D.N.SINHA, J. - (1.) THIS is a reference made under s. 66(1) of the Indian IT Act. The facts are as follows : Sir Indra Singh and his two sons, Sardar Baldev Singh and Ajaib Singh, were the only shareholders in M/s Indra Singh & Sons (P) Ltd. Sir Indra Singh transferred 350 shares to his grandson, Sardar Surjit Singh, before the annual general meeting of the said company which was held on the 30th March, 1949. The said Sardar Surjit Singh is the assessee in this case, and we are concerned with the assessment for the year 1949- 50. On the 19th Jan., 1953, an order was made under s. 23A of the IT Act upon M/s Indra Singh & Sons (P) Ltd. and by that order it was directed that the undistributed portion of the assessable income of the company should be deemed to have been distributed as dividend among the shareholders as at the date of the general meeting aforesaid, and in consequence the proportionate share thereof of each shareholder was to be included in the total income of such shareholder for the purpose of assessing his total income. The amount of dividend that was thus deemed to have been distributed to the assessee was Rs. 1,38,052. On the 27th Nov., 1954, a notice was issued under s. 34 of the said Act, requiring the assessee to file a return. Although in the statement of the case, s. 34 only is mentioned, it appears that the actual notice was under s. 34(1)(a). Previous to this notice, the assessee had no assessable income and never filed a return. Upon receipt of the said notice, he filed a return showing the said amount of dividend for Rs. 1,38,052 under protest. He was assessed upon that income. Against this assessment, the assessee appealed to the AAC and, thereafter, to the Tribunal, both of whom have upheld the assessment. Before the Tribunal the assessee raised three contentions : (1) the provisions of s. 23A were ultra vires the Constitution; (2) the issue of the notice under s. 34(1)(a) was not in accordance with law, and was barred by limitation; (3) the income of the assessee was not actual income but a "deemed income", and, therefore, could not be held to have escaped assessment so as to enable proceedings to be taken under s. 34.
(2.) THE Tribunal held against the assessee, whereupon the assessee asked for an order of reference and the following questions were referred. "(1) Whether the Tribunal was correct in holding that the provisions of s. 23A were not ultra vires the Constitution ? (2) Whether the Tribunal was correct in holding that the provisions given in s. 23A enabled the ITO to include the deemed income contemplated by that section in the total income of the shareholder for the purpose of assessing his total income ? (3) Whether on the facts and in the circumstances of this case the provisions of s. 34(1)(a) are applicable and the notice under s. 34(1)(a) of the Indian IT Act had been validly issued and the assessment made pursuant to the said notice was not barred by limitation ?" The provisions of s. 23A which are applicable to this case is the section as it stood before the amendment by the Finance Act of 1955. The relevant provisions thereof were as follows : "23A. (1) Whether the ITO is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company up to the end of the sixth month after its accounts for that previous year are laid before the company in general meeting are less than sixty per cent of the assessable income of the company of that previous year, as reduced by the amount of income- tax and super-tax payable by the company in respect thereof, he shall, unless he is satisfied that having regard to the losses incurred by the company in earlier years or to the smallness of the profit made, the payment of a dividend or a larger dividend than that declared would be unreasonable, make with the previous approval of the IAC an order in writing that the undistributed portion of the assessable income of the company of that previous year as computed for income-tax purposes and reduced by the amount of income-tax and super-tax payable by the company in respect thereof shall be deemed to have been distributed as dividends amongst the shareholders as at the date of the general meeting aforesaid, 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." It is clear that the income which is assessed is not the actual income, but a "deemed income" in the hands of the shareholder. The first point that has been canvassed before us is that a law which treats the income of a company as the income of a shareholder, although he has not received it, should be held to be unconstitutional. It is said that it contravenes the provisions of Arts. 14, 19(1) (g) and 31 of the Constitution. It is also argued that there is a violation of the principles of natural justice. The question as to whether the provisions of s. 23A are ultra vires came to be considered by the Madras High Court in C. W. Spencer vs. ITO, Madras (1957) 31 ITR 107 (Mad). The first point taken there was the absence of legislative competence. What had to be considered was entry 54 in List 1 of the Seventh Schedule of the Government of India Act, 1935. This heading related to "Taxes on income other than agricultural income". It was held that there was legislative competence. The learned judges referred to the case of Navinchandra Mafatlal vs. CIT (1954) 20 ITR 758 which laid down that legislation to prevent evasion of tax was well within the ambit of the power to levy a tax, and that it was ancillary to the power to tax income, which was authorised by entry 54. With regard to the argument that s. 23A attempted to tax a person by introducing a fiction to the effect that he had income, while he had never received the income, and the income was really that of the company, the learned judges said as follows : ".... the legal fiction enacted by s. 23A does correspond to reality, if the veil of the legal personality of the corporate person, the company, is pierced, in order to look at the real person behind that corporate personality. It should be remembered that s. 23A deals with controlled companies, as distinguished from companies in which the public have a substantial interest. In fact, in popular parlance, such companies have come to be called 's. 23A companies' even as in England they are known as 's. 245 companies'. The extracts from Simon's Income Tax, second edition, volume 3, page 341, which we have set out above, explain the real possibilities of evasion by a person or group of persons by resort to the device of a corporate personality. The income does in reality belong to them, and is under their control all the time. The evasion of liability to super-tax is equally real. That in such companies there might be an individual member or two in a minority unable to force a factual distribution at any given point of time, cannot affect the reality of the situation which s. 23A was designed to meet. The basis assumption that underlies s. 23A is the identity of the interests of the shareholders and the controlled company. That assumption is founded on reality. The share-holder created a veil of a corporate personality as legally distinct from his juristic personality. That was legal. The legislature countered that with a legal fiction. That was also legal. if both are forgotten the taxpayer and the tax-gatherer proceed on the realities of the situation. The profits are taxed."
(3.) THE same objection was taken before the Supreme Court in the case of Sardar Baldev Singh vs. CIT (1960) 40 ITR 605 (SC), Sarkar J. explained the real nature of s. 23A as follows : "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, there-fore, 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 evade payment of super-tax, which, of course, is a form of income-tax. They would be able to evade the super-tax because super-tax 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 which super-tax 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 54." ;