# 37 2 COMMISSIONER OF INCOME TAX, WEST BENGAL v. M/S. ABDUL RAHIM OSMAN& CO. (INDIA) PRIVATE LIMIUID

- **Citation:** [1973] 2 S.C.R. 372
- **Court:** Supreme Court of India
- **Decided:** 1972-09-19
- **Bench:** K. S. Hegde, P. Jaganmohan Reddy, H. R. Khanna
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/37-2-commissioner-of-income-tax-west-bengal-v-m-s-abdul-rahim-osman-co-india-5855
- **Pages:** 5

## Headnote

Indian Income Tax Act, 1922 (Act II of 1922)-Section 23A(l)-
Scope of.
The respondent is a private comp~ny. The assessment was for the
years 1958-59 and 1959·60 of which the accounting year ended on 30th
June 1957 and 30th June !958 respectively. The Company had de·
clared dividend a'fter the 12 months following the accounting year, and
hence, the Income Tax Officer
subjected the Company to
Super Tax
iri terms of the latter part of S. 23A(l) of the Indian Income Tax Act,
1922, by including the dividends of Rs. 15,000 and Rs. 90,000 declared
and paid by the Company in respect of relevant accounting years.
The respondent contended that once dividend is declared before an
order is made under S. 23-A(l), no Super-Tax can be levied in respect
of those dividendo. This submission was rejected by the I.T.O., who sought
to assess the respondent by including, the dividends already declared and
paid.
An appeal to the Appellate. Assistant Commissioner, was unsuccessful. The Tribunal, however, referred the following question to the
High Court under S.66(1)of the Indian Income Tax Act 1922 :"whether,
on the facts of the case, the Tribunal was right in holding that in the
matter of calcui.tion of undistributed balance of the total' income of an
assessee for the purl'ose of levy of Super Tax, in terms of S.23-A(l)
of the Income-tax Act, 1922, the r.T.O. should take into consideration
dividend declared by the Company after the period of twelve months
immediately following the expiry of, the previous years relevant to the
assessment years, 1958-59 and 1959·60, but before the date on which the
orders \Jnder S.23-A(l) hail been made by the Income Tax Officer;". The
)"figh Court has answered that question in the affirmative and against the
Department. The question before this Court was whether the High Court
w~s right in answering the question in the
~ffirmative referred to by
I.he Tribunal. Dismissing the appeal,'
HELO :(i) S.23-A(l) has been enacted with a view to deter private
Companies which do not distribute , more than 60% of their assessable
income; otherwise their undistributed balance of the net income will
by mbjected to additional Super Tax,.
The object of the Section is to
prevent the share-holders in adopting device to avoid payment of Super
Tax inasmuch as the rates of Super ,Tax for the Coinpanies being lower,
there may be temptation to get the Company accumulate profits and capitalise
them, such as, for instance, to issue bonus shares, which were not assessable as income in the hands of the· shareholders_ It is done to avoid these
artifices and force Such companies, to
declare the minimum statutory
dividends. In cases where the provisions have not been comolied with,
the I.T.O., with the previous r.pproval of the inspecting Assistant Commissioner, may make an order 'if at the time of the passing of the order, it
is !found that the company has not distributed its dividends with'n 12
months immediately following the accounting year Jess than the statutory
percentage of its total income of the accounti"g year as reduced by the
amount of taxes payable by the company. Though tlie I.T.O. bas juris·
diction to oass an order under Sub.,Section (1), he has to make a reoular
as,,.,ssment of the company under S. 23, which he cannot do if in fact, a
B
c
D
E
F
G
H
A
B
c
D
E
F
G
·'
H
C.I.T. v. ABDUL AAH!M & co. LTD. (Jaganmohan Reddy, J.) 373.
dividend had been declared before the making of that order, as otherwise,
tre com~y·s undistributed balance which is assessed by the l.T.O. would
e'cced its commercial profits.
There is also a likelihood of double taxation because not only the comp:u1y is charged Super-Tax for not distributing the dividends, but also it
will be assessed on the dividends it has in fact distributed, to income tax
and once again, to the Super-Tax. Such a result was not intended as the
company can declare· dividends in General Meeting:.
from the profits
earned by it and when that is declared and paid, the J.T.O., though for
t

## Text

37 2
COMMISSIONER OF INCOME TAX, WEST BENGAL
A
v.
M/S. ABDUL RAHIM OSMAN& CO. (INDIA) PRIVATE
LIMIU!D
September 19, 1972
[K. S. HEGDE, P. JAGANMOHAN REDDY AND H. R. KHANNA, JJ.)
Indian Income Tax Act, 1922 (Act II of 1922)-Section 23A(l)-
Scope of.
The respondent is a private comp~ny. The assessment was for the
years 1958-59 and 1959·60 of which the accounting year ended on 30th
June 1957 and 30th June !958 respectively. The Company had de·
clared dividend a'fter the 12 months following the accounting year, and
hence, the Income Tax Officer
subjected the Company to
Super Tax
iri terms of the latter part of S. 23A(l) of the Indian Income Tax Act,
1922, by including the dividends of Rs. 15,000 and Rs. 90,000 declared
and paid by the Company in respect of relevant accounting years.
The respondent contended that once dividend is declared before an
order is made under S. 23-A(l), no Super-Tax can be levied in respect
of those dividendo. This submission was rejected by the I.T.O., who sought
to assess the respondent by including, the dividends already declared and
paid.
An appeal to the Appellate. Assistant Commissioner, was unsuccessful. The Tribunal, however, referred the following question to the
High Court under S.66(1)of the Indian Income Tax Act 1922 :"whether,
on the facts of the case, the Tribunal was right in holding that in the
matter of calcui.tion of undistributed balance of the total' income of an
assessee for the purl'ose of levy of Super Tax, in terms of S.23-A(l)
of the Income-tax Act, 1922, the r.T.O. should take into consideration
dividend declared by the Company after the period of twelve months
immediately following the expiry of, the previous years relevant to the
assessment years, 1958-59 and 1959·60, but before the date on which the
orders \Jnder S.23-A(l) hail been made by the Income Tax Officer;". The
)"figh Court has answered that question in the affirmative and against the
Department. The question before this Court was whether the High Court
w~s right in answering the question in the
~ffirmative referred to by
I.he Tribunal. Dismissing the appeal,'
HELO :(i) S.23-A(l) has been enacted with a view to deter private
Companies which do not distribute , more than 60% of their assessable
income; otherwise their undistributed balance of the net income will
by mbjected to additional Super Tax,.
The object of the Section is to
prevent the share-holders in adopting device to avoid payment of Super
Tax inasmuch as the rates of Super ,Tax for the Coinpanies being lower,
there may be temptation to get the Company accumulate profits and capitalise
them, such as, for instance, to issue bonus shares, which were not assessable as income in the hands of the· shareholders_ It is done to avoid these
artifices and force Such companies, to
declare the minimum statutory
dividends. In cases where the provisions have not been comolied with,
the I.T.O., with the previous r.pproval of the inspecting Assistant Commissioner, may make an order 'if at the time of the passing of the order, it
is !found that the company has not distributed its dividends with'n 12
months immediately following the accounting year Jess than the statutory
percentage of its total income of the accounti"g year as reduced by the
amount of taxes payable by the company. Though tlie I.T.O. bas juris·
diction to oass an order under Sub.,Section (1), he has to make a reoular
as,,.,ssment of the company under S. 23, which he cannot do if in fact, a
B
c
D
E
F
G
H
A
B
c
D
E
F
G
·'
H
C.I.T. v. ABDUL AAH!M & co. LTD. (Jaganmohan Reddy, J.) 373.
dividend had been declared before the making of that order, as otherwise,
tre com~y·s undistributed balance which is assessed by the l.T.O. would
e'cced its commercial profits.
There is also a likelihood of double taxation because not only the comp:u1y is charged Super-Tax for not distributing the dividends, but also it
will be assessed on the dividends it has in fact distributed, to income tax
and once again, to the Super-Tax. Such a result was not intended as the
company can declare· dividends in General Meeting:.
from the profits
earned by it and when that is declared and paid, the J.T.O., though for
the noniulfilment ~f the conditions prescribed in the Section, may seek to
reopen it, he cannot make an assessment in cases where the dividend has
actually been declared and paid, before the date o( his order. [375FJ
CIVIL APPELLAT.E JURISDICTION: c. A. Nos. 1378 and 1379
of 1969.
Appeals by cert1ficate from the judgment and order dated May
21, 1968 of the Calcutta High Court in Income-tax Reference
No. 17 of 1965.
V. S. Desai, P. L. !1111eja, R. N. Sac/11hey and S. P. Nayar, for
the appellant.
M. C. Setalvad, S. Roy Chowdlwry and G. S. Chatterjee, for
the respondent.
The Judgment of \he Court was delivered by
JAGANMOHAN REDDY, J. This appeal is by certificate and
though no reasons have been given for the grant of it, the learned
advocate for the respondent does not contest that a question of
law does arise and has not objected to the certificate. The ques1icn that was referred to the High Court by the Tribunal under
s. 66(1) of the Indian Income-tax Act. 1922 (hereinafter called
the 'Act') is as follows :-
"Whether, on the facts and in the circumstances of
the case, the Tribunal was right in holding that in the
matter of calculation of ·undistributed balance of the
total income of an assessee for the purpose of levy of
super-tax in terms of s. 23-A(I )'of the Income-tax Act.
1922, the Income-tax Officer should have taken into
con~ideration dividend declared by the company after
th~ period of 12 months immediately following the expiry of the previous years relevant to the assessmrnt
years 1958-59 and 1959-60 but before the date on
which the orders under s. 23-A (I) had been made hv
the Income-tax Officer?
·
The. High Court has answerd that question in the affirmative and
~gamst the department following the reasoning which was o/Jitcr
m the case of Moore Avenue Proverties Private Ltd. v. C.T.T.(').
~----
. ···-- ····-·-··
II> 59 l.T.R. 466.
374
SUPREME COURT REPORTS
[ 1973] 2 S.C.R.
The respondent is a private company to which it is not disputed, sub-s. ( l) of s.23-A would be attracted if it fulfilled the
conditions pr~<rribed therein.
The assessment rel~tin!' tu •:. hich
the income-t:u Officer sought to, exercise his jurisdiction under
that section was for the years 1958-59 and 1959-60 for which the
accounting year ended on 30th June 1957 and 30th June 1958
respectively.
The order of the Income-tax Officer was
dated
October 31, 196 I. The contention of the appellant is that
th~
company had declared the divider.ds after the 12 months following the accounting year and hence the Income-tax Officer had,
with the previous sanction of the Inspecting Assistant Commissioner, validly subjected the company to super-tax in terms of the
latter part of s. 23-A (I). On behalf of the respondent it was
submitted that once dividends were declared before an order is
made under this section no super-tax can be levied in respect of
those dividends.
This submission was rejected by the
I ncomctax Officer who sought to assess the
respondent by
, .eluding
Rs. 15,000 and Rs. 90,000/- declared as dividends at the general
meetings held on December 17, 1959 and May 26, 1960 in respect of the relevant assessment years.
An appeal to the Appellate Assistant Commissioner was
unsuccessful.
The Tribunal
however on a reading of the relevant parts of the section came to
the conclusion that in computing the undistributed balance of the
total income not only the income-tax and super-tax payable by
the company but also any other tax levied by the local authority
etc.
are to be deductetl but also "Jividends actually distributed,
if any" which are the words used in the latter part of s. 23-A ( 1).
It was also of the view that no time limit was applicable in taking into account the :ictual distribution of dividends in passing
an order under s. 2:-1-A (I) by the Income-tax Officer as such it
directed that the sums of Rs. J 5,000 and 90,000_ 1were <o 'be
taken into account in arriving at the undistributed balance of the
total income of the respondent company for the purpose of levy
of super-tax.
Before considering the contention on behalf cof the
revenue it will be necessary to examine the tenns of the section
and the object for which it was .enacted.
S.23-A ( 1) after it W3S
re-cast by the Finance Act of ! 955 is as follows :-
"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 twelve
months immediately following the expiry of that previous year arc less than the statutory percentage 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 exA
n
c
D
E
F
G
H
A
B
c
D
E
F
G
H
C.!.T. v. ABDUL RAHIM & co. LTD. (Jaganmohan Reddy, J.) 375°
eluding the amount of any super-tax payable under this
section;
( b) the amount of any other klx levied under any
law for the time being in force on the company by the
Government or by a local authority in excess of the
amount, if any, which has been allowed in computing
the total income; and
(c) in the case of a banking company, the amount
actually transferred to a reserve fund under s.17 of the
lfa11king Companies Act, 1949;
the I ncumc-tax Olliccr shall, unless he· is satisfied that, having reg~rd to th~ losses incurred by the company in 'earlier years or to
th~ smallnc:,s of the profits made in the previous year, the paymcr.t o[ a dividend or a larger dividend than that declared would
b~ unreasonable, make an order in writing that the company shall,
qi.1rt from the sum determined as payable by it on the basis of
the -.sscssmcnt under section 23, be liable to pay super-tax at the
rnte of fifty per cent 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 thirty-seven per cent 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 amount as
re·
duced by the amounts, if any, referred to in clause (a), clause
(b) or clause (c) and the dividends actually distributed, if any."
This provision is procedural and applies only to companies in
which the public are not substantially interested. It seems to
have been enacted with a view to deter private companies which
do not distribute more than 60% of their assessable income on
pain of exposing them to the drastic consequences of subjecting
their undistributed balance of the net income to additional supertax.
The object of the section is to prevent the sliareholders in
adopting a device to avoid payment of super-tax inasmucp. as
the rates of super-tax for the companies being lower there may be
a temptation to get the company to accumulate profits and capitalise them such as for instance to issue bonus shares which were
not assessable as income in the hands of the shareholders. It is
to avoid these artifices and force such companies to declare the
minimum statutory diviJends, though in the light of the changed
definition of 'dividend' under s. 2 ( 6A) profits may attract tax
even when they reach the shareholder in capitalised forms,
or
where they are distributed to them on liquidation from accumulated profits over the years they will be chargeable as dividends.
In c1ses where the provisions have not been complied with, the
Tncomc-tnx Officer with the previous approval and consent of the
Inspecting Assistant Commissioner will get jurisdiction to make
.376
SUPREME COURT itJ:iPORTS
[1973] 2 S.C.R.
.an order if at the time of the passing of the order it is found that
A
.the company has not distributed by way of dividends within
twelve months immediately following the accounting year less
than the statutory percentage of its total income of the accounting
year as reduced by the amount o~ taxes payable by the company
and in the case of banking companies the amount actually carried
to a reserve fund under a statutory compulsion. Though the In8
come-tax Officer has jurisdiction to pass an order under sub-s. ( 1)
he has to make a regular assessment on the company. under s. 23
which he cannot do if in fact a dividend had been declared before
the making of that order, as otherwise the company's undistributed balance which is assessed by the Income-tax Officer would
exceed its commercial profits. Tpere is also a likelihood of c
double taxation because not only the. company is charged with
super-tax for not distributing the dividends, but also it will be
assessed on the dividends it has :in fact distributed to incometax and once ·again super-tax. Such a result was not intended.
As the company can only declare dividends in general meeting
from the profits earned by it, and when that is declared and paid
D
the Income-tax Officer though for the non-fulfilment of the.
conditions prescribed in the section may seek to re-open it he
cannot make an assessment in cases where the dividend has
actually been declared and paid 'before the date of his order. In
this view, we think the High Court was right in answering the
question in the affirmative. The appeal is accordingly dismissed
with costs.
s.c.
Appeal dismissed.
,
• ..