1. These are references under Section 66(1) of the Indian Income-tax Act, 1922 (to be hereinafter referred to as ‘the Act’). A common question of law is referred to this Court in these cases by the Income-tax Appellate Tribunal (Delhi Bench) and that question is:

“Whether on the facts and in the circumstances of the case, action under Section 34(1)(b) could be initiated in the case of a shareholder by serving on him a notice under the said Section even before an order under section 23-a(1) of the Act is passed in the assessment of the Company?”

2. The assessees in these cases are shareholders in M/s. Uttam Singh Dugal & Co. (Private) Limited, New Delhi. The assessment year, with which we are concerned in this case is 1954–55, the account-period being the year ending March 31, 1954. The I.T.O initiated proceedings under S. 23-A of the Act against M/s. Uttam Singh Dugal and Co. as per his notices dated March 8, 1957 But an order under that section was passed only on January 20, 1960. Even before that order was made he initiated proceedings against the assessees by issuing notices under Section 34(1)(b) on March 20, 1959. On the basis of those notices, assessment orders against the assessees were made during the last week of January, 1960. The question for consideration is whether notices issued against the assessees under Section 34(1)(b) of the Act are valid notices.

3. section 23-a(1) provides:

“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 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 amongst 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 provisos are not relevant for our present purpose.)

4. section 23-a(1) provides that as soon as an I.T.O makes an order in writing that the undistributed portion of the assessable income of the company during the relevant previous year as computed for income-tax purpose and reduced in the manner provided in that section, shall be deemed to have been distributed as dividends amongst its shareholders as at the date of the general meeting of the company and thereupon the proportionate share thereof of each shareholder shall be included in his total income. On the basis of that provision, it was contended that in view of the order made by the I.T.O on January 20. 1960, it should be deemed that the dividends in question had been distributed in the year 1953–54 and consequently the same was assessable in the assessment year, 1954–55: but in fact it was not assessed: hence the same could be brought to tax by having recourse to Section 34(1)(b). Section 34(1)(b) to the extent it is material for our present purpose, reads:

“34. (1) If—

(a) ****

(b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income, profits or gains chargeable to income-tax have escaped assessment for any year, or have been under-assessed, or assessed at too low a rate, or have been made the subject of excessive relief under this Act, or that excessive loss or depreciation allowance has been computed, he may in cases falling under clause (a) at any time within eight years and in cases falling under clause (b) at any time within four years of the end of that year, serve on the assessee, or, if the assessee is a company, on the principal officer thereof, a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of Section 22 and may proceed to assess or reassess such income, profits or gains or recompute the loss or depreciation allowance; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section:

*****”

5. There is no dispute that in view of the order made on January 20, 1960, the dividends in question must be deemed to have been distributed in the relevant account year i.e 1953–54. There was also no dispute that it is open to the I.T.O to take proceedings under Section 34 within the time fixed by law to bring to tax those dividends. That much is concluded by the decisions of the Supreme Court in Sardar Baldev Singh v. Commissioner of Income-tax, Delhi and Ajmer, (1960) 40 ITR 605 : (AIR 1961 SC 736) and Commissioner of Income-tax Bombay v. Robert J. Sas, (1963) 48 ITR (SC) 177. But these decisions do not conclude the controversy that is before us. In the instant cases, proceedings under S 34(1)(b) were initiated even before an order under section 23-a(1) was made. On March 20. 1959, when notices under Section 34(1)(b) were issued to the assessees, no order under section 23-a(1) had been made. Therefore, can it be said that at the time the I.T.O issued those notices, he had any information in his possession, from which he could believe that income, profits or gains chargeable to income-tax in the assessment year 1954–55 had escaped assessment or had been under-assessed?

6. When an order under section 23-a(1) is made, in reality, no dividend is distributed amongst the shareholders. But because of the legal fiction created by section 23-a(1) for the purpose of assessment, it would be deemed that there had been a distribution of the dividends in question in the relevant assessment year. That fiction comes into existence only when an order under section 23-a(1) is made and not till then. Till an order under section 23-a(1) is made, no income can be said to have accrued either in fact or in law. Hence, on the dates the impugned notices under Section 34(1)(b) were issued, there was no basis for the I.T.O to believe that any portion of the assessees' income for the assessment year 1954–55 had escaped assessment. Section 34(1)(b) prescribes that the I.T.O, in consequence of the information in his possession had reason to believe that a portion of the assessees' income had escaped assessment. In these cases, he had no such information. The only information, he had, was that he had taken proceedings under section 23-a(1) against the company, which may result in an order under that section, in which case the fiction contemplated by that provision may come into existence. Such an information does not satisfy the requirements of Section 34(1)(b).

7. Dealing with the effect of an order under section 23-a(1) of the Act, this is what Chagla, C.J observed in Navinchandra Mafatlal v. Commisioner of Income-tax, Bombay, (1955) 27 ITR 245 : (AIR 1954 Bom 550):

“This income came into existence for the first time by an order made by the Income-tax Officer under Section 23-A on 20th February, 1947, and having come into existence at that date, it could only have been first assessed at that date. Prior to 20th February, 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 23-A.”

8. To the similar effect is the observation made by the Supreme Court in 1960–40 ITR 605 : (AIR 1961 SC 736) referred to earlier. Therein speaking for the Court Sarkar J. (as he then was) observed as follows:

“Section 23-A requires that on an order being made under it the undistributed portion of the assessable income of the company for a year as computed for income-tax purposes and after the deductions provided in the section, is to be “deemed to have been distributed as dividends amongst the shareholders as at the date of the general meeting” being the meeting at which the accounts for the year concerned were passed, 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.”

9. The section creates a fictional income arising as on a specified date in the past and it does so for the purpose of assessment to tax It is as if it actually existed then. Now, if the assessment for the relevant year does not include that income, it has escaped assessment.”

10. From this passage it is clear that the fiction in question comes into existence only after an order under section 23-a(1) is made.

11. If the assessees had submitted their returns, in obedience to the notices received by them, immdiately after the receipt of those notices, they need not have included the dividends with which we are concerned in these cases. Those dividends were not a part of their income at that time.

12. Section 34(1)(b) has to be strictly construed. In a sense, it is a penal provision. If the conditions, mentioned in that section, are not fulfilled, then no action under that provision can be taken. From the facts, stated earlier, it is clear that the requirements of Section 34(1)(b) are not satisfied. By the time, the order under section 23-a(1) came to be made, the action under Section 34(1)(b), against the assessees became barred by time.

13. For the reasons, mentioned above, our answer to the question, referred to us, is in the negative i.e no action under Section 34(1)(b) could have been taken against the assessees on the basis of the impugned notices.

14. The Department to pay the costs of these references. Advocate's fee Rs. 250 (one set)

15. MBR/D.V.CReference answered in negative.