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AMICUS AI
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • Veeraswami
  • Ramaprasada Rao, JJ.
Acts
  • section 23A of the Indian Income-Tax Act, 1922,
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • Veeraswami
  • Ramaprasada Rao, JJ.
Acts
  • section 23A of the Indian Income-Tax Act, 1922,
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Smart Summary

Factual and Procedural Background

The assessment year is 1955–56. The assessee, a private limited company, was assessed in February 1956 on a total income of Rs. 67,680. Subsequently it was found that Madras Motor Insurance Company Limited had declared a sum of Rs. 1,666 as a notional dividend in favour of the assessee (the assessee held shares in that company). The assessment was reopened and section 23A of the Indian Income-Tax Act, 1922 was invoked by the department. The Appellate Tribunal held that section 23A could not be applied because the notional dividend never actually came into the assessee’s accounts. The matter was referred for the court's opinion.

Legal Issues Presented

  1. Whether distributable profit for the purposes of section 23A of the Indian Income-Tax Act, 1922 includes notional dividend.

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The court held that section 23A, in view of its scheme and purpose, does not comprehend notional dividend as part of the total income available for actual distribution. The reasons given were:

  • A notional dividend is not an actual receipt; although it may be included in total income for assessment, section 23A contemplates distribution of profit that the assessee actually possesses.
  • Distribution of profit implies the assessee has the income or profit in its hands; a notional dividend is a legal fiction and therefore cannot be treated as an actual distributable fund.
  • The court contrasted notional dividend with income determined by best judgment, noting that the latter is presumed to be actual income for assessment purposes, whereas notional dividend is a fiction and cannot be treated as actual distributable profit.
  • The Tribunal's additional practical point — that the assessee's failure to distribute Rs. 1,666 could not be unreasonable because the assessee never had that sum — was endorsed by the court.

Holding and Implications

Reference answered in favour of the assessee.

Direct consequences: the invocation of section 23A on the basis of the Rs. 1,666 notional dividend was rejected; the assessee succeeded and was awarded costs. Counsel's fee was fixed at Rs. 250.

No broader implications were discussed in the opinion; the decision resolves the reference between the parties and does not purport to lay down a wider precedent in the text of the opinion.

Show full summary ...

    Commissioner Of Income-Tax, Madras v. Sundaram Private Ltd.

    Veeraswami, J.:— The short point in this reference is whether distributable profit for purposes of section 23A of the Indian Income-Tax Act, 1922, would include notional dividend. We are concerned with the assessment year 1955-56. The assessee is a private limited company which was regularly assessed for that year in February, 1956, on a total income of Rs. 67,680. Later, finding that a sum of Rs. 1,666 was declared to be notional dividend in favour of the assessee by another company by name the Madras Motor Insurance Company Limited in which the assessee held shares, the assessment was reopened and in view of this notional dividend section 23A was invoked and applied. The Appellate Tribunal, disagreeing with the departmental view, held that section 23A proceeded on the assumption that the assessee had a balance of profit which it could distribute but failed to do so. Since the sum of Rs. 1,666, in fact, never came into the accounts of the assessee, the Tribunal was of the view that section 23A could not be applied.

    2. We are of the view that section 23A, having regard to its scheme and purpose, will not comprehend notional dividend as part of the total income available for actual distribution.

    3. A notional dividend is not an actual receipt. It may be that it may form part of the total income for purposes of assessment, but we do not think that, for purposes of section 23A, it can be so regarded, for what it contemplates is distribution of profit, which implies that the assessee actually has in its hands the income or profit. In this sense notional dividend may differ from income determined by best judgment. When income is determined by best judgment, it has to be presumed that the income so determined is actual income. But that is not the case in respect of notional dividend which is but a fiction. We are, therefore, of the view that the Tribunal was right in the view it took.

    4. We may add that the Tribunal's view can be supported also on the ground that, if the assessee did not distribute the sum of Rs. 1,666, it cannot be considered to be unreasonable, because actually the assessee did not have that fund in its hands.

    5. The result is that the reference is answered in favour of the assessee with costs. Counsel's fee Rs. 250.

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    Comments

    Commissioner Of Income-Tax, Madras v. Sundaram Private Ltd.
    (Jun 20, 1968)