Citation Codes

Equivalent Citations

citation codes

Case Number

MISC. CASE NO. 444 OF 1946

Judges

Mootham

Acts

section 10(2) (xii) of the Indian Income-tax Act
section 66 of the Indian Income-tax Act, 1922,
provisions of section 64(4)
INDIAN INCOME TAX ACT

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Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

This is a reference under section 66 of the Indian Income-tax Act, 1922, in which the assessee is a private limited company. The company held its annual general meeting on 13 April 1939 and filed a return on 7 September 1939 for the assessment year 1939-40, disclosing an assessable income of Rs. 42,510. The Income-tax Officer did not accept the company's statement of income and, because the company did not produce its account books when required, made an assessment under section 23(4) determining the sum payable by the assessee to be Rs. 8,17,137. That assessment order was made on 29 June 1942.

On 16 September 1944 the successor-in-office to that Income-tax Officer, being of the opinion that the assessee had distributed less than sixty per cent of its assessable income as dividends for the year in question, made an order under section 23A with the previous approval of the Inspecting Assistant Commissioner. Subsequent proceedings under Chapter VIII were instituted against the managing director; those proceedings were compounded upon payment of Rs. 7,50,000.

Four questions were referred to the court (as framed in the opinion):

Whether proceedings under section 23A could be initiated by the successor-in-office to the Income-tax Officer who had made the assessment?
Whether the proceedings under section 23A were time-barred or otherwise invalid because they were made on 16 September 1944 after the assessment completed on 29 June 1942?
Whether the composition money of Rs. 7,50,000 paid by the assessee should have been taken into consideration when proceedings under section 23A were taken (i.e., whether that amount reduces the "assessable income" referred to in the section)?
For the purpose of section 23A, is the assessable income the amount disclosed in the company's books (Rs. 42,510) or the amount determined by the Income-tax Officer for assessment (Rs. 8,17,137)?

Legal Issues Presented

Whether a successor Income-tax Officer (i.e., one other than the officer who made the original assessment) may initiate proceedings under section 23A.
Whether an order under section 23A can be made after an assessment under section 23(4) has been completed (i.e., whether time-bar or other invalidity attaches to such an order made subsequently).
Whether a sum paid to compound criminal proceedings (Rs. 7,50,000) is deductible under section 10(2)(xii) and thus reduces the company's assessable income for the purposes of section 23A.
Whether the phrase "assessable income" in section 23A refers to the company's book/balance-sheet figure or the income determined/assessed by the Income-tax Officer.

Arguments of the Parties

Appellant's Arguments

The assessee contended that proceedings under section 23A could be initiated only by the Income-tax Officer who had made the assessment order (i.e., that the successor-in-office had no such power in the circumstances).
The assessee argued that an order under section 23A could not be passed after the assessment order had been made (i.e., that an order made on 16 September 1944 was time-barred or otherwise invalid because the assessment had been completed on 29 June 1942).
The assessee submitted that the phrase "assessable income" in the first occurrence in section 23A meant the income disclosed in the company's balance-sheet and accounts (Rs. 42,510), while the second occurrence (qualified by "as computed for income-tax purposes") meant the company's assessed income (Rs. 8,17,137), thus seeking a distinction between the two uses.
On the third question, the assessee argued that the Rs. 7,50,000 paid to compound proceedings should be treated as an allowable deduction under section 10(2)(xii) ("laid out or expended wholly and exclusively" for the purpose of the business), thereby reducing assessable income.

The opinion does not contain a detailed, separately labelled account of the Revenue's procedural or substantive arguments beyond the points considered and rejected or accepted by the court in its reasoning.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Sir Kasturchand Limited v. Commissioner of Income-tax, Bombay City (Bombay High Court)	Held that the Act lays down no period of limitation for an order under section 23A; concerned with circumstances to be taken into account by the Income-tax Officer when deciding whether to make an order under section 23A.	The court relied on the decision for the proposition that there is no period of limitation preventing an order under section 23A being made after an assessment; this supports the answers to Questions 1 and 2 (successor may act and order was not time-barred).
Ezra Pro-Prietary Estates Ltd. v. Commissioner of Income-tax, West Bengal	Concerned with the circumstances to be taken into account by the Income-tax Officer in deciding whether an order under section 23A should be made.	The court noted that the observations in this case (so far as relevant) do not suggest that the term "assessable income" in section 23A has more than one meaning, and therefore the case does not support the assessee's attempted distinction in meaning.
In re Gabdulal Tulsiram	In that case the assessee had compounded a criminal offence on payment of Rs. 11,265; the opinion states it was held that this was money wholly and exclusively expended for the purposes of the business and it was not therefore a permissible deduction.	The court cited this case when considering whether the composition payment could be deducted under section 10(2)(xii); the cited conclusion supports treating such payments as not allowable deductions for reducing assessable income under section 23A (as stated in the opinion).
Commissioner of Income-tax, West Bengal v. H. Hirjee (Supreme Court)	The Supreme Court held that money spent in defending criminal proceedings was not an expenditure "laid out or expended wholly and exclusively" for the purpose of the business and therefore not an allowable deduction under the relevant provision.	The court relied on this authority to support the conclusion that the Rs. 7,50,000 paid to compound criminal proceedings was not deductible under section 10(2)(xii) and therefore could not reduce the assessable income for section 23A.

Court's Reasoning and Analysis

The court addressed the referred questions in the following sequence and by the following reasoning (limited to the material stated in the opinion):

On Questions 1 and 2 (whether the successor-in-office could initiate proceedings under section 23A and whether an order could be made after an assessment): the court examined section 64(4), which provides that every Income-tax Officer shall have all powers conferred on an Income-tax Officer in respect of income arising within the area for which he is appointed. That statutory provision was treated as authorising a successor-in-office to exercise the powers under the Act in respect of the relevant income.
The court then analysed section 23A itself and its procedural conditions: an order under section 23A cannot be made before the expiry of six months after the accounts for the previous year are laid before the company in general meeting; the Income-tax Officer must take into account the amount of profit made, consider whether a larger dividend would be unreasonable (having regard to losses or smallness of profit), and must obtain previous approval of the Inspecting Assistant Commissioner. Where the company has distributed not less than 55% of its assessable income, a notice of proposed order must be served and an order cannot be made within three months of such notice. The court observed that construing the section so as to prevent action after assessment would make the section largely unworkable.
The court expressly relied on the Bombay High Court decision in Sir Kasturchand (noting that it held there is no period of limitation for an order under section 23A) to conclude that an order under section 23A could validly be made after an assessment. Accordingly, the answer to Question 1 was affirmative (successor may initiate) and to Question 2 negative (proceedings were not time-barred).
On Question 4 (meaning of "assessable income" in section 23A): the court considered the argument that the first use of "assessable income" in the section refers to the company's book figure whereas the second use (qualified by "as computed for income-tax purposes") refers to the assessed income. The court rejected this distinction. It held that "assessable income" means income assessable to income-tax under the Indian Income-tax Act and carries the same meaning wherever used in the sub-section. The court explained that the phrase "as computed for income-tax purposes" does not convert the second use into a different concept; if assessable income is income assessable under the Act, that concept remains the same when a computation is made for income-tax purposes. The court noted that for some companies assessable income may be a notional income (which could exceed actual profits), and that the Act gives the Income-tax Officer power to refrain from exercising s23A where dividends declared are not unreasonable relative to actual profits. On these bases the court concluded that the assessed figure (Rs. 8,17,137) was the assessable income for the purposes of section 23A.
On Question 3 (whether the Rs. 7,50,000 composition money was deductible under section 10(2)(xii)): the court reformulated the question as whether the payment was an expenditure "laid out or expended wholly and exclusively" for the purpose of the business. The court recited the facts that the managing director had been served with notice to show cause why criminal proceedings should not be taken, the company paid Rs. 7,50,000 to compound the offence, and the Inspecting Assistant Commissioner agreed to compounding under section 53(2). The court concluded that the payment could not be said to have been made wholly and exclusively for business purposes. The court relied on prior authorities (including In re Gabdulal Tulsiram and the Supreme Court decision in Commissioner of Income-tax, West Bengal v. H. Hirjee) which, as cited in the opinion, support the position that payments to compound or to defend criminal proceedings are not allowable deductions under the "wholly and exclusively" test. On that basis the court answered Question 3 in the negative.
The court also recorded that the assessee did not challenge the Income-tax Officer's finding that its assessable income was Rs. 8,17,137, which the court accepted for the purposes of the reference.

Holding and Implications

Holding:

Question 1: The successor-in-office may initiate proceedings under section 23A (answer: Yes).
Question 2: The proceedings under section 23A made on 16 September 1944 were not time-barred or otherwise invalid by reason of the assessment having been completed on 29 June 1942 (answer: No — i.e., not time-barred).
Question 3: The composition payment of Rs. 7,50,000 is not an allowable deduction under section 10(2)(xii) and therefore cannot be taken into account so as to reduce the assessable income for the purposes of section 23A (answer: No).
Question 4: For the purposes of section 23A "assessable income" means income assessable to tax under the Indian Income-tax Act and, in this case, is the income determined by the Income-tax Officer, namely Rs. 8,17,137 (answer: Rs. 8,17,137).
The assessee was ordered to pay the costs of the reference, assessed at Rs. 500.

Implications:

Direct effect on the parties: the court upheld the Income-tax Officer's assessed figure as the relevant "assessable income" for section 23A; the composition payment may not be used to reduce that assessable income; and the order under section 23A made by the successor-in-office was valid despite post-assessment timing. The assessee is liable for costs of Rs. 500.
Broader precedent: the opinion does not purport to create a novel legal principle beyond its interpretations of section 23A and affirmation of the existing authorities cited; the court applied previously decided authorities to the facts at hand. The opinion does not state that it is establishing any new general rule beyond the conclusions set out above.

Disposition: Reference answered accordingly.

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Juggilal Kamlapat Cotton Spinning And Weaving Co., Ltd. v. Commissioner Of Income Tax, U. P. & C. P. And Berar, Lucknow.

- This is a reference under section 66 of the Indian Income-tax Act, 1922, the assessee being a private limited company. The company held its annual general meeting on the 13th April, 1939, and on the 7th September following it filed a return in respect of the assessment year 1939-40 disclosing an assessable income of Rs. 42,510. The statement of the companys income was not however accepted by the Income-tax Officer, and as the company did not produce its account books when required to do so that Officer acted under section 23(4) of the Act and determined the sum payable by the assessee to be Rs. 8,17,137. This assessment order was made on the 29th June, 1942. Thereafter, on the 16th September, 1944, the Income-tax Officers successor-in-office, being of opinion that the assessee had in respect of the year in question distributed less than sixty per cent. of its assessable income, made with the previous approval of the Inspecting Assistant Commissioner an order under section 23A. Proceedings were subsequently instituted against the managing director of the assessee company under Chapter VIII of the Act, those proceedings being compounded upon payment of the sum of Rs. 7,50,000. It is in these circumstances that the following questions have been referred to this court :

1. Whether in the circumstances of the case proceedings under section 23A could be initiated by the successor-in-office to the Income-tax Officer who had made the assessment of the assessee company for the year 1939-40 ?

2. Whether in the circumstances of the case the proceedings under section 23A were time-barred or were otherwise invalid having been made on the 16th September, 1944, while the assessment had been completed on 29th June, 1942 ?

3. Whether the amount of composition money, namely Rs. 7,50,000 paid by the assessee, should have been taken into consideration at the time proceedings under section 23A were taken, that is, whether that amount can rightly go to reduce the figure of "assessable income" referred to in that section ?

4. Whether the assessable income of the applicant company for the purpose of section 23A is the income disclosed by the books of account of the applicant, viz., Rs. 42,510, or it is the amount determined to be the income by the Income-tax Officer for the purpose of the assessment to income-tax, viz., Rs. 8,17,137 ?

The first question suggests that the point raised before the Tribunal was that proceedings under section 23A can be initiated only by the Income-tax Officer who had made the assessment order. In view of the provisions of section 64(4) which provides that.

"Notwithstanding anything contained in this section every Income-tax Officer shall have all the powers conferred by or under this Act on an Income-tax Officer in respect of any income, profits or gains accruing, or arising or received within the area for which he is appointed."

Learned counsel now state that the first and second questions may be deemed to involve only one matter, namely whether an order under section 23A can be passed after an assessment order had been made under section 23(4). The assessment order in the present case was made on the 29th June, 1942, and the argument for the assessee is that no order under section 23A could be passed read as follows :

Section 23A so far as is relevant read 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, 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 smallness of the profit made, the payment of a dividend or a larger dividend than that declared would be unreasonable, 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 amongest the shareholders as at the date of the general meeting aforesaid, 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 opening words of the section enact that the Income-tax Officer must be satisfied in respect of "any previous year" that the profits and gains distributed as dividend "for that previous year" are less than sixty per cent. Of the assessable income of the company. In our opinion the section makes it quite clear that an order under it may be made on the basis of a failure by the assessee to distribute a dividend of the minimum amount in a year which has already passed, and we can find nothing elsewhere in the Act which places the restriction on the power of the Income-tax Officer for which the assessee contends. An order cannot be made under this section before the end of a period of six months from the date upon which the accounts from the year in question are laid before the assessee company in general meeting and after the Income-tax Officer has taken into account the amount of profit made, has considered whether the payment of a larger dividend would be unreasonable and has obtained the previous approval of the Inspecting Assistant Commissioner, and where the assessee company has distributed not less than 55 per cent. of its assessable income then under the second proviso to sub-section (1) notice of the proposed order has to be served upon the company and on order cannot be made within three months of the receipt of such notice. It is manifest that the construction sought to be placed upon the section by the assessee would make the section largely unworkable. It has indeed been held by the Bombay High Court in Sir Kasturchand Limited v. Commissioner of Income-tax, Bombay City, that the Act lays down no period of limitation for an order made by an Income-tax Officer under this section. The answer to the first question must be in the affirmative and to the second question in the negative.

It is convenient now to consider the fourth question referred to this court. The section provides that an order thereunder cannot be made by the Income-tax Officer unless he is satisfied, inter alia, that the profits and gains distributed as dividends by the company are less than sixty per cent. of "the assessable income of the company..... as reduced by the amount of income-tax and super-tax payable by the company in respect thereof" and that the order which he may make will relate to the undistributed portion of "the assessable income of the company...... as computed for income-tax purposes and reduced by the amount of income-tax and super-tax payable by the company in respect thereof" and the argument on behalf of the assessee is that whereas the phrase "assessable income", where it first appears, means the income of the company as disclosed in its balance sheet and accounts, it means, when used on the second occasion, the companys assessed income. We do not think this argument can be sustained. "Assessable income" in our opinion means income assessable to income-tax under the Indian Income-tax Act and has the same meaning wherever it is used in this sub-section.

The distinction sought to be made by the assessee is based on the phrase "as computed for income-tax purposes" which follows the expression "assessable income" where it is used for the second time. No such distinction can in our judgment be validly drawn. If "assessable income" means, as we think it does, income assessable to tax under the Act, then it must remain the same when a computation is made for income-tax purposes. Assessable income in the case of certain companies, for example companies which derive their entire income from property, may be a notional income which may be greater than the profits that had been actually earned by the company. It is for that reason that the Income-tax Officer has been given the power, where the profits are small and, compared to the profits actually made, the dividend declared is not unreasonable, not to take action under the provisions of section 23A of the Act. There is in our opinion no warrant for the suggestion that the words "assessable income" in the first part of that section mean income which the company considers to be its assessable income and treats it as such in its balance-sheet and accounts. This view involves an artificiality in the section and means that the Income-tax Officer would, for the purposes of the section, have to accept the assessees own figure of his profit although that figure may have been computed otherwise than in accordance with the provisions of the Act. It is more reasonable to hold that "assessable income" means what the words convey, namely that income which is assessable to income-tax under the Indian Income-tax Act. No hardship can be caused to the assessee by this interpretation as it is abundantly clear that a dividend has to be declared out of the actual profits and not out of what may be the notional income for the purposes of assessment. Sri G. S. Pathak who appeared for the assessee invited our attention to the cases of Sir Kasturchand v. Commissioner of Income-tax, Bombay City, to which we have already referred, and Ezra Pro-Prietary Estates Ltd. v. Commissioner of Income-tax West Bengal. Both these case were concerned with the circumstances which are to be taken into account by the Income-tax Officer in deciding whether an order should be made under section 23A, and the observations made by the learned Judges, so far as they are relevant at all, are against the submission made on behalf of the assessee, for in neither case is there any suggestion to be found that the expression "assessable income" as used in section 23A (1) has more than one meaning.

The assessee did not challenge the finding of the Income-tax Officer that its assessable income was Rs. 8,17,137, and our answer to the fourth question is that that is the assessable income of the assessee for the purposes of section 23A.

The third question has not been well framed. Learned counsel are agreed that the real question is whether the sum of Rs. 7,50,000 is an allowable expenditure under section 10(2) (xii) of the Indian Income-tax Act with the result that the assessable income of the company was really Rs. 8,17,137 less Rs. 7,50,000, that is Rs. 67,137. Section 10 (2) (xii) of the Act at the material time provided for the deduction from the profits and gains of an assessee of any expenditure not being in the nature of capital expenditure or personal expenses of the assessee "laid out or expended wholly and exclusively" for the purpose of such business, profession or vocation.

The assessee had submitted a return showing its assessable income as Rs. 42,510. The Income-tax Officer found that the assessable income was Rs. 8,17,137. The managing director of the assessee company was thereafter served with notice to show cause why criminal proceedings should not be taken against him. The assessee thereupon paid a sum of Rs. 7,50,000 to compound the offence and the Inspecting Assistant Commissioner under section 53(2) of the Act agreed to the offence being compounded on payment of this amount. We are clearly of opinion that this payment cannot be said to have been made wholly and exclusively for the purpose of the business. In In re Gabdulal Tulsiram where the assessee had compounded a criminal offence on payment of Rs. 11,265 it was held that this was money wholly and exclusively expended for the purposes of the business and it was not therefore a permissible deduction, and in Commissioner of Income-tax, West Bengal v. H. Hirjee the Supreme Court held that money spent in defending criminal proceedings was similarly not an expenditure laid out or expended wholly and exclusively for the purpose of the business of the assessee. Our answer to the third question, therefore, is in the negative.

The assessee must pay the costs of this reference which we assessee at Rs. 500.

Reference answered accordingly.

Juggilal Kamlapat Co... v. Commissioner Of Inco...