied that in, respect of any previous year the profits and gains distributed as dividends by any company up to the end of the sixth month after its accounts for that previous year are laid before the company in general meeting are less than sixty per cent, of the assessable income of the company of that previous year as reduced by the amount of Income Tax and super-tax payable by the company in respect thereof he shall, unless he is satisfied that having regard to losses incurred by the company in earlier years or to the small(sic)ess of the profit made, the payment of a dividend or a larger dividend than that declared would be unrea(sic)nble, make with the previous approval of the Inspecting. Assistant Commissioner an order in writing that the undistributed portion of the assessable income of the company of that previous year as computed for Income Tax purposes and reduced by the amount of Income Tax and super-tax payable by the company in respect thereof shall be deemed to have been distributed as dividends amongst the share-holders as at the date of the general meeting aforesaid, 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.

As stated in Kanga''s Income Tax (Third Edition, page 690):

The object of this section is to prevent avoidance of super-tax by the shareholders of a company in which the public are not substantially interested. The rates of super-tax applicable to companies are much lower than the highest rates applicable to other Assessees. The Income Tax paid by the company is deemed to have been paid on behalf of the share-holders, but the shareholders have to pay super-tax again in respect, of the dividends even if the dividends are paid out or profits which have borne super-tax in the hands of the company.

An individual might avoid the high incidence of super-tax by transferring to a private limited company in return for shares, the source of his income, and by securing that, instead of any dividends being declared the profits made by the company should be allowed to accumulate in the hands of the company and should-be ultimately distributed in a capital form by creating bonus share which are not assessable as income in the hands of the share-holders. This section aims at foiling an attempt to avoid super-tax by such means.

What the section does is to postulate as a notional dividend distribution in the circumstances specified in the section and to direct an assessment on that basis. The income derived from a notional distribution can also be only notional or artificial. The word "Income" is a word of wide import and the taxation of an income that the law deems to have been derived is not unwarranted either in the light of legislative practice or of judicial interpretation.

In Navinchandra Mafatlal Vs. The Commissioner of Income Tax, Bombay City, the ambit of the word "Income" occurring in Entry 54 in List. I of schedule VII to the Government of India Act, 1935, came up for consideration. Their Lordships said that the word when it occurs in a Constitution should not be construed ''in any narrow and pendantic sense" and that it should be given "its widest connotation" when it occurs "in a legislative head conferring legislative power".

l9. We are unable to see anything In the section, a procedural section - ''S.C. Cambatta v. Commr. of Income Tax, Bombay'' AIR 1947 Bom 264 (E), enacted in terrorem ''1949- SIR KASTURCHAND LTD. Vs. COMMISSIONER OF Income Tax, BOMBAY CITY., , to prevent fraud on revenue, which, in any way militates against any of the provisions of the Constitution and must answer the question in the negative.

The Department will have the costs from, the Assessee, advocate''s fee Rs. 150/-.

A copy of this judgment will be sent to the Appellate Tribunal Madras Bench ''B'' as provided in Section 66(5) of the Indian Income Tax Act 1922.