Appeals Nos 158 to 164 of 1960
Appeals from the judgment and order dated October 8 1958 of the Bombay High Court in ITA Nos
7505 7506 5046 to 5048 5149 and 5150 of 1956 57
A V Viswanatha Sastri section N Andley J B Dadachanji Rameshwar Nath and P L Vohra for the appellants
R Ganapathy Iyer and D Gupta for the respondent
January 12
The Judgment of the Court was delivered by HIDAYATULLAH J
These seven appeals have been filed on a certificate granted by the High Court of Bombay against the judgment and order of the High Court dated October 8 1958 in a case referred by the Income tax Appellate Tribunal Bombay
The first appellant is the Bhor Industries Ltd a Company incorporated in 1944 in the former Bhor State with its registered office also situated in the town of Bhor
It did the business of dyeing printing and bleaching cloth cloth proofing etc in Bhor State
The remaining five appellants are the shareholders of this Company which admittedly was a private Company limited by shares at all material times
We are concerned in these appeals with the account years of the Company 1946 and 1947
During these years the income of the Company was as follows Assessment Total Income accruing Total World year Income or arising in the Income Sum Indian State of of 2  3 Bhor
1 2 3 4 1947 48 Rs 432542 Rs 224542 Rs 657084 1948 49 Rs 432709 Rs 347416 Rs 780125 412 The Company held its general meetings to declare dividends at Bhor on August 171947 and August 19 1948 respectively
For the account years 1946 and 1947 respectively it declared a dividend of Rs 2580and Rs 1140 
Bhor State merged with the Province of Bombay by virtue of the States Merger Governors  Provinces Order 1949 which came into force on August 1 1949
By the Taxation Laws Extension to Merged States and Amendment Act 1949 which received the assent of the Governor General on December 31 1949 the Indian Income tax Act was extended to the merged States with effect from April 1 1949
That Act also introduced section 60A in the Income tax Act by which power was given to the Central Government if it considered necessary or expedient so to do to avoid any hardship or anomaly or to remove any difficulty in the application of the Income tax Act to merged States to make a general or special order granting exemption reduction in rate or other modification
Under the power thus conferred the Central Government notified the Merged States Taxation Concessions Order 1949
For the assessment years 1947 48 and 1948 49 corresponding to the account years of the Company 1946 and 1947 the Income tax Officers assessed the Company as non resident and held that the Company was not a public Company within the meaning of section 23A of the Indian Income tax Act
The Income tax Officer who passed the order for the assessment year 1947 48 under section 23A held that the assessable income in British India of the Company in 1946 minus the taxes must be deemed to be distributed among the shareholders in the proportion of their shareholdings
The Incometax Officer calculated the amount deemed to be distributed as follows 413 1946 assessment year 1947 48
Total Income 
Rs 432542 Taxes 
Rs 189237 Amount available for distribution 
Rs 243305 as dividend Dividend declared 
Rs 2580 Balance of the amount available and deemed to be distributed 
Rs 240725 For the account year 1947 the Income tax Officer took the total world income less the taxes as the amount available for distribution as dividend
According to him that amount was as follows 1947 assessment year 1948 49
Total income 
Rs 432709 Income in Bhor State 
Rs 347416 Total world income 
Rs 780125 Taxes 
Rs 243399 Amount available for distribution as dividend 
Rs 536726 Dividend declared 
Rs1140 Balance of the amount available for distribution 
Rs535586 The Income tax Officer then apportioned it among the shareholders as on August 19 1948
This worked out at Rs 5399 per share
The Income tax Officer then divided this amount of Rs 5399 in the proportion the total income bore to the income in Bhor State and taxed the former in the hands of the shareholders but the balance was included and considered for purposes of rate only
The Tribunal in the statement of the case illustrated this by citing the case of one of the shareholders Pushpakumar M D Thackersey as follows 414 The portion of Rs 535586 apportionable to his 90 shares at the rate of Rs 5399 per share worked out at Rs 50211 
This amount of Rs 5021was divided into two smaller amounts in the ratio already mentioned and the amount of Rs 27851was actually brought to tax whereas the amount of Rs 22360 attributable to Bhor State income of Rs 347416 was merely included in the total income for rate purposes In computing these  deemed dividends  the two Income tax Officers did not deduct the interest charged to the Company under section 18A8 from the assessable income along with income tax and super tax under section 23A1
The Company as well as the shareholders appealed to the Appellate Assistant Commissioner but their appeals were unsuccessful
Their further appeals to the Tribunal were also dismissed
They raised the contentions that section 23A was not applicable to the Company that the deemed income arising from a fictional distribution of the dividends could not be taxed in the hands of the shareholders because section 23A did not apply to them and that they were protected by the Concessions Order in the same way in which the Company was
They also raised the contention that in
determining the balance of the amount available for distribution interest charged under section 18A8 ought to have been deducted
All these contentions were not accepted by the Department and the Tribunal
At the instance of the Company and the shareholders the Tribunal drew up a statement of the case and referred three questions to the High Court for its decision
These questions were as follows  1
Whether paragraph 12 of the Merged States Taxation Concessions Order 1949 precluded the Income tax Officer from making an order under Section 23A in the case of the assessee company in respect of its profits and gains of the previous year ended 31st December 1946  31st December 1947  415 2
Whether in making an order under Section 23A in respect of the profits and gains of the year 19461947 the assessable income of that previous year is to be reduced not only by the amount of incometax and super tax payable by the company in respect thereof but also by the amount of interest charged to it in accordance with the provisions of Section 18A  3
Having regard to the order passed by the Income tax Officer under Section 23A in respect of the Company s profits of the year 1947 and having apportioned the sum of Rs 17641 to the shareholder Pushpakumar as his proportionate share in the distribution made by the Income tax Officer under Section 23A and having regard to the provisions of Section 142 c whether the said sum of Rs 17641has been properly included in his total income for the purpose of charging it to tax   The third question was a typical question as similar questions also arose in the case of other shareholders with variation in the amount
The amount of Rs 17641  the Tribunal stated replaced Rs 50211in view of certain directions given by the Tribunal
The High Court framed one more question as the second part of question No 1 in disposing of the reference which read as follows
  Whether paragraph 12 of the Merged States Taxation Concessions Order 1949 precluded the Income tax Officer from making any order under Section 23A so as to affect the assessee shareholders in respect of their profits and gains for the assessment year 1949 50  The High Court answered the first and second questions and the question framed by it in the negative and the third question in the affirmative
The High Court however granted a certificate under section 66A of the Income tax Act and the present appeals have been filed
The contentions raised before the High Court have been raised before us
The Company questions the application of section 23A to the two assessment years 1947 48 and 1948 49 while the shareholders 416 question the application of section 23A to the Company and also to them in the assessment year 1949 50
Both the Company and the shareholders contend that interest under section 18A8 ought to have been deducted along with the income tax to find out the available surplus
The shareholders claim the benefit of section 142 c in respect of the entire amount of the balance deemed to be distributed
To begin with one must remember that the Indian Income tax Act was applied to Bhor State from April 1 1949 and that there was no income tax law in force in Bhor State prior to its merger
This position also obtained in many other Indian States which merged with the Provinces in British India
The fact that income tax is charged in an assessment year on the income profits or gains of the previous year would have made persons resident in merged States to pay tax on income which but for the extension of the Indian Income tax Act was either not liable to income tax at all or was liable at a lesser rate
In view of the apprehended difficulties and anomalies the Extension Act itself gave power to remove such anomalies and hardships
Section 60A was added to the Income tax Act and it read as follows  If the Central Government considers it necessary or expedient so to do for avoiding any hardship or anomaly or removing any difficulty that may arise as a result of the extension of this Act to the merged States the Central Government may by general or special order make an exemption reduction in rate or other modification in respect of income tax in favour of any class of income or in regard to the whole or any part of the income of any person or class o f persons   The Concessions Order 1949 was passed in furtherance of this power
We are concerned only with paragraph 12 of the Concessions Order 1949 which has been relied upon by the Company and the share
holders who are appellants before US
It is not necessary to refer to paragraphs 4 5 and 6 to which passing reference Was made in the arguments because 417 they deal with income in an Indian State which has not been taxed in these cases at all
Paragraph 12 provided for the application of section 23A to a previous year ending on or after August 1 1949 but not to a previous year ending before August 1 1949
It may be quoted here The provisions of section 23A of the Indian Income tax Act shall not be applied in respect of the profits and gains of any previous year ending before 1st day of August 1949 unless the State law contains a provision corresponding thereto Reading the Extension Act section 60A and the Concessions Order 1949 together the following position emerges
The Indian Income tax Act applied to and from the assessment year 1949 50 April 1 1949 to March 31 1950 in the merged States
Corresponding previous years were comprehended
The difficulty which was likely to be felt was with respect to the fact that the merger with the Province of Bombay operated from August 1 1949 and not from April 1 1949
In respect of the exemption under section 14 2 c the position was preserved by applying paragraphs 5 and 6 to the exempted income
These two paragraphs made the State rate applicable to that exempted income
Similarly previous years ending after March 31 1948 were to be assessed to Indian income tax but the excess of the tax computed at Indian rates over the tax computed at State rates was to be given away as rebate and profits and gains of companies of any previous year ending before August 1 1948 earned in an Indian State were saved from section 23A unless there was in the State a provision corresponding to section 23A
It must be remembered that the Income tax Officer in the present case did not seek by his order under section 23A to distribute the Bhor State income of the shareholders of the Company as dividend he restricted his order to the British Indian income
There was in fact in the State of Bhor no law of Income tax and no order taxing income which arose in Bhor could be passed by the Income tax Officer
418 By the definition in section 25A of the Indian Incometax Act
a company formed in pursuance of an Act of an Indian State was a company for the purposes of the Act and it was open to the Income tax Officer exercising powers under section 23A to declare the income of such a company accruing or arising within the taxable territory as distributed among the shareholders
The right of the Department to pass an order under section 23A1 of the Indian Income tax Act was not chal lenged before the Tribunal and it was not the subject of a decision in the High Court
The argument still has been on behalf of the Company as well as the shareholders that paragraph 12 of the Concessions Order saved the profits and gains whether made in Bhor State or in British India from the application of section 23A and that indirectly the shareholders were entitled to the same benefit
Paragraph 12 of the Concessions Order depends on whether a company was being assessed under the Indian Income tax Act in respect of its profits and gains in an Indian State for any previous year ending before the first day of August 1949
By the application of the Indian Act to an Indian State the income of a company in an Indian State was likely to be taxed to Indian income tax from the assessment year 1949 50
For the earlier assessment years a company s income in the Indian State was exempt without the assistance of the Concessions Order
The exemption granted by the Concessions Order was to operate in respect of those profits and gains which but for the exemption would have been included in the assessment year 1949 50 and subsequent years
In so far as paragraph 12 of the Concessions Order was concerned it gave exemption in respect of action under section 23A to income of  any previous year  ending before the first day of August 1949
The date August 1 1949 was chosen because the merger with the Provinces took place on that date
The word  any  does not refer to all the previous years prior to and ending before August 1 1949 but to a previous year in relation to the assessment year 1949 50 and ending before the first day of August 1949
The words 419 any previous year mean therefore only one previous year which would be a previous year for the purposes of the assessment year 1949 50 but which to get the exemption must end before the first day of August 1949
The exemption therefore did not apply to previous years other than the one described and in respect of the earlier previous years paragraph 12 of the Concessions Order was hardly needed
Otherwise there would be no need to mention in the paragraph the date on which the previous year must end
It is thus quite clear that paragraph 12 provided for income profits and gains of those previous years which were specially mentioned and in respect of which anomalies were likely to arise by reason of the fact that the merger took place on August 1 1949 while the Income tax Act was applied from April 1 1949
In view of the fact that specific terminii of previous years are expressly mentioned in the Concessions Order it is not possible to accept the argument on behalf of the appellants that  all  previous years before the date mentioned were comprehended in paragraph 12
The application of that paragraph must be limited to one previous year only which ended prior to August 1 1949
The previous years with which we are concerned ended on December 31 1946 and December 31 1947 respectively
In the case of this Company the previous year which would answer the description in paragraph 12 would be the previous year ending December 31 1947
To that previous year the provisions of section 23A were not applicable and the profits and gains made in Bhor State would be protected
The position which obtained in the assessment year 194748 would thus obtain also in the assessment year 1948 49 in so far as the Company was concerned and its profits and gains in Bhor State could not be considered for purposes of application of section 23A
The position was however different in regard to the income in British India which formed the total income of the Company in the taxable territory
It was not contended that the assessable income of the Company in the taxable territories would not attract 420 s23A if the distribution of dividends from that income was below the mark set in section 23A There is thus no difference between the assessment years 194748 and 1948 49 and the method of calculation adopted in the first year is also applicable to the second
To this extent the answer to the first question first part must be deemed to be modified in respect of the previous year ending December 31 1947
It is next contended that interest that was charged to the Company under section 18A8 ought to have been deducted along with the income tax before the fictional dividends were computed
Section 18A8 reads as follows  Where on making a regular assessment the Income tax Officer finds that no payment of tax has been made in accordance with the foregoing provisions of the section interest calculated in the manner laid down in sub section 6 shall be added to the tax as determined on the basis of regular assessment
 The words of the sub section are clear to show that interest as interest is added to the tax as determined
There is nothing to show that it is to be treated as tax and it thus retains its character of interest but is recoverable along with the tax
Indeed section 29 of the Income tax Act makes a distinction between tax penalty and interest
Since section 23A speaks of deduction only of income tax and super tax no deduction could be made in respect of this interest
Question No 2 was thus correctly answered by the High Court
In so far as the shareholders who were all resident in the taxable territories were concerned paragraph 12 of the Concessions Order did not in terms protect them
Section 23A enjoins that dividends to the extent of 60 per cent
of the assessable income of the Company after deduction of income tax and super tax must be paid
When the assessable income of the Company has been determined and after the necessary deductions have been made if dividends are not distributed in accordance with section 23A the fiction applies to that portion of the profits and gains which were taxable as assessable income of the Company in the 421 taxable territories and which ought to have been so dis tributed
Section 23A as it was before the amendment in 1955 mentioned 60 per cent
of the assessable income of a company as reduced by the amount of income tax and super tax payable by a company and provided further that the undistributed portion of the assessable income of a company as computed and reduced shall subject to certain conditions be deemed to have been distributed as dividends amongst the shareholders
We have already shown that the benefit of paragraph 12 is not available in respect of these fictional dividends in so far as the assessable income of the Company was concerned
It is however contended that these dividends would be deemed to be declared in Bhor State and to have been received there and that unless another fiction is engrafted upon the fiction created by section 23A these deemed dividends cannot be taxed in the hands of the shareholders
No doubt the section implies a fiction but if the fiction is given effect to such income must be deemed to be distributed to the shareholders and the fiction thus transcends all questions of accrual or receipt in the taxable territories
What is deemed to be distributed must be deemed to have accrued and also received by the person to whom it is deemed to be distributed See sections 41a and 41bi and ii
Paragraph 12 of the Concessions Order saved the Company in respect of income in Bhor State for the assessment year 194849 for the corresponding previous year ending before August 1 1949 but it did not save the operation of a 23A in respect of the assessable income of the Company in the taxable territories and the distribution of dividends to the shareholders from that income
In our opinion the High Court was right in holding that the dividends deemed to have been distributed out of the Assessable income of the Company in the taxable territories were  rightly assessable in the total income of the shareholders resident in the taxable territories
No question has been referred on the method of calculation of the dividends deemed to 422 have been distributed and we need therefore express no opinion on that part of the case
The shareholders appellants 2 to 6 claim the benefit of a 142o of the Act which provides  142
The tax shall not be payable by an assessee c in respect of any income profits or gains accruing or arising to him within an Indian State unless such income profits or gains are received or deemed to be received in or are brought into British India in the previous year by or on behalf of the assessee or are assessable under Section 12 B or Section 42
 We have already shown that the force of the fiction makes the dividends which ought to have been distributed to be so distributed
We have also said that this fiction transcends all questions of accrual and receipt
The effect of section 23A is to make dividends payable out of the British Indian income to the shareholders
Paragraph 4 of the Concessions Order and section 142c saved for the shareholders the income of the Company outside the taxable territories only that is to say the income earned in Bhor State
They do not affect the operation of section 23A on the assessable income of the Company which by reason of the application of the Indian Income tax Act even prior to the Extension Act was assessable under the Indian Income tax Act
Dividends payable out of that portion of the income will attract section 23A and section 142c does not apply
Section 142c saves only that portion of the income which was not assessable in the taxable territories by reason of its accrual in the State
The Income tax Officer in assessing the income of the shareholders for the assessment year 1949 50 ought to have deducted the income which accrued in Bhor State while applying section 23A to them
This he in effect did but he adopted a method on which no question has been raised and the correctness of the method cannot be examined
The answer to question No 1 is thus in the negative with the modification that section 23A applied only to that 423 portion of the income which was earned in British India and not in Bhor State
The answer to the second question is in the negative
The answer to the third question is in the affirmative
The question posed and answered by the High Court hardly arises in view of the answer to the first questions That question and the answer to it are set aside as being not necessary
The appeals thus fail except for a slight modification in the answer to the first question and subject to that modification are dismissed
The appellants must bear the costs of these appeals
There shall be one hearing fee
Appeals dismissed


Summary:
The appellant was the Mahant of the Asthal Estate in Bihar which was in the management of a Receiver appointed by the Civil Court in a suit relating to the estate
On appeal the question that arose for decision in this Court was whether the appellant Mahant was liable to be assessed under the Bihar Agricultural Income tax Act 1948 to pay agricultural income tax for the year in which the estate was in the management of the Court Receiver
Held that the income though collected by the Receiver was the income of the appellant
By virtue of the provisions of sections 2 cl
m and 13 of the Bihar Agricultural Income tax Act it was open to the taxing authorities to treat the Receiver as the assessee because he held the property from which income was derived but on that account the income in the hand of the owner was not exempt from liability to assessment of tax
Section 3 of the Act provides for charging agricultural income of every person  as defined in section 2 cl
m which includes a receiver and section E3 merely provides a machinery for recovery of tax from Persons including receivers and is not by itself a charging section