Killick Nixon & Company was a partnership concern carrying on business on a fairly large scale in India. It owned various mills and managing agencies of a number of limited companies. This partnership firm used to employ officer assistants, mostly Europeans, on the basis of a contract for three years; if the services of the assistants so employed were found satisfactory, extensions were invariably given after every three years on increased salary. Subject to their works being satisfactory, the assistants so employed to become partners of the firm one day. The assessee was one such assistants who joined the firm in 1930. The original contract relating to the assessee's employment was not placed on record. What was placed on record as a specimen copy of the initial agreement was the contract with one W. J. Heygate. It was undisputed that the terms of employment regarded the assessee were the same as those of the contract with W. J. Heygate. Clause 10 of the said agreement provided that notwithstanding anything contained in it, the firm might terminate the agreement without assigning any reasons after giving the assessee one calendar moth's previous notice of its intention so to do. The assessee continued in the employment of the firm and his contract of service was renewed from time to time. On November 1, 1947, was made the last renewal. The terms of this last renewal were the same as those of J. G. Miline, a copy of whose renewed contract was placed on record. This renewal provided for a contract of service from November 1, 1947, to October 31, 1950. Under this contract the assessee was to receive a salary of Rs. 1,200 per month plus a commission of 2 1/2 per cent, on the net profits of the partnership. The Appellate Tribunal found that if the partnership had continued to do business, the assessee would have got approximately Rs. 50,000 per annum. Sometime about the last quarter of the year 1947, the firm decided to reorganise its business and with that end in view two limit companies were floated : one was called the Killick Industries Ltd., which was a public limited company, and the other was called Killick Nixon and Company which was a private limited company. This private limited company was to take over the business previously carried on by the partnership. This arrangement necessitated the termination of the services of the firm's employees and the assessee received a notice from the firm dated December 29, 1947. This notice stated that in view of the changes proposed, the assessee's employment with the firm would terminate as from January 31, 1948. The assessee was then about 38 years old. There were in all sixteen officers including the assessee who were employed with the firm "contract terms". With the exception of one all these sixteen officers were Europeans. The three years contracts expired on different dates depending upon the original date of employment in respect of these sixteen officers. So far as the assessee was concerned, it appears that the new company, styled Killick Industries Ltd., agreed to take over the services of the assessee on new terms under which his salary was increased but the commission was disallowed, but he was left in more or less the same position financially. The assessee entered the employment of Killick Industries Ltd. on these new terms on February 1, 1948. Killick Nixon and Company transferred their assets to the new companies and received shares of the new companies in lieu thereof. A large number of shares of Killick Industries Ltd. were put on the Indian market. The shares were of the face value Rs. 100 only put were quoted in the market at Rs. 130 per share. Some of these shares were kept by the partners of Killick Nixon and Company. All the members of the covenanted staff in the partnership firms (who were officers) were given shares of Killick Industries Ltd. free of payment. The assessee received an allotment of 1,700 shares of the value of Rs. 2,21,000. The assessee's case was that the shares were given by the partnership to the members of the staff as compensation for loss of employment resulting from premature termination of their services.
The proceedings under s. 34 of the Indian Income-tax Act, 1922, were initiated with the issue of a notice on July 25, 1949. The assessee's contention was that the initiation of proceedings on July 25, 1949, was invalid as the department's right to revive the assessment was governed by old S. 34 where the period of limitation prescribed was only four years in the case of a failure to file a return and this period having expired on March 31,1947, and the Amending Act of 1948 (XLVIII of 1948) having come into force on March 30, 1948, the eight years' provided period therein could not be invoked. The High Court upheld this contention and said :"In our opinion, the contention of the learned counsel for the assessee is well founded, that the new rule of limitation of eight years prescribed by the amended section 34 would not apply to the case of the assessee before us., whose was an instance of a failure to submit a return, when the period of four years had ran out long before 30th March 1948 when the amended section 34 came into force as part of the Income-tax Act with effect from that date, 30th March 1948.The learned counsel for the Department next referred to section 31 of Act XXV of 1953 in support of his contention, that 'the notice issued on 25th July 1949 was valid. The learned counsel himself had to realise that section 31 of Act XXV of 1953 did not enlarge the scope of the amended section 34; nor did it purport to amend it. The validity of the notice, dated 25th July 1949 will still have to be decided with reference to the provisions of the amended section 34. Section 31 of Act XXV of 1953 does not therefore affect the question at issue, whether the extended period of limitation of eight years would apply to the assessee when the period of limitation applicable to the assessee had expired before the amended section 34 came into force on 30th March 1948."
The relevant assessment years were 1946-47 and 1947-48. The assessment orders were made on November 27, 1953. It is obvious that the assessments were not made within the time prescribed by sub-section (3) of section 34, the period being four years in this case. The Tribunal relied on the second proviso to sub-section (3) of section 34 as amended by the Amending Act of 1953 which came into force on April 1, 1952. For reasons which I have given in S. C. Prashar, Income-tax Officer, Market Ward, Bombay v. Vasantsen Dwarkadas [1963] 49 I. T. R. (S. C.) 1 (Civil Appeal No. 705 of 1957) in which judgment has been delivered today, the second proviso to subsection (3) of section 34 does not revive a remedy which became barred before April 1, 1952, when the amended proviso came into force.Next, the appellant relied on section 31 of the Amending Act of 1953. I agree with my learned brother, Kapur J., that the question of law which was referred to the High Court does not take in the point now sought to be urged before us. Secondly, for reasons given by me in S. C. Prashar, Income-tax Officer, Market Ward, Bombay v. Vasantsen Dwarkadas [1964] Vol. 1 S.C.R. 29, I do not think that section 31 saves the assessment.
The firm of Purshottam Laxmidas was started on October 28, 1935. This firm had two partners, Dwarkadas Vussonji and Parmanand Odhavji. Dwarkadas died on April 1, 1946, leaving a son, Vasantsen. Another firm by the name of Vasantsen Dwarkadas was started on January 28, 1941, and in that firm there were three partners, Vasantsen, Narandas Shivaji and Nanalal Odhavji. This firm was dissolved on October 24, 1946. The firm of Vasantsen Dwarkadas filed a return of its income for the assessment year 1942-43 and also claimed registration as a firm. The income-tax authorities refused registration and came to the conclusion that the firm of Vasantsen Dwarkadas belonged really to Dwarkadas, father of Vasantsen ; therefore they added the income of the firm to the income of Dwarkadas. In subsequent assessment years the firm of Vasantsen Dwarkadas again applied for registration, but registration was again refused. For the assessment years 1942-43 to 1948-49 several appeals were filed before the Income-tax Appellate Tribunal by the firm Vasantsen Dwarkadas both against the quantum of income assessed and against the refusal of the Income-tax Officer to register the firm of Vasantsen Dwarkadas. An appeal was also filed by the firm of Purshottam Laxmidas against its assessment in respect of excess profits tax, and there was also an appeal for the assessment year 1942-43 by Vasantsen as the heir and legal representative of his father against the decision of the income-tax authorities that the income of the firm Vasantsen Dwarkadas should be included in the income of Dwarkadas. It appears that after the decision in Vasantsen's case in the assessment year 1942-43, the Income-tax Officer gave a finding that the firm of Vasantsen Dwarkadas was only a branch of the firm of Purshottam Laxmidas and therefore the Income-tax Officer added the income of Vasantsen Dwarkadas to the income of the firm Purshottam Laxmidas. This question also came up before the Income-tax Appellate Tribunal in the appeals filed by Purshottam Laxmidas in respect of the assessments made against it. By a consolidated order dated August 14, 1951, the Income-tax Appellate Tribunal disposed of all the aforesaid appeals, and it came to the conclusion that the business done in the name of Vasantsen Dwarkadas was really the business of the firm Purshottam Laxmidas. With regard to the appeal filed by Vasantsen as heir and legal representative of his father for the assessment year 1942-43, the Tribunal expressed the view that the income of Vasantsen Dwarkadas should be deleted from the assessment of Dwarkadas.
The Appellate Assistant Commissioner to whom the assessee appealed held that the provisions of section 10(5A) did not apply to the facts of the case on the ground that the appellants were not agents of the company from which payment had been received and the amount received was not compensation as no legal damage had been caused to them by the company. He, however, held that the sum of Rs. 20,000 in respect of each of the appellants was a taxable receipt. The assesses appealed to the Tribunal and four contentions were raised by them.
The original assessee was Purshottamdas Thakurdas, a well-known businessman of Bombay. He died some time after the proceedings in the High Court had terminated and the appellants herein are his legal respresentatives. As nothing turns upon the distinction between the assessee and his legal respresentatives in this case, we shall ignore it for the purpose of this judgment. By a notice issued under section 18A(1) of the Act the Income-tax Officer concerned required the assessee to make advance payment of tax in respect of the assessment year 1947-48. On September 15, 1946, the assessee submitted an estimate of his income under sub-section (2) of section 18A. In this estimate the assessee showed his total income at Rs. 4,64,000. He deducted the sum of Rs. 3,64,000 stated to be his dividend income, on the ground that section 18 of the Act applied to such income. After claiming credit for Rs.10,000 on the ground of double taxation relief, the assessee estimated the advance tax payable by him at Rs. 2,67,752. The Income-tax Officer took the view that under section 18A(2) of the Act the assessee was bound to include in his estimate, and to pay advance super-tax on, his dividend income. Since that was not done and the advance tax paid was less than eighty per cent. of the tax determined on the basis of the regular assessment he levied penal interest on the assessee under subsection (6) of section 18A of the Act in respect of the super-tax payable on the dividend income. There was an appeal to the Appellate Assistant Commissioner who confirmed the view of the Income-tax Officer. On a further appeal, the Appellate Tribunal held by its order dated October 25, 1957, that sub-section (6) of section 18A did not apply to dividend income and the assessee was not liable to pay penal interest in respect of the dividend income.
The section 23A(1) creates a fictional distribution of dividend which is deemed to be a receipt of dividend by the shareholder although in fact the shareholder does not receive it. It is deemed to have been distributed on the date on which accounts of the previous year were laid before the company at its general meeting. Thus construed the undistributed assessable income in the present case rightly determined by the Income-tax Officer because 60% was not distributed by way of dividends up to the end of the sixth month after holding of the meeting which was on December 4, 1948. Under section 23A(1) of the Act dividend distributed by June 30, 1949, should not have been less than the statutory limit but the effect of the deeming provisions is not that the income should be deemed to have been distributed on June 30, 1949, but on the date of the general meeting, i.e., December 4, 1948, and, therefore, within, the accounting year 1948, the relevant assessment year being 1949-50. It makes no difference that according to the wording of section 23A (1) the order could be passed at any time, the assessment would still have to be made under section 34(1)(b) of the Act and if a notice is not served in accordance with that provision the Income-tax Officer will have no jurisdiction to take any action against the shareholder. The notice under section 34(1) is to be served within four years from the end of the assessment year. It was held by this court in First Additional income-tax Officer, Mysore v. H. N. S. Iyengar [1962] 44 I. T. R. 437 that the period of eight or four years under section 34(1)(a) or (b) begins from the end of the assessment year. Besides, we cannot see why section 23A(1) should become unworkable merely because the notice under section 34(1) which is the assessment section prescribes a time limit for taking action for escaped incomes nor was any reason brought to our attention in support of that submission.
The respondent made advance payment of tax under section 18A(1) of the Income-tax Act for the assessment year 1952-53. On August 30, 1952, regular assessment for this year was made and a part of the tax paid in advance was thereupon found refundable to the respondent. Under the provisions of sub-section (5) of section 18A, as it then stood, interest at a certain rate was payable on the amount paid in advance by an assessee under this section. Rupees 14,720-14-0 were found payable to the respondent under this provision and this sum was paid some time in September, 1952. On May 24, 1953, subsection (5) of the section 18A was amended with effect from April 1, 1952. It is not necessary to refer to this amendment in detail and it is enough to state that under it the Government was to have paid to the respondent Rs. 9,404-5-0 instead of Rs. 14,720-14-10. On March 18, 1957, a notice was issued under section 34(1)(b) stating that as the Income-tax Officer had reason to believe that the respondent's income for the assessment year ending March 31, 1953, had been under-assessed and had been the subject of excessive relief, he proposed to reassess the said income. The respondent protested, but notwithstanding the protest, the assessment under section 34 was made on July 30, 1957. The order of reassessment stated : "As per the amended provision of section 18A(5) the assessee was entitled to interest of a much smaller amount than what has been allowed to him during the original assessment. As excessive relief has been allowed to the assessee in the original assessment under section 23(3) and in order to enable me to recover the excess interest allowed action under section 34 was taken. Hence I will proceed to recover the excess interest allowed to the assessee during the original assessment. " On the application of the respondent under article 226 of the Constitution this order was set aside by the High Court of Bombay.
The appellant company was incorporated under the Indian Companies Act, 1866, and has its office at Ahmedabad. It carries on the business of manufacturing and selling cotton piece goods and chemicals. For the assessment year 1952-53, the corresponding account year being the calendar year 1951, the appellant was assessed to income tax and super tax on a total income Rs. 1,02,79,808 and allowed a rebate of one anna per rupee on the undistributed profits of Rs. 36,62,776 under the first proviso to Paragraph B of Part 1 of the First Schedule to the Finance Act, 1952. The amount of rebate allowed was Rs. 2,28,924. for the assessment year 1953-54, the corresponding account year being the calendar year 1952, the appellant showed a book profit of Rs. 45,67,966, but was assessed to a loss of Rs. 5,98,353 on April 17, 1954. For the said calendar year 1952, the appellant declared a dividend of Rs. 19,32,000 on April 20, 1954. This dividend came out of the undistributed profits of the calendar year 1951 on which the appellant had been allowed a rebate. On March 18, 1958, the Income-tax Officer, Special Circle, Ahmedabad respondent No. 1 before us, issued a notice to the appellant calling upon the latter to show cause why action under sub-section (10) of section 35 should not be taken against the appellant by withdrawing the rebate allowed on the sum of Rs. 19,32,000. The appellant raised some objections, one of which was that sub-section (10) of section 35 did not apply to his case. The Income tax officer, however, held that sub-section (10) of section 35 applied and accordingly directed that the rebate allowed on the sum of Rs. 19,32,000 should be withdrawn, by re-computing the tax payable by the appellant. He ordered the issue of a demand notice for a sum of Rs. 1,20,750 which was the rebate allowed on Rs. 19,32,000. The Income-tax officer passed this order on March 27, 1958.
The provision of the Income tax Act under which the right to refund arose have to be briefly referred to before we proceed to consider the questions that arise in this appeal. Section 16(2) states that for the purpose of inclusion in the total income of an assessee, dividend paid to him shall be increased to such amount as would, if income-tax at the rate applicable to the total income of the company were deducted therefrom, be equal to the amount of the dividend. Sub-section (3) of section 18 requires that out of the income chargeable as interest on securities income-tax has to be deducted at the source at the maximum rate. Sub-section (4) of this section provides that all sums so deducted shall be deemed to be income received by the assessee in computing his income and under sub-section (6) these deductions have to be paid to the credit of the Central Government. Sub-section (5) states that any deduction made in accordance with the provisions of this section and any sum by which a dividend has been increased under sub-section (2) of section 16 shall be treated as a payment of income tax or super tax on behalf of the person from whose income the deduction was made to of the shareholder as the case may be. Section 49B provides that where any dividend has been paid or deemed to have been paid to an assessee who is a shareholder of a company which is assessed to income tax such assessee shall if the dividend is included in his total income be deemed to have paid himself in respect of such dividend income tax of an amount by which the dividend had been increased under section 16(2). Section 48 is in these terms:
The assessee company was registered in the erstwhile Baroda State and its status during the assessment years was that of a non-resident. The relevant assessment years were 1941-42 and 1942-43 the previous years being the calendar years I940 and I94I. It carried on the business of dyeing and selling dyed yarn. It effected sales of dyed yarn of the total value of Rs. 14,22,995 and Rs. 19,22,107 in the previous years relevant to the assessment years I94I-42 and I942-43 respectively. The sales were made to purchasers both in the Indian States and in what was British India. During the previous year relevant to I94I-42 out of the total sales of the value of Rs. I4,2 2,996, Rs. 11,88,063 were to merchants in British India and out of these some sales were to Calcutta merchants which are not now in dispute and the balance amounting to Rs. 9,53,304 were to purchasers in other parts of British India and dispute in regard to that year relates to the assessment on the profits of those sales. Similarly, in the previous year relevant to I942-43 Out of the total sales of Rs. I9,22,107 a sum of Rs. 6,04,588 were made to purchasers in British India and assessment in regard to profits out of that sum is in dispute. The Income-tax Officer found that the sale price was received by the assessee company at Petlad in the erstwhile Baroda State by means of cheques, drafts and hundis in the years relevant to the two assessment years and it is not disputed that they were sent by post. These cheques, drafts and hundis were sent back by the assessee company either to its creditors in British India in payment of its liabilities or to the credit of its accounts with its bankers in British India. The contention of the assessee company was that these sums were received by it at Petlad in the erstwhile Baroda State and therefore the profits on these sales were not taxable in the taxable territories inasmuch as they were received in an Indian State. After appeal to the Appellate Assistant Commissioner appeal was taken to the Income-tax Appellate Tribunal which held that the cheques and hundis which were sent by the assessee company to its bankers and creditors were received by them as agents of the assessee company and, therefore, the profits were received in British India and were liable to tax. Against that order the assessee company applied under section 66 of the Income-tax Act for a statement of the case to the High Court. On February 21, I955, the Appellate Tribunal referred the following question to the High Court: "Whether the proportionate profits on the sale proceeds aggregating. Rs. 9,53,304 for the assessment year I94I-42 and Rs. 6,04,588 for the assessment year I942-43 or any part thereof were received by or on behalf of the assessee company in British India ? " The Appellate Tribunal in the statement of the case remarked that no attempt had been made at a previous stage to investigate as to whether the post office had acted as the agent of the assessee company or of the buyers. The High Court, on September 23, 1955, made the following order calling for a supplemental statement : " The same question arises on this reference as in the last reference (I. T. Reference No. 15 of I955) and we want a supplemental statement of the case on the same lines as we have indicated in the last reference. The supplemental statement of the case will be confined to the two amounts mentioned in the question raised on this reference, viz., Rs. 9.53.304 for the assessment year 1941-42 and Rs. 6,04,585 for the year 1942-43. " The parties by this order were allowed to adduce further evidence.
The Income-tax Officer, Alleppey, held that the debt was written off at a time when it was neither bad nor doubtful and the claim to write it off was premature. He, therefore, disallowed it. An appeal was taken to the Appellate Assistant Commissioner and he upheld the order of the Income-tax Officer though on a different ground. He held that the advance was made for the purpose of purchasing shares of the new company then in formation and it was thus made for the acquisition of a capital asset, which was either the control of the new company or "to gain its goodwill likely to result in the grant of agency rights" to the assessee company. According to the Commissioner, the loss, if any, was of a capital nature and the question whether the claim of bad debt was premature or otherwise did not arise for consideration. The Appellate Assistant Commissioner also held that the deduction could not be claimed as an allowance under section 10(2)(xv) of the Income-tax Act. The assessee company appealed to the Tribunal. The Tribunal upheld the order of the Appellate Assistant Commissioner but on a third ground. The Tribunal accepted that one of the objects of the assessee company was the promotion and financing of other companies for gain but this advance of Rs. 6,00,000 was not made by the assessee company in the normal course of its business. It was rather a transaction actuated only by personal motives. In reaching this conclusion the Tribunal observed that the advance was made to Southern Agencies Ltd., which was not a company promoted by the assessee company, that between these two companies there was no previous business connection and that the assessee company had no expectancy of a financial benefit. The Tribunal held that the Rodier Textile Mills Ltd., Pondicherry, was not being financed or promoted by the assessee company and that the statement by the assessee company that it would have received some agency right was not supported by evidence.
Amarchand N. Shroff, Mangaldas and Hiralal were partners in a firm of solicitors. Amarchand died on July 7, 1949. Thereafter the partnership was carried on by Mangaldas and Hiralal up to November 30, 1949, and on December 1, 1949, Ramesh, son of Amarchand, who had by then qualified as a solicitor joined the firm as the third partner. After the death of Amarchand the arrangement between the various partners in regard to the realisations of the old outstandings was that in respect of the work done up to the death of Amarchand the realisations were to be divided amongst Amarchand, Mangaldas and Hiralal, in respect of the work between July 8, 1949, and November 30, 1949, the realisations were to be divided between Mangaldas and Hiralal and in respect of work done after December 1, 1949, the realisations were to be divided amongst Mangaldas. Hiralal and Ramesh. The firm kept its accounts on cash basis. For the five assessment years 1950-51 to 1954-55 the following amounts were received : Rs. 37,847, Rs. 43,162, Rs. 34,899, Rs. 13,402 and Rs. 32,523 by the heirs and legal representatives of Amarchand out of the outstandings. The Income-tax Officer sought to tax these realisations. For the assessment years 1950-51 and 1951-52 he assessed the amounts in the hands of the heirs and legal representatives of Amarchand as a Hindu undivided family. Against that order an appeal was taken to Appellate Assistant Commissioner and then to the Appellate Tribunal. The two members of the Tribunal agreed in holding, though for different reasons, that the amounts were not the income of the Hindu undivided family, but merely represented inheritance or realisations of the assets of Amarchand.
The assessees are a Hindu undivided family and engage themselves as Pandas or priests who assist devotees in performing worship and ceremonies especially connected with pilgrimage to the temple of Jagannath at Puri, and for services rendered by them they receive certain emoluments which are called Dakshina or Pranami. It is not disputed that amounts received as Pranami are profits or gains of business or vocation carried on by the assessees and liable to incometax. Besides Pranami the assessees collect from the pilgrims amounts of money known as Annadan under writings executed by the pilgrims. In these appeals the assessees claim that those amounts are not liable to be included in their taxable income, because they are exempt under section 4(3)(i) and (ii) of the Indian Income-tax Act. The assessees claim that "their estate originally and virtually represents the Guru Gadi created and established for the main purpose of propagating the cult of Lord Jagannath in different parts and among different peoples embracing the Hindu religion" and the offerings known as Annadan received by them on condition of utilising the same for the Bhog (food offering) in the temple of Jagannath are exempt from liability to pay income-tax, because the Annadan offerings are income derived from property held under a trust and in any event they are income of a religious institution derived from voluntary contributions and applicable solely to religious purposes. In support of their plea the assessees rely upon the Annadan Patras signed by the pilgrims, in the following form:
The assessee firm carries on business which is mainly speculation. In the year of account it claimed inter alia a loss of Rs. 1,05,641 which, it was said, arose in speculation in a venture of the assessee firm with one Damji Laxmidas. This venture was carried on in the name of Damji Laxmidas on behalf of an alleged firm in which Damji was said to have a share of 6 annas and the assessee firm the balance. A deed of partnership dated November 14, 1944, was also produced before the Income-tax Officer. The sum of Rs. 1,05,641 represented half the losses of the joint venture, the other half being claimed by Damji in his own individual assessment. The so-called firm of Damji Laxmidas and the assessee firm was an unregistered one. The Income-tax Officer, Bombay, disallowed the losses and added back this amount along with some others to convert a loss of Rs. 55,931 declared by the assessee firm into a profit of Rs. 1,88,575. This profit was carried by him in accordance with the share of the partners into their individual assessment. In the assessment of Damji, it may be stated here, the loss was not allowed on the ground that, having arisen in an unregistered partnership it could only be considered in the assessment of the unregistered partnership. In rejecting the evidence of the loss of Rs. 1,05,641 in the assessment of the assessee firm the Income-tax Officer gave three reasons (i) that the ankdas were in the name of Damji Laxmidas and not in the name of the unregistered firm or the assessee firm, (ii) that the assessee firm claimed only 8 annas of the losses and not 10 annas according to its share and (iii) that the assessee firm which was well-known firm doing extensive business was said, surprisingly enough to have entered into a partnership with an insignificant person like Damji Laxmidas to carry on this vast business. He held that the assessee firm had purchased these losses from Damji Laxmidas to be able to set them off against its profits to avoid tax. The Appellate Assistant Commissioner dismissed the appeal files by the assessee firm and so also the Appellate Tribunal. The two members of the Appellate Tribunal gave different reasons. The Judicial member (Mr. A. R. Aggarwal) observed :"So far as the last item No. (3) is concerned we are not satisfied that really the loss of Rs. 1,05,641 was the loss of the a assessee. It is admitted by the assessee that the ankdas are in the name of Damji Laxmidas. By no evidence we are satisfied (sic) that really the assessee did business in the joint account. Consequently, this claim of the assessee is disallowed."
Section 35 which deals with the rectification of mistakes provides that the Income-tax Officer (among other officers) may at any time within four years from the date of any assessment order, etc., passed by him, on his own motion rectify any mistake apparent from the record of the assessment and shall within the like period rectify any mistake which has been brought to his notice by an assessee. One of the provisions says that no such rectification shall be made, having the effect of enhancing an assessment or reducing the refund unless the Incometax Officer has given notice to the assessee of his intention so to do and has allowed him a reasonable opportunity of being heard.Section 18A which was inserted by the Income-tax (Amendment) Act, 1944 (11 of 1944), provides for advance payment of tax by an assessee. Sub-section (8) of that section says that where, on making the regular assessment, the Income-tax Officer finds that no payment of advance tax has been made in accordance with previous provisions of that section, interest calculated in the manner laid down in sub-section (6) shall be added to the tax as determined on the basis of the regular assessment. Sub-section (6) says that if in any year an assessee has paid advance tax under sub-section (2) or (3) on the basis of his own estimate and the tax so paid is less than eighty per cent. of tax determined on the basis of the regular assessment, so far as such tax relates to income to which the provisions of section 18 do not apply, and if it is not due to any variation in the rate of tax, simple interest at the rate of six per cent. per annum from the 1st day of January in the year in which the tax was paid up to the date of the said regular assessment, is payable by the assessee on the amount by which the tax paid falls short of the eighty per cent.
The three companies who are the appellants here own certain mines in Bihar. The Tata Iron & Steel Co. Ltd. - appellants in Civil Appeals Nos. 587 and 588 of 1961 - has taken on lease certain iron ore mines at Noamundi in the Singhbhum district from where it extracts iron or which it utilities in its factory at Jamshedpur for making iron and steel. Similarly, the Indian Iron & Steel Co. Ltd., which is the appellant in Civil Appeals Nos. 590 and 591 of 1961, holds mining concessions for iron and manganese ore at Gua and Monoharpur in the district of Singhbhum and the ore extracted by it is utilised for the manufacture of iron and steel and steel and steel products at the company's factories at Burnpur and Kulti in the district of Burdwan. In the same manner the Indian Copper Corporation Ltd., which is the appellant in the Civil Appeals Nos. 600 and 601 of 1961, has taken on lease certain mines in the district of Singhbhum and the ore mined by it is manufactured into copper and copper products at its factory at Moubhandar in the same district. The question raised for decision is whether the three appellants could be said to have derived "annual net profits from the mines" when the ore mined by them is not sold as such but is utilised for the production of finished products which the appellants sell.
The Income-tax Officer, with the previous approval of the Inspecting Assistant Commissioner, applied the provisions of section 23A, of the Income-tax Act and held that the company was deemed to have declared dividend of Rs 3,97,788. The assessee company was being managed by a firm called Mangaldas Mehta & Co. That firm consisted of fourteen partners of whom seven were the directors of the assessee company. The members of the managing agents who were also directors held between them 35,469 ordinary shares and 880 first preference shares. The remaining seven members of the managing agents, who were not directors of the assessee company, held respectively 41,659 and 370 shares of the two categories. Seventy-five shares were held by Girdhardas & Co. Ltd., to which company admittedly section 23A was applicable. Some of the members of the managing agency firm held on behalf of their minor children or on behalf of their joint families 9,899 ordinary shares and 837 first preference shares.
The assessee was charged with interest under sub-section. (8) of section 18A of that Act. That sub-section provided that in the cases the mentioned interest calculated in the manner laid down in sub-section (6) of section 18A shall be added to the tax assessed. The Assessee contends that he could not be made liable to pay the interest as in his case it could not be calculated in the manner indicated. The only question that arises in this appeal is whether this contention is right. The assessee's contention was rejected by the Appellate Commissioner but not by the Appellate Tribunal. The respondent Commissioner thereupon obtained a reference of the following question to the High Court of Punjab for its decision : "Whether, on a true construction of sub-section (6), (8), and (9) of section 18A of the Indian Income-tax Act, the interest referred to in sub-section (8) is chargeable for failure on the part of an assessee to submit an estimate of his income and pay tax as required by the terms of sub-section (3) of that section ?" The High Court answered that question against the assessee. Hence the present appeals by him. There are three appeals because there are three orders charging interest under section 18A(8), one in respect of each of three assessment years. It would help now to refer briefly to some of the provisions of section 18A. That section dealt with advance payment of income-tax and super-tax, that is, payment of such taxes on income of the year in which taxes are paid and therefore before assessment. Sub-section (1) of this section gives power in certain cases to an Income-tax Officer to make an order directing a person to make an advance payment of tax of an amount equal to the amount of the tax payable for the latest previous year in respect of which he has been assessed. Sub-section (2) gives an assessee, on whom an order under sub-section (1) has been made, power to make his own estimate of the advance tax payable by him and to pay according to such estimate instead of according to that order.
Under the said act agricultural income derived from lands situated throughout the State of Kerala became assessable with effect from the assessment year 1957-58. Pursuant to the provisions of that Act the income-tax authorities started proceedings to assess the income derived in from lands situated in the Madras area for the year 1957-58. On a petition filed by some of the assessees, the Kerala High Court held that the State of Kerala had no authority to levy tax on agricultural income which accrued before November 1, 1956, from lands situated in the Madras area and that the assessments for 1957-58 were not sustainable under the Act even in respect of income which arose after November 1, 1956, on the ground that the previous year, as defined under the Act, was a period of twelve months ending on March 31, preceding the year for which assessment was to be made. The result of the decision was that agricultural income derived from lands in the Madras area was not liable to tax for the assessment year 1957-58, whereas similar income from agricultural lands situated in the T-C area was liable to tax; indeed, the income accrued between November 1, 1956, and March 31, 1957, i.e. the income accrued after the Madras area become part of the Kerala State, also could not be taxed. To remedy the situation brought about by historical reasons in the two geographical parts of the Kerala State, the Government of Kerala promulgated on January 12, 1959, the Agricultural Income-tax (Amendment) Ordinance (II of 1959). Subsequently, the Kerala Legislature passed the Agricultural Income-tax (Amendment) Act (II of 1959) replacing the earlier Ordinance, hereinafter called the Amending Act.