JUDGMENT This is a writ petition under article 226 of the constitution. The prayer is for the issue of a writ of certiorari quashing the order of the Income-tax officer dated 24th of May, 1963, under section 35 of the Income-tax Act (hereinafter referred to as the Act) and for the quashing of the notice of demand dated the 24th may, 1963, passed in pursuance of the order under section 35 of the Act.
The facts leading up to this petition are these : The petitioner is a private limited company which was incorporated on the 18th of September, 1942, with its registered office at Kanpur. For the relevant assessment year 1955-56, the petitioner company filed its return of the total income in the sum of Rs. 2,99,039. The Income-tax Officer, Mr. Misra, who had then the jurisdiction over the case passed an assessment order dated 19th of March, 1956, under section 23(3) of the Act on a total income of Rs. 3,29,774 (annexure "A"). Certain specific disallowances not under the proviso to section 13 of the Act were made, the main item being excessive depreciation which had been claimed. The ultimate paragraph of the said assessment order significantly notes : "The assessee declared Rs. 1,20,000 as dividends. "No action under section 23A was taken by Mr. Misra, the said Income-tax Officer.
More than three years thereafter, another Income-tax Officer appears to have woken up to the fact that the order required ought to have been passed under section 23A of the Act. The Inspecting Assistant Commissioner by a notice under section 23A(8) of the Act dated the 16th of July, 1959 (annexure "B"), called upon the petitioner to attend on the 23rd of July, 1959, and show cause why approval of the proposed order under section 23A should not be given. In the said notice, the total income given was Rs. 3,29,774, as per the assessment order, annexure "A" and it was stated that no dividends had been declared within 12 months of the end of the previous year and the balance, after deducting the taxes of Rs. 1,41,390, was worked out at Rs. 1,88,390. The secretary of the company having alone attended had agreed that section 23A was applicable to the case for the relevant assessment year 1955-56. The order under section 23A(1) of the Act was thereupon passed on the 27th of July, 1959. After deducting the taxes and donations on which rebate had been allowed under section 15B of the Act in the assessment order for 1955-56, the total reduced income was worked out at Rs. 1,81,315. 60% of this reduced income was worked out to Rs. 1,08,789. The additional super-tax under section 23A(1) at the rate of 4 annas was thus determined at Rs. 27,197 and the company was required to pay this tax within 14 days. A mistake in calculation of additional super-tax in the order under section 23A(1) was discovered, which was rectified under Section 35 of the Act by an order dated the 31st of August, 1959 (annexure "D"), and the correct amount of additional super-tax was worked out at Rs. 45,328. 75 nP. in place of Rs. 28,258 hitherto calculated.
Subsequently, in the course of the assessment proceedings for 1959-60, it was noticed that a trading liability in the sum of Rs. 2.79 lakhs which had been shown and allowed as a disputed amount payable to the Iron and Steel controller was not paid and was still being carried forward. A notice was thereupon issued under section 34(1)(a) for bringing that sum to tax in the assessment year 1955-56.
The said Income-tax Officer issued a notice on the 28th August, 1961, under section 34 of the Act for the relevant year of assessment 1955-56. This notice presumably was under section 34(1)(a) as the penultimate paragraph thereof states that the notice was being issued after obtaining the necessary satisfaction of the Commissioner of Income-tax. This notice did not mention any reason for re-opening the assessment. A subsequent notice, however, was issued on the 22nd September, 1961 (annexure "G"), paragraphs 2 and 3 whereof read as follows :
"A perusal of the account of Iron and Steel controller as appearing in your books shows that you have created a liability of Rs. 2,78,953 in this year. This liability is not supported by any bills. Since this liability on reference to the deputy price and Accounts officer, Calcutta, is found as not payable you are requested to let me know whether you have any objection if this sum is treated as your income of this year.
Your case is fixed for hearing on September 29, 1961, at 10.00 a.m."
On the 28th September, 1961, the petitioner wrote to the Income-tax officer (annexure "I"), which reads :
"With reference to your above letter we beg to say that as already agreed by us vide our letter dated March 22, 1961, for the assessment year 1959-60 we have got no objection to the addition stated in your letter under reply provided that whenever payment is made the amount so paid shall be allowed as deduction in the year during which such payment has been made.
We may further add that this amount is still due to the Iron and Steel controller and is under dispute."
The letter dated the 22nd March, 1961, however has not been produced by the petitioner nor by the opposite party. There was some kind of agreement arrived at between the parties during the assessment proceedings 1959-60 that the sum of Rs. 2,78,953 will be brought to assessment in the year 1955-56 but whenever the petitioner makes payment to the Iron and Steel Controller the sum so paid will be allowed in that year. It may also be noticed that the petitioner did not at any time accept that the sum of Rs. 2,78,953 was not due. In fact it was reiterated that the amount was still outstanding and had to be paid. Notwithstanding this insistence and the receipt of this letter, on the very next day, i.e., the 29th September 1961, an order under section 34(I) read with section 23(3) was passed. Paragraph 3 of this order reads :
"3. The company filed a written reply dated September 28, 1961, agreeing to the addition of Rs. 2,78,953 as stated above. This sum would, therefore, be added to the total income already computed under section 23(3). It is further agreed that it the assessee is required to pay any sums in respect of this liability, the same would be allowed in the relevant year in which the payments are made.
The total income is computed as under :
Rs.
Income already determined under section 23(3) as per Income-tax officers order dated September 19,1956 3,29,774 Addition for liabilities as discussed above 2,78,953 Total Income 6,08,727 It may be noticed that there is pointed reference to some agreement in this assessment order. The petitioner had insisted that the amount is still due to the Iron and Steel Controller and it would appear that this assertion was accepted as a provision was made that if and when the amount is paid it will be allowed against the income of that year. There was, therefore no finding given that there was any failure on the part of the petitioner to fully and truly disclose all material facts in the return filed by him under section 22 of the Act. Manifestly the assessment was based on an agreement which was just and reasonable. According to the petitioner it was further agreed that no penal action would be taken and in pursuance of that agreement no penal action under section 28(1)(c) was initiated by the Income-tax Officer. Section 23A action also was not taken immediately upon the passing of the said assessment order under section 34 of the Act. Again, according to the petitioner, it was never in the contemplation of either party, and the petitioner had definitely understood that no penal action by way of a section 23A order would be taken. After the lapse of over 7 months the Income-tax Officer, however, issued a notice dated the 8th of May, 1962 (annexure "K") under section 35 of the Act. Paragraph 2 reads :
"The above orders were passed in pursuance to the total income of Rs. 3,29,774 as originally assessed under section 23(3) vide order dated March 19, 1956. Since the total income has been recomputed at Rs. 6,08,727 for the above year under section 34(1)(a) vide order dated June 29, 1961, it has become necessary to recompute your income available for distribution as dividends and also for levy of further penal super-tax. Since such an order will enhance your liability, you are hereby given an opportunity to have your say in the matter, if you have any objection to the passing of such an order.
Before the issue of this notice the sanction of the Inspecting Assistant Commissioner was not obtained as required by section 23A(8) of the Act. The petitioner replied to the said notice by his letter dated the 14th of May, 1962, objecting to the rectification on the ground.
"It is respectfully submitted that by virtue of the order dated September 29, 1961, under section 34(1)(a) of the Act, the additional income that was included was purely a notional income as the sum of Rs. 2,78,953 continued to be the liability in the books of the company. It was for assessment purposes only that the said income was included in the total income and your good self has expressly mentioned in the order that it was agreed that if the assessee would be required to pay any sum in respect of such liability, the same shall be allowed in the relevant years in which the payments are made. This would clearly indicate that the income assessed was a notional income only and could not under any circumstances whatsoever be declared as dividend to the shareholders".
A further reply was submitted by the petitioner on the 26th June, 1962 wherein it was stated :
"In continuation of our letter No. I/T dated May 14, 1962, in respect of the above we beg to submit as will be borne out by the records the relevant assessment in which a sum of Rs. 2,78,953 was included was made as a result of mutual agreement according to which it was already under stood that except for including the sum in the assessable income no penal action will be taken in respect thereof, in fact this was as per agreement that an appeal against the assessment was also not preferred as stated in the assessment order itself.
It was also agreed that it we are required to make any payment in future against the said liability of Rs. 2,78,953 the same would be allowed in the year of payment. It is thus evident that the question of any additional tax under section 23A which is in the nature of penalty does not arise in respect of the said sum."
The stress, therefore, in both these letters was on the agreement arrived at between the parties that the addition of the sum of Rs. 2,78,953 in the assessment year 1955-56 would not entail any penal action. Notwithstanding the protest by the petitioner the Income-tax officer on the 24th May, 1963, proceeded to pass an order under section 35, rectifying the mistake in the order under section 23A(1) of the Act as passed on the 27th July, 1959, and rectified on the 9th September, 1959. It was stated therein that taking the total income at Rs. 3,29,774 as per the original assessment which was made in 1956 (annexure "A") and after deducting the tax payable and the donations which are the subject-matter of relief under section 15B of the Act, the income came to Rs. 1,81,315. As assessment for this year was subsequently re-opened an order under section 34(1)(a)/23(3) was passed on the 29th September, 1961, recomputing the assessable income of the company at Rs. 6,08,727. In view of this order it had become necessary to rectify the order passed earlier under section 23A(1). Again the secretary of the company only appeared and asserted that the income added was on the basis of mutual agreement and was only notional. He, therefore, pleaded that this sum could not be considered for purposes of an order under section 23A of the Act. The Income-tax Officer, however held that the agreement to allow the amount of in the year when the petitioner was called upon to pay the Iron and Steel Controller, at best only permitted the treatment of that sum as reserve and, therefore, it could not be excluded in determining the capital profits of the assessee company. The Income-tax Officer thus on the total income as per assessment of Rs. 6,08,727, less the permissible deductions under section 23A(1) of Rs. 2,69,629 arrived at the profits of Rs. 3,39,098. From this he reduced the amount on which penal super-tax of Rs. 1,81,315 under section 23A(1) had already been charged, and arrived at the distributable profits of Rs. 1,57,783. Penal super-tax at Rs. 25% was further charged on this sum of Rs. 1,57,783. This came to Rs. 39,445,75 nP. and thus the alleged mistake was rectified.
It is this order under section 35 of the Act rectifying the section 23A order and the demand notice issued pursuant there to that is the subject-matter of the present writ petition. several contentions have been raised and they are :
(1) That section 35 cannot be invoked for the purpose of rectifying an order made under section 23A(1) pursuant to an assessment made under section 34 of the Act, as the mistake in such a case cannot be said to be a mistake apparent from the record.
(2) When section 34 assessment was made on the basis of an agreement between the parties and no penal action under section 28(1)(c) was taken it was understood that no penal super-tax under section 23A would also be levied.
(3) The sum of Rs. 2,78,953 could not be termed as commercial profits and, therefore, before passing an order under section 23A(1), the smallness of commercial profits had to be considered and the liability of Rs. 2,78,953 not having been extinguished it could not have formed a part of the commercial profits of the company and as such no distribution of dividends could validity have been expected to be made therefrom.
(4) Section 23A(8) of the Act required that no order of the Income-tax Officer under section 23A could be passed, unless the Inspecting Assistant commissioner had occasion to consider the proposal made and the petitioner had been given an opportunity of being heard by him.
(5) Section 35 order had deprived the petitioner of the right of appeal to challenge the inclusion of the sum of Rs. 2,78,953 in the profits of the company for purpose of section 23A of the Act.
(6) That, in any event, the petitioner was entitled, in view of the provisions of section 23A(2)(iii) of the Act, to a locus poenitentiae of three months in which to further distribute the profits and gains so that the total distribution may not be less than 60% of the total income of the company of the relevant previous year.
It is unnecessary to deal with all these contentions raised by the learned counsel for the petitioner as I am satisfied that the further period of three months for the declaration of dividends was not given to the petitioner under the provisions of section 23A(2)(iii) of the Act.
Mr. Gulati, the learned standing counsel, has contended that the provisions of section 23A(2) would not be available in this case even though the petitioner had distributed dividends of Rs. 1,20,000 before the assessment was made on the 19th March, 1956, as noted in that assessment order. According to him what was required under section 23A (I) and 23A(2) of the Act was that the dividends should have been distributed within twelve months immediately following the expiry of that previous year and any distribution made beyond that period was of no avail.
In order to appreciate the contention it becomes necessary to examine the relevant provisions of section 23A of the Act as it stood at the material time before its amendment in 1957. The relevant portion of section 23A reads :
"23A. (1) subject to the provisional of sub-sections (3) and (4), where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the 12 months immediately following the expiry of that previous year are less than 60% of the total income of the company of that previous year as reduced by -
(a) the amount of income-tax and super-tax payable by the company in respect of its total income, but excluding the amount of any super-tax..
The Income-tax Officer shall, unless he is satisfied that, having regard to losses incurred by the company in earlier years or to the smallness of the profits made in the previous year, the payment of a dividend or a larger dividend than that declared would be unreasonable, make an order in writing that the company shall, apart from the sum determined as payable by it on the basis of an assessment under section 23, be liable to pay super-tax at the rate of eight annas in the rupee in the case of a company whose business consists wholly or mainly in the dealing in or holding of investments, and at the rate of four annas in the rupee in the case of any other company, on the undistributed balance of the total income of the previous year, that is to say, on the total income reduced by the amounts, if any, referred to in clause (a), clause (b) or clause (c) and the dividends actually distributed, if any.
(2) No order under sub-section (1) shall be made - ...
(ii) in the case of any other company which has distributed not less than fifty five percent, of its total income as reduced by the amounts, if any, aforesaid; or
(iii) in any case where according to the return made by a company under section 22, it has distributed not less than sixty percent of its total income as reduced by the amounts, if any, aforesaid, but in the assessment made by the Income-tax Officer under section 23 a higher total income is arrived at, and the difference in total income does not arise to of the application of the proviso to section 13 or sub-section (4) of section 23 or the omission by the company to disclose its total income fully and truly.
unless the company, on receipt of a notice from the Income-tax Officer that he proposes to make such an order, fails to make within three months of the receipt of such notice a further distribution of its profits and gains so that the total distribution made is not less than sixty percent, of the total income of the company of the relevant previous year as reduced by the amounts, if any, aforesaid."
There cannot be much doubt that under section 23A(1) of the Act, as no dividends had been distributed with 12 months immediately following the expiry of the relevant previous year there was an obligation to make an order under section 23A(1) of the Act. The Income-tax Officer therefore had jurisdiction, subject to the approval of the Inspecting Assistant Commissioner, to make an assessment under section 23A(1) of the Act. That order, however, could not have been passed in view of the provisions of sub-section (2) of section 23A of the Act for the reason that by the time the assessment came to be made under section 23A of the Act nearly three years after the assessment under section 23(3) the petitioner had already admittedly distributed Rs. 1,20,000 as dividend. The section 23A order was passed on the 27th July, 1959, as a result of agreement with the secretary of the company. That order had become final and it cannot now be touched.
The only question, therefore, is whether the petitioner can now challenge the section 35 order on he ground that the company had, according to the income returned by it under section 22 of the Act, distributed Rs. 1,20,000 which was not less than 60% of its total income as reduced by the tax payable, and that the addition of Rs. 2,78,953 was as a result of an assessment made under section 34/23(3) of the Act, and, therefore, a locus poenitentiae was available to it to make a further distribution of its profits within three months so that the total distribution made is not less than 60%. I can see no good and valid reason why the petitioner should be deprived of the opportunity contemplated under section 23A(2)(iii) of the Act to make a further distribution within three months of the receipt of a notice from the Income-tax Officer that he proposes to make such order.
Sub-section (I) of section 23A contains a condition that the distribution of dividends should have been within 12 months immediately following the expiry of that previous year in order to give jurisdiction to the Income-tax Officer to make an assessment under section 23A of the Act. There is, however, no such condition precedent in sub-section (2) which, no doubt, is meant to deal only with marginal cases. There is no condition precedent that the dividends should have been distributed within 12 months following the previous year. This sub-section would indicate that the legislature intended to give a locus poenitentiae to such companies as had not distributed the statutory percentage of dividends within 12 months of the expiry of the relevant previous year but which had made a distribution of 55% of its total income or 60% of the income as returned before the assessment came to be made on a figure greater than that returned. The clause that will be applicable in the present case is section 23A(2)(iii). Here, the return under section 22, admittedly, was made on Rs. 2,99,039. This sub-clause makes provision for an order under section 23A not be passed if the following conditions are satisfied :
1. That a return under section 22 has been made;
2. That dividends not less than 60% of its total returned income as reduced by the income-tax and other statutory amounts was distributed before assessment was made;
3. The return as made was not accepted and certain specified disallowances were made which increased the assessable income from that what was returned;
4. That the increased assessable income was not as a result of an assessment made by invoking the proviso to section 13 or one under sub-section (4) of section 23 or the result of an omission by the company to disclose its total income fully and truly.
If the conditions are satisfied then no order under section 23A can be passed unless the petitioner has been given a further time of three months from the receipt of such notice to distribute its profits so that the total distribution made is not less than 60% of the total distributable profits of the company as determined upon assessment.
It now remains to be seen whether these conditions can be said to have been satisfied by the petitioner in the present case. The return is made under section 22 of the Act in the sum of Rs. 2,99,039. The assessment was no made as a result of the application of the proviso to section 13 nor as a result of action under section 23(4), nor because of the failure of the petitioner to fully and truly disclose its total income, but the order under section 23(3) was the result of specific disallowances which led to the determination of the total income at Rs. 3,29,774. Even from this amount if the taxes as computed in the section 23A(1) order are deducted, as was done in the section 23A order passed on the 27th July, 1959, the profits as reduced by taxes, were worked out at Rs. 1,81,315 and 60% of the undistributed profits arrived at would only be Rs. 1,08,789. As against this even before the assessment was made on the 19th of March, 1956, a sum of Rs. 1,20,000 had, admittedly, been declared as dividends. Therefore, if any further sum came to be added to the total income as a result of an assessment under section 34/23(3) the position would still remain much the same, inasmuch as the return filed by the petitioner under section 34 was the same as had originally been filed, i.e. of Rs. 2,99,039, 60% of the distributable income would be Rs. 1,08,315 and as the petitioner had already declared dividends of Rs. 1,20,000 before the assessment was made under section 34, the opportunity of distributing further dividends as a result of the assessment made under section 34/23(3) cannot be denied to it. Mr. Gulati, however, contended that the subsequent assessment under section 34 would rule out the application of sub-section (2) of section 23A of the Act for the reason that an assessment under section 34(1)(a) can only be made if there is an omission by the company to disclose its total income fully and truly. Generally speaking that would be the proper way of looking at an assessment made under section 34(1)(a) of the Act, but as already noticed, in the present case, the assessment appears to have been made as a result of an agreement between the parties and the petitioner had up to the very last moment insisted that the sum of Rs. 2,78,000 was still outstanding and payable to the Iron and Steel Controller. The Income-tax Officer did not challenge the bona fides of the petitioner in this regard and would appear to have conceded, as is noted in the assessment order, that as and when the payment is made to the Iron and Steel Controller by the petitioner, the said amount will be allowed in that year. In there circumstances, although, technically speaking, an assessment was made under section 34(1)(a) of the Act it is impossible to say that it had been established that the company had failed to disclose its total income fully and truly merely because it had continued to show as trading liability an amount of Rs. 2,78,000 as payable to the Iron and Steel Controller.
Thus, there being no impediment to the application of sub-section (2) to section 23A, I would in the peculiar circumstances of the case direct that the order under section 35, dated the 24th May, 1963, and the demand notice of the same date be quashed by the issue of a writ of certiorari and it is directed that the petitioner be given three months from today in accordance with law to make a further distribution of its profits and gains so that the total distribution made is not less than 60% of the total income of the company of the relevant previous year as reduced by the taxes payable pursuant to the assessment made under section 34(1) of the Act. If no distribution is made within the period specified the present order made by the Income-tax Officer under section 35 will again be revived subject to the rights of the petitioner under sub-section (3) and (4) of section 23A(I) of the Act.
The petition is accordingly allowed. No order as to costs.
Petition allowed.