Authored By : Mitter, Syed Sadat Abdul Masud

Mitter, J.

1. This is a Reference under Section 66(1) of the Income-tax Act the question referred being Whether on the facts and in the circumstances of the case, the Income-tax Officer was justified in making an order in respect of the Assessee company under Section 23A(1) of the Indian Income-tax Act as amended by Section 15 of the Finance Act, 1955

2. The facts are: The Assessee is a private limited company. For the assessment year 1955-56 the corresponding accounting year ending on June 30, 1954, the assessable income was found to be Rs. 68,751 ; the tax payable thereon was Rs. 36,839, the commercial profits amounted to Rs. 25,831 and the amount of dividend distributed on September 14, 1955, was Rs. 19,250. The Income-tax Officer took the view that as the distribution was not within the period of 12 months immediately following the expiry of the previous year, the same could be ignored for the purpose of Section 23A(1) calling for an order under that section. The Appellate Assistant Commissioner accepted the argument of the Assessee that no order under Section 23A(1) should have been made in view of the smallness of profit and the undisputed tax liability. On a curious process of reasoning he held that the declaration of dividend within 15 months of the accounting year being permitted by the Indian Companies Act could be reckoned as distribution of profits even for the purpose of Section 23A(1). The Tribunal did not agree. Strangely, however, there is no reference in the order of the Tribunal to the Appellate Assistant Commissioner's finding about the smallness of profits. In the agreed statement of case also there is no express reference to this contention of the Assessee, namely, that even ignoring the distribution altogether as not being within the period of 12 months, no order under Section 23A(1) should have been made on consideration of the commercial profits and the tax liability.

3. On behalf of the Assessee concession was frankly made that the distribution of dividend being beyond the period of 12 months from the close of accounting year, could not be considered as distribution for purposes of Section 23A(1). Reliance was, however, placed on the other aspect of the matter and it was urged that an order under Section 23A(1) should not have been made. Strong exception was taken to this course by the learned Advocate for the Revenue. It was argued that this question did not arise out of the order of the Tribunal although the question, as framed, certainly admitted the canvassing thereof. Reliance was placed on several judgments in support of this argument of the Revenue. This first case to which our attention was drawn is Commissioner of Income-tax, Bombay v. Scindia Steam Navigation Co. Ltd.(1961) 42 I.T.R. 589. There the facts were as follows: The Assessee was the owner of a ship which was requisitioned by Government and lost by enemy action on March 16, 1944. Government paid to the Assessee various amounts of compensation totaling Rs. 23,33,333 in between July 1944 and August 1946. The original cost of the ship was Rs. 24,95,016 and its written down value at the commencement of the year of account was Rs. 15,68,484. The difference between the cost price and the written down value, viz. Rs. 9,26,532, represented the deductions which had been allowed year after year on account of depreciation. The question which arose was whether this sum was liable to be included in the total income of the company for the year of assessment 1946-47 in view of the fact that the total compensation received by the Assessee had exceeded the cost price of the ship. The question turned on the interpretation of Section 10(2)(vii) of the Act. Before the Income-tax authorities the Assessee sought to avoid the application of the proviso to the section on the ground that on representations made by it, the Board of Revenue had directed that for the purpose of Rule 4, Schedule II of the Excess Profits Tax Act, 1940, the amount payable as compensation should be taken into account as though it had actually been received within 30 days of the date of the loss of the ship and in consequence the amount should be deemed to have been received on April 16, 1944. If that contention was correct the money could not be subjected to tax as income of the company for the year of assessment. This was rejected by the Income-tax authorities. The Appellate Tribunal held that the concession which the Board of Revenue had intended to give was limited to excess profits tax and was not allowable in considering the proviso to Section 10(2)(vii) and that the material date was when the compensation was, in fact, received and that was in the year of account. When the reference came up for hearing before the Bombay High Court, the Assessee contended that the proviso to Section 10(2)(vii) under which the charge was made could not be taken into account in making the assessment as the same had been introduced by the Income-tax (Amendment) Act, 1946', which came into force on May 4, 1946, whereas the liability of the company to be taxed fell to be determined as on April 1, 1946, when the Finance Act, 1946, came into force. The Revenue raised a preliminary objection to this question being mooted for the first time before the High Court on the. ground that it did not arise out of the order of the Tribunal, having been neither raised before it nor dealt with by it, and that, further, it had not been referred to the Court. Overruling this objection, the learned Judges of the Bombay High Court observed that the form in which the question was framed was sufficiently wide to take in the new contention, that even if the particular aspect of the question had not been argued before the Tribunal, it was implicit in the question as framed, and therefore, the Assessee could raise it. Before the Supreme Court the main contention of the Revenue was that it was not open to the High Court to go into the question of the applicability of the proviso to Section 10(2)(vii). It was argued that the Court had no jurisdiction to allow such question to be raised before it. Reviewing the cases which bore on -the interpretation of Section 66(1), Venkatarama Aiyar J., who delivered the judgment of Das, Kapur, Hidayatullah JJ. and himself, formulated certain principles which appear at p. 611 of the report. He observed:

The result of the above discussion may thus be summed up:

(1) When a question is raised before the Tribunal and is dealt with by it, it is clearly one arising out of its order.

(2) When a question of law is raised before the Tribunal but the Tribunal fails to deal with it, it must be deemed to have been dealt with by it, and is, therefore, one arising out of its order.

(3) When a question is not raised before the Tribunal but the Tribunal deals with it, that will also be a question arising out of its order.

(4) When a question of law is neither raised before the Tribunal nor considered by it, it will not be a question arising out of its order notwithstanding that it may arise on the findings given by it.

Stating the position compendiously, it is only a question that has been raised before or decided by the Tribunal that could be held to arise out of its order.

4. It was argued by Mr. Pal, on behalf of the Revenue, that the case fell within the fourth group because the question as to whether an order under Section 23A(1) was justified in view of the smallness of profits made did not arise out of the order of the Tribunal as there was no suggestion in that order that this aspect of the matter had been canvassed before the Tribunal at all. It will be noticed from the judgment of the Supreme Court itself that this contention cannot be accepted. After laying down the above test, Venkatarama Aiyar J. proceeded to add:

In this view, we have next to consider whether the question which was raised before the High Court was one which arose out of the order of the Tribunal, as interpreted above. Now the only question on which' the parties were at issue before the Income-tax authorities was whether the sum of Rs, 9,26,532 was assessable to tax as income received during the year of account 1945-56. That having been decided against the Respondents, the Tribunal referred on their application under Section 66(1), the question, whether the sum of Rs. 9,26,532 was properly included in the Assessee company's total income for the assessment year 1946-47 and that was the very question which was argued and decided by the High Court. Thus it cannot be said that the Respondents had raised any new question before the Court. But the Appellant contends that while before the Income-tax authorities the Respondents disputed their liability on the ground that the amount in question had been received in the year previous to the year of account, the contention urged by them before the Court was that even on the footing that the income had been received in the year of account the proviso to Section 10(2)(vii) had no application, and that it was a new question which they were not entitled to raise. We- do not agree with this contention. Section 66(1) speaks of a question of law that arises out of the order of the Tribunal. Now, a question of law might be a simple one having its impact at one point, or it may be a complex one, trenching over an area with approaches leading to different points therein. Such a question might involve more than one aspect requiring to be tackled from different standpoints. All that Section 66(1) requires is that the question of law which is referred to the Court for decision and which the Court is to decide must be the question which was in issue before the Tribunal. Where the question itself was under issue, there is no further limitation imposed by the section that the Reference should be limited to those aspects of the question which had been argued before the Tribunal. It will be an over-refinement of the position to hold that each aspect of a question is itself a distinct question for the purpose of Section 66(1) of the Act.

Further on, his Lordship pointed out that though the point argued before the Income-tax authorities was that the income was received not in the year of account but in the previous year, the question, as framed, is sufficient to cover the question which was actually argued before the High Court, namely, that in fact the assessment is not proper by reason of the proviso being inapplicable. The new contention does not involve refraining of the issues. On the very terms of the question as referred which are specific, the question is permissible and was open to the Respondents. In the result, we are of opinion that the" question of the applicability of the proviso is really implicit, as was held by Chagla C.J., in the question which was referred, and, therefore, it was one which the Court had to answer.

5. In view of the clear pronouncement of the Supreme Court it is not necessary to refer to the other cases cited at the Bar. According to the decision of the Supreme Court, if the question of law is so framed that a particular contention can be urged on the facts as noted in the Tribunal's order, the High Court is competent to examine the merits thereof. In my opinion, the Assessee is on firmer ground in this case because the question had actually been canvassed at length before the Appellate Assistant Commissioner and dealt with by him. From the papers it appears that the Assessee was represented by J. P. Gupta both before the Appellate Assistant Commissioner and the Appellate Tribunal, and it is difficult to believe that an obvious argument which was made at length before the Appellate Assistant Commissioner was not pressed at all before the Tribunal. In my view, the case falls within the second group formulated by the Supreme Court. In any event, the order of the Appellate Assistant Commissioner is an annexure to the statement of the case under Section 66(1) and forms a part of it.

6. Proceeding on the basis that the dividend distributed by the Assessee within the 12 months immediately following the expiry of the previous year was nil, it was still for the Income-tax Officer to satisfy himself that having regard to the smallness of the profit made, the payment of a dividend larger than that declared would be unreasonable. We have recently had to consider this question in Commissioner of Income-tax (Central), Calcutta v. Union Co. Ltd. I.T. Ref. No. 4 of 1961 where we have held that the Income-tax Officer must take into account only the distributable, profits and deduct there from the tax liability of the company on the assessable income and then consider whether the distribution was reasonable in the circumstances of the case. The tax liability of Rs. 36,839 being in excess of the commercial profits amounting to Rs. 25,831 it was well within the power of the company not to distribute any dividend at all, and the Income-tax Officer should have been satisfied that a larger distribution was not justified.

7. In the result, we hold that the answer to the question must be in the negative and in favour of the Assessee who will have the costs of this Reference.

Syed Sadat Abdul Masud, J.

8. I agree.

Reference answered in favour of Assessee.