Case: Bhor Industries Limited Vs. Commissioner of Income Tax, Bombay City I, Bombay

2. 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:-      ?TABLE?      3. The Company held its general meetings to declare dividends, at Bhor on August 17, 1947 and August 19, 1948 respectively. For the account years 1946 and 1947 respectively it declared a dividend of Rs. 2,580/- and Rs. 1,140/-.      4. 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 S. 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 State, 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.      5. 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 S. 23A of the Indian Income-tax Act. The Income-tax Officer who passed the order for the assessment year 1947-48 under S. 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 share holdings. The Income-tax Officer calculated the amount deemed to be distributed as follows :      1946 (assessment year 1947-48).      Total Income ... ......Rs. 4,32,542      Taxes ... ......Rs. 1,89,237      Amount available for distribution as dividend ......Rs. 2,43,305      Dividend declared ... ......Rs. 2,580      Balance of the amount available and deemed to be distributed...Rs. 2,40,725      6. 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. 4,32,709      Income in Bhor State ......Rs. 3,47,416      Total world income ......Rs. 7,80,125      Taxes ... ......Rs. 2,43,399      Amount available for distribution as dividend ......Rs. 5,36,726      Dividend declared ......Rs. 1,140      Balance of the amount available for distribution ......Rs. 5,35,586      7. The Income-tax Officer then apportioned it among the shareholders as on August 19, 1948. This worked out at Rs. 539.9 per share. The Income-tax Officer then divided this amount of Rs. 539.9 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 :-      "The portion of Rs. 5,35,586 apportionable to his 90 shares at the rate of Rs. 539.9 per share worked out at Rs. 50,211/-. This amount of Rs. 50,211/- was divided into two smaller amounts in the ratio already mentioned and the amount of Rs. 27,851/- was actually brought to tax whereas the amount of Rs. 22,360/- attributable to Bhor State income of Rs. 3,47,416/- 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 S. 18A(8), from the assessable income along with income-tax and super-tax under S. 23A (1).      8. The Company as well as the share-holders 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 S. 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 S. 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 S. 18A(8) ought to have been deducted. All these contentions were not accepted by the Department and the Tribunal.      9. 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 S. 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?      2. Whether in making an order under S. 23A in respect of the profits and gains of the year 1946/1947 the assessable income of that previous year is to be reduced not only by the amount of income-tax 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 S. 18A ?      3. Having regard to the order passed by the Income-tax Officer under S. 23A in respect of the Companys profits of the year 1947 and having apportioned the sum of Rs. 17,641/- to the shareholder, Pushpakumar, as his proportionate share in the distribution made by the Income-tax Officer under S. 23A and having regard to the provisions of S. 14(2)(c), whether the said sum of Rs. 17641/- has 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. 17,641/-, the Tribunal stated, replaced Rs. 50,211/- in 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 S. 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 S. 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 S. 23A to the two assessment years, 1947-48 and 1948-49, while the shareholders question the application of S. 23A to the Company and also to them in the assessment year, 1949-50. Both the Company and the shareholders contend that interest under S. 18A(8) ought to have been deducted along with the income-tax to find out the available surplus. The shareholders claim the benefit of S. 14(2) (c) in respect of the entire amount of the balance deemed to be distributed.

Reasoning:
10. 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 hardships13. By the definition in S. 2(5A) of the Indian Income-tax 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 S. 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 S. 23A(1) of the Indian Income-tax Act was not challenged 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 S. 23A, and that indirectly the shareholders were entitled to the same benefit15. 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, 194916. 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 S. 23A were not applicable, and the profits and gains made in Bhor State would be protected. The position which obtained in the assessment year 1947-48 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 S. 23A17. 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 S. 23A, if the distribution of dividends from that income was below the mark set in S. 23A. There is thus no difference between the assessment years, 1947-48 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, 194718. It is next contended that interest that was charged to the Company under S. 18A(8) ought to have been deducted along with the income-tax before the fictional dividends were computedThe 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, S. 29 of the Income-tax Act makes a distinction between tax, penalty and interest. Since S. 23A speaks of deducting only on 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 Court19. 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 S. 23A, the fiction applies to that portion of the profits and gains, which were taxable as assessable income of the Company in the taxable territories and which ought to have been so distributed. 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 shareholders21. 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 have been distributed, and we need, therefore, express no opinion on that part of the case.