Case: Sardar Baldev Singh Vs. Commissioner Of Income-Tax, Delhi &amp; Ajmer

2. The appellant held shares in a company called Indra Singh and Sons Ltd. which had its office at Calcutta. The other shares in that Company were held by Indra Singh and Ajaib Singh. The holding of all the shareholders were equal. An annual general meeting of this company was held on April 17, 1943, in which the accounts for year ending March 31, 1942, were placed for consideration. The accounts were passed at the meeting but no dividend was declared though the accounts disclosed large profits3. On June 11, 1947, anx Officer of Calcutta passed an order under S. 23A of thex Act that Rs. 14,23,110 being the undistributed portion of the assessable income of the company for the year ending March 31, 1942, after the deductions provided in the section, be deemed to have been distributed as dividend among the three shareholders on the date of the general meeting, that is, April 17, 1943. As a result of this order a sum of Rs. 4,74,370 being his share of the amount directed to be distributed, had under the section, to be included in the income of the appellant for the assessment year. The validity of this order was never challenged4. Thex Officer, Calcutta informed thex Officer, Delhi of the order made by him under S. 23A. Thereupon thex Officer, Delhi on April 10, 1948, issued a notice under S. 34 of the Act to the appellant then residing in Delhi, requiring him to file withine days, a revised return for the year5 as a part of his income for that year had escaped assessment. Obviously the notice was on the basis that the said sum of Rs. 4,74,370 had escaped assessment for the year. On February 10, 1949, the appellant submitted a revised return under protest and included in it the said sum of Rs. 4,74,370. Thex Officer, Delhi then reopened the earlier assessment and on March 25, 1949, made a fresh assessment order for5 assessing the appellant on an income of Rs. 5,23,417. The appellant appealed against this order to the Appellate Assistant Commissioner but his appeal was dismissed. He then appealed to thex Appellate Tribunal but was again unsuccessful. He has filed the present appeal with special leave of this Court against the judgment and order of thex Appellate Tribunal.

Court's reasoning:
Now, under thex Act, the appellant could apply to the Tribunal to refer to a High Court any question of law that arose out of the formers decision. The Act itself gave no right of appeal at all from that decision, nor any other remedy against it. The appellant had applied to the Tribunal for an order referring certain questions arising out of its decision to the High Court at Calcutta but was unsuccessful in getting an order for reasons to be presently stated. The Tribunal was in Calcutta. The appellant who was in Delhi, asked a firm ofx practitioners named S. K. Sawday and Co. in Calcutta, to move the Tribunal for an order of reference. Sawday and Co. had the necessary petition and papers prepared. They sent these to the appellant at Delhi by post on January 5, 1953, for his signature and the papers reached Delhi on January 7, 1953. The appellant who was then the Defence Minister of the Government of India, was at the time away from Delhi on official tour. Immediately on his return from tour he signed the papers and on January 21/22,1953, sent them from Delhi by post to Sawday and Co. in Calcutta. The papers reached Calcutta on January 24, 1953, but were not delivered to Sawday and Co. before January 28, 1953, due to a postmans default as was admitted by the postal authority concerned. Sawday and Co. filed the petition in the Tribunal on the same date but that was one day too late as it should have been filed on January 27, 1953. The Tribunal thereupon dismissed the application as having been made out of time. The appellant appealed against this dismissal to the High Court at Calcutta but the High Court dismissed the appeal. In these circumstances, the appellant moved this court for special leave to appeal and asked for condonation of delay in moving this Court, placing before it all the facts which we have earlier mentioned. This Court on a consideration of these facts condoned the delay and granted special leave. There was no attempt by the appellant to overreach or mislead the Court and the Court in its discretion gave the leave. In these circumstances, we are unable to agree with the contention that the appellant is not entitled to proceed with this appeal, because he could have availed himself of the remedy provided by the Act and was by his own conduct, unable to do so. This Court had in spite of this thought fit to grant leave to the appellant to appeal from the decision of the Tribunal. Further the learned counsel for the appellant intends to confined himself to questions of law arising from the judgment of the Tribunal. We, therefore, see no reason why the appeal should not be heardIf that proviso applied to the present case, the appellant had to raise the objection that proceedings under S. 34 could not be taken at Delhi within thee days mentioned in the notice under the section. It is said that this had not been done. It seems to us however that the proviso would apply only if an objection to a place of assessment had been taken under S. 64 and the objection that the appellant has taken in this case is not one under that section. That section applies where the assessment can be made in one place or another in India and an objection is taken to one of such places. Here the contention is that the assessment under S. 34 can be made only in Lahore and therefore cannot be made in India at all. To such a contention S. 64 has no application. Thes point must therefore fail9. We are however of the opinion that the contention of the appellant is without foundation. Section 34 provides that in the case mentioned in it, the income may be assessed or reassessed and the provisions of the Act shall, so far as may be, apply accordingly as if the notice issued under the section had been issued under S. 22 (2) of the Act. Now the place where an assessment is to be made pursuant to a notice under S. 22(2) has to be determined under S. 64. Indeed that is the only provision in the Act for deciding the proper place for any assessment. There is nothing which makes S. 64 inapplicable to an assessment made under S.34., it seems to us clear, that the place where an assessment under S. 34 can be made has to be decided under S. 64. Now the appellant was not carrying on any business, profession or vocation. He was working as the Defence Minister of Government of India and residing in Delhi. He could be properly assessed by thex Officer, Delhi under S. 64 (2) if the assessment was the original assessment . This is not in dispute. It follows that no objection can legitimately be taken by the appellant to his assessment under S. 34 by thex Officer, Delhi10. We find nothing in the two cases cited by Mr. Sastri, who appeared for the appellant, to support the contention that in this case the assessment under S. 34 could not have been made in India at all. In neither of these cases any question as to the place of assessment under S. 34 or any other section arose. In the first, C. V. Govindarajulu v. Commissioner of, Madras, ILR (1949) Mad 624: (AIR 1949 Mad 399  ), it was held that the proceedings under S. 34 and the original assessment proceedings were not separate and therefore in the former, a penalty could be levied under S .28 for failure to submit a return pursuant to a general notice under S. 22(1) on which the latter were deemed to have commenced. It does not follow that because the two assessments are not separate for certain purposes, the latter must take place only where the first had been made. In the second, Lakshminarain Bhadani v. Commissioner of, B and O.,0 ITR 594: (AIR 1953 SC 429  ) this Court held that a proceeding under S. 34 may be taken against a karta of a Hindu undivided family to reopen an original assessment on the family, though in the meantime, there had been a disruption of the family and an order in respect of it had been passed under S. 25A(1) of the Act. It was said that the position was as if thex Officer was proceeding to assess the income of the Hindu undivided family as in the year of assessment. This of course does not mean that the assessment under S. 34 must take place at the place where the original assessment was made or not at all11. Then it is said that thex Officerreassessedthe appellants income under S. 34 on the basis that part of it, namely, the dividend that became liable to be included in the appellants income under S. 23A, had escaped assessment. It is contended that on a proper reading of S. 34 this would not be a case of income escaping assessment because that section applies to income actually escaping assessment and not to income deemed to have escaped assessment which is all that has happened in the present case. It is said that in order that income may escape assessment there must in fact have been an income. It is also said that in order to apply S. 34 to this case two fictions have to be resorted to, namely, (a) bringing an income into existence where none existed and (b) holding that that income has escaped assessment where no income actually did so. It is argued that the language of S. 34 does not permit two fictions being created, and that as the section reopens a closed transaction, it must be strictly construed13. On its own merits also we are unable to accept the argument of the learned counsel for the appellant. Section 23A requires that on an order being made under it, the undistributed portion of the assessable income of the company for a year as computed forx 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."The section creates a fictional income arising as on a specified date in the past and it does so for the purpose of that income being included in the income of the shareholders for assessment of their. The income must therefore be deemed to have been in existence on the date mentioned 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 included that income, it has escaped assessment. That is what happened in this case. Therefore the case is one to which S. 34 would clearly apply15. We do not also agree that the rejection of the appellants present argument will compel us to raise two fictions. There is only one fiction, namely, that raised by S. 23A. That fiction having been raised, the income that has thereby to be deemed to exist must be held to have actually escaped assessment. We are unable to agree that in order to apply S. 34 to an income deemed to exist under S. 23A, we would have to read the former section to cover a case where income has to be deemed to have escaped assessment. If the income had come into existence, and not been assessed, it has escaped assessment; it is not a case where the income has to be deemed to have escaped assessment .In our view, therefore, the present contention of the appellant must fail and the income deemed to have been received by him by virtue of the order made under S. 23A on June 11, 1947, must be held to have escaped assessment for the year16. It is now necessary to refer to one of the reasons on which the judgment of the Tribunal is based. It was there said that "It was incumbent on the, Calcutta, passing the order under S. 23A to have included the sum of Rs.4,74,370 in the other assessed income of the assessee and to have recomputed the assessable income and the tax thereon." It was held that "the, Delhiwent wrong in having recourse to the provisions of S.34 and making an assessment thereunder" but that this amounted to a mere irregularity not vitiating the assessment made under that section. In the end the Tribunal observed, "Anyhow, the Tribunal is empowered to substitute its own order for that of thex Officerand acting under that power we assess the assessee under the provisions of Sec. 23A(1) of the Indian17. It seems to us that the Tribunal was wrong in the view that it took. The learnedl conceded that this is so.We are unable to agree that an assessment could be made under S. 23A. That section does not provide for any assessment being made. It only talks of the fictional income being included in the total income of the shareholders "for the purpose of assessing his total income." The assessment therefore has to be made under the other provisions of the Act including S. 34, authorising assessments. In our view, the assessment in this case had been properly made by the, Delhi18. Lastly, it is said that S. 23A is unconstitutional inasmuch as it was beyond the competence of the legislature that enacted it. This section has been redrafted and amended several times since it was first enacted in 1930. We are concerned with the section as it stood on June 11, 1947, when the order under it was made in this case.n (1) of the section in the form that it stoodd that is the material portion of the section for ours enacted by Act VII of 1939. It is thatn which gave the power to make an order that the undistributed portion of the assessable income of the company shall be deemed to have been distributed as dividends and provided that thereupon the proportionate share thereof of each shareholder shall be included in his income for assessment. The enactment was by the Central legislature which then derived its competence to legislate from the Government of India Act, 1935. There is no doubt, and neither is it disputed that thatn had been enacted under the power contained in entry 54 of List 1 in the Seventh Schedule to the Government of India Act, 1935. The entry read, "Taxes on income other than agricultural income." The argument of Mr. Sastri is that this entry only authorises legislation for taxing a person on his income; under it a law cannot be made taxing one person on the income of another20. In spite of all this it seems to us that the legislation was not incompetent. Under entry 54 a law could of course be passed imposing a tax on a person on his own income. It is not disputed that under that entry a law could also be passed to prevent a person from evading the tax payable on his own income. As is well known the legislative entries have to be read in a very wide manner and so as to include all subsidiary and ancillary matters. So entry 54 should be read not only as authorising the imposition of a tax but also as authorising an enactment which prevents the tax imposed being evaded. If it were not to be so read, then the admitted power to tax a person on his own income might often be made infructuous by ingenious contrivances. Experience has shown that attempts to evade the tax are often made21. Now it seems to us that S. 23A was enacted for preventing such evasion of tax. The conditions of its applicability clearly lead to that conclusion. The first condition is that the company must have distributed as dividend less than sixty per cent. of its assessable income after deduction ofx andx payable by it. The taxing authority must then be satisfied that the payment of a dividend or of a larger dividend than that declared, would, in view of losses incurred in earlier years or the smallness of the profit made, be unreasonable. Lastly, the section does not apply to a company in which the public are substantially interested or a subsidiary company of a public company whose shares are held by the parent company or by the nominees thereof. The section provides by an explanation as follows:"For the purpose of this, a company shall be deemed to be a company in which the public are substantially interested if shares of the company (not being shares entitled to a fixed rate of dividend, whether with or without a further right to participate in profits) carrying not less thane per cent. of the voting power have been allotted unconditionally to, or acquired unconditionally by, and are at the end of the previous year beneficially held by the public (not including a company to which the provisions of thisn apply), and if any such shares have in the course of such previous year been the subject of dealings in any stock exchange in the taxable territories or in fact freely transferable by the holders to other members of the public"22. The section thus applies to a company in which at least 75 per cent of the voting power lies in the hands of persons other than the public, which can only mean, a group of persons allied together in the same interest. The company would thus have to be one which is controlled by a group. The group can do what it likes with the affairs of the company, of course, within the bounds of the Companies Act. It lies solely in its hands to decide whether a dividend shall be declared or not. When therefore in spite of there being money reasonably available for the purpose, it decides not to declare a dividend it is clear that it does so because it does not want to take the dividend. Now it may not want to take the dividend if it wants to evade payment of tax thereon. Thus by not declaring the dividend the persons constituting the group in control, could evade payment of super tax, which, of course, is a form of. They would be able to evade thex becausex is payable on the dividend in the hands of the shareholders even though it may have been paid by the company on the profits out of which the dividend is paid, and because the rate at whichx is payable by a company may be lower than the rate at which that tax is payable by other assessees. By providing that in the circumstances mentioned in it, the available assessable income of a company would be deemed to have been distributed as dividend and be taxable in the hands of the shareholders as income received by them, the section would prevent the members of such a group from evading by the exercise of their controlling power over the company, payment of tax on income that would have come to them. That being so, the section would be within entry 5423. In conceivable circumstances the section may work hardship on members of the public who hold shares in such a company but that would not take the section outside the competence of the legislature. It would still be an enactment preventing evasion of tax. Considerations of hardship are irrelevant for deciding questions of legislative competence.