BHOR INDUSTRIES LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS reference under section 66(I), made at the instance of the assessees, one of whom is Bhor Industries Ltd., Bombay, and giver others who are shareholders, raises certain interesting questions. The assessment years so far as the company is concerned are 1947 -48 and 1948 -49. The assessment year in respect of the shareholders is 1949 -50. The Bhor Industries Ltd. was at all material times a private company limited by shares and incorporated in the erstwhile Indian State of Bhor. Its registered officer was situate at Bhor and it carried on business of dyeing, printing and bleaching cloth, proofing etc. For both the years 1956 and 1947 it was held to be 'non -resident' in the then British India. It will be convenient to use the expression 'British India' for taxable territories in our judgment. Holding that the company was non -resident in British India in either of the two years, the Income -tax Officer had to determine its total income and its total world income. The general meetings of the company were held in respect of those years at Bhor and the only dividends that were declared at those meeting aggregated to Rs. 2,580 and Rs. 1,140 for the two years respectively. In this judgment we shall refer to some facts only to serve as an illustration in appreciating the legal contentions raised before us. In 1946, the total income of the company was Rs. 4,32,542. The income arising in the Indian State of Bhor was Rs. 2,24,542 and its total world income which would be the sum of those two items was Rs. 6,57,084 and the only amount that it paid out as dividend was Rs. 2,580. In substance and in effect the profits were kept undistributed and the shareholders of the private limited company were content with that position. The company was one in which the public were not substantially interested within the meaning of Explanation to section 23A. The Income -tax Officer, therefore, invoked and brought into operation the provisions of section 23A and made and order under section 23A in respect of both the years. The dispute before the Income -tax Officer related to the contents of the order including proportionate quantum that could be included in the total income of the shareholders concerned for the purpose of their assessment for the year 1949 -50. It will be convenient to go back to the illustration with which we started. In respect of the year 1946, the position regarding the income of the company was this. The total income, as already mentioned, was Rs. 4,32,542. The income that accrued in the Indian State of Bhor was Rs. 2,24,542 and the income -tax and super -tax payable on the income of the company came to Rs. 1,89,237. The amount available for distribution had to be ascertained as required by section 23A and that worked out at Rs. 2,43,305 by deducting the amount of income -tax and super -tax from the total income. The dividend declared by the company was only Rs. 2,580. Therefore, the undistributed portion which was deemed to have been distributed under section 23A amongst the shareholders worked out at Rs. 2,40,725 by deducting Rs. 2,580 from Rs. 2,43,305. The position in respect of the year 1947 was slightly different by its is not material to go into that for the purpose of this reference. Substantially, the facts for the purpose of this reference in respect of both the years can be taken as the same in view of the nature of the arguments urged before us. At this stage, we are, as already mentioned, referring to the income of the company. Some time after the end of the previous year 1947, the State of Bhor was merged in the Province of Bombay in consequence of the States Merger (Governors' Provinces) Order, 1949. That Order came into operation on 1st August, 1949. On 31st December, 1949, came into operation the Taxation Laws (Extension to Merged States and Amendment) Act, 1949. By section 3 of the latter enactment the Indian Income -tax Act, 1922, as also the Indian Finance Act, 1949, were extended to all the Merged States. That section specifically provides that the two Acts 'shall operate as if they had been extended to, and brought into force in, all the urged States on the first day of April, 1949.' The effect of this was that, although the States of Bhor became merged in the then Province of Bombay as from 1st August, 1949, that being the date on which the assent of the Governor -General was given, the effect of section 3(2) was that the provisions of the Income -tax Act and the relevant Indian Finance Act, 1949, were brought into force in that State some months earlier, that is on 1st April, 1949, Section 60A was added to the Indian Income -tax Act to bring the law in harmony and by section 6 of the Taxation Laws (Extension to Merged States and Amendment) Act, 1949, the Central Government was empowered to make any exemption, reduction in rate or other modification in respect of the income -tax in certain cases to avoid hardship and difficulties. We shall presently state the relevant provisions of the enactments of which we have made some mention. In exercise of the powers conferred by section 60A, the Central Government made an order intituled

(2.) IT will be seen that income and classes of income and income of any person or classes of person, previously, i.e., prior to 1st April, 1949, were not being touched by the Indian income -tax law when it was brought into the scheme of the taxation prevalent in the whole country. That, therefore, was bound to result in certain hardships and difficulties and likely to give rise to anomalous situations. To obviate that and to give relief or exemptions, where it was fit and reasonable to grant exemptions, the Legislature empowered the Central Government to pass requisite orders. It may here be mentioned that the Order was to be the creature of the provisions of section 60A and nothing more. It could not operate beyond the ambit or matrix of section 60A and was not intended to do so. We make this observation at this stage because the whole brunt of the argument of Mr. Palkhivala is to the contrary. The provision of the Merged States (Taxation Concessions) Order, 1949, which is very strongly relied on by Mr. Palkhivala is paragraph 12 of the same. In the course of the arguments before us as also in the judgment of the Tribunal reference has been made to certain other paragraphs of that order. IT will be convenient to quote those paragraphs :

(3.) EXPLANATION - For the purpose of this sub -section, - a company shall be deemed to be a company in which the public are substantially interest 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 than twenty -five 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 this sub -section apply), and if any such shares have in the course of such previous year been the subject dealings in any stock exchange in the taxable territories or are in fact freely transferable by the holder to the members of the public.