M/S. BHOR INDUSTRIES LTD. vs. THE COMMISSIONER OF INCOME-TAX, BOMBAY· CITY I.

CIVIL APPEAL No. 158/1960Supreme Court[1961] 3 S.C.R. 40912 January 1960Bench: 3 JudgesAuthor: J.L. KAPUR, M. HIDAYATULLAH, J.C. SHAH15 pages
AI SummaryDismissed

What were the facts?

M/s. Bhor Industries Ltd. (appellant), incorporated in 1944 in the Bhor State, had its registered office and business operations there. Its shareholders resided in British India. The Bhor State merged with Bombay Province on August 1, 1949, and the Indian Income-tax Act, 1922, was extended to the merged State from April 1, 1949. The Merged States (Taxation Concessions) Order, 1949, was issued under Section 60A of the Act. For account years 1946 and 1947, the company declared dividends of Rs. 2,580 and Rs. 1,140 respectively. The Income-tax Officer assessed the company as non-resident and, for assessment years 1947-48 and 1948-49, deemed dividends to be distributed among shareholders under Section 23A of the Act. The officer did not deduct interest charged under Section 18A(8) when computing these deemed dividends. The company and shareholders challenged this assessment.

What did the Supreme Court hold?

The Tribunal held that (1) the expression "any previous year" in Paragraph 12 of the Merged States (Taxation Concessions) Order, 1949, referred to only one previous year for assessment year 1949-50 that ended before August 1, 1949, and thus did not preclude the application of Section 23A to the profits of the account years 1946 and 1947. (2) Interest under Section 18A(8) retains its character as interest and is not tax, and since Section 23A only allows deduction of income-tax and super-tax, no deduction for interest was permissible. (3) The fiction created by Section 23A, which deems dividends to be distributed, transcends questions of accrual and receipt, meaning what is deemed distributed is also deemed to have accrued and been received by the shareholder in the taxable territories. (4) Section 14(2)(c) saves only income not assessable in taxable territories by reason of its accrual in an Indian State and does not affect the operation of Section 23A on assessable income. The Tribunal noted that no question was referred on the method of calculation of deemed dividends, and therefore, expressed no opinion on that aspect. The appeals were dismissed with a slight modification to the answer of the first question, stating Section 23A applied only to the portion of income earned in British India, not in Bhor State.

What were the issues?

1. Whether Paragraph 12 of the Merged States (Taxation Concessions) Order, 1949, precluded the Income-tax Officer from applying Section 23A of the Indian Income-tax Act, 1922, to the profits and gains of account years ending December 31, 1946, and December 31, 1947, as these were previous years ending before August 1, 1949? The appellant argued that Paragraph 12 provided an exemption. The revenue contended that the exemption was limited. 2. Whether interest under Section 18A(8) of the Act ought to have been deducted along with income-tax and super-tax before computing the deemed dividends under Section 23A(1)? The appellant argued for this deduction. The revenue did not record a specific argument on this point. 3. Whether dividends deemed to have been declared and received in Bhor State could be taxed in the hands of shareholders in British India without another fiction engrafting receipt in the taxable territories? The appellant argued they could not be taxed. The revenue contended that the fiction under Section 23A deemed receipt. 4. Whether shareholders were entitled to the benefit of Section 14(2)(c) of the Act in respect of the entire amount of the balance deemed to be distributed? The appellant shareholders claimed this benefit. The revenue argued that Section 14(2)(c) did not affect the operation of Section 23A.

Which sections of the Income-tax Act were involved?

Section 60A,Section 23A,Section 18A(8),Section 14(2)(c)

AI-generated summary — verify with the full judgment below

3 S.C:R. SUPREME COURT REPORTS 409 income in the hands of the appellant and the only question which was sought to be referred and raised before the Board of Agricultural Income-tax was one as to the liability of the appellant to be assessed to agricultural income-tax for the year in question.

In that view of the case, the appeal fails and is dis- missed with costs.

Appeal dismissed. M/S. BHOR INDUSTRIES L'l'D. . v. THE COMMISSIONER OF INCOME-TAX, BOMBAY· CITY I. (and connected appeals) (J. L. KAPUR, M. HrnAYATULLAH and J.C. SHAH, JJ.)

Income-tax-Assessment of dividend income-Company incor- porated in Indian State subsequently merged-Extension of Indian Income-tax Act to merged State-Taxation concessions tit merged State-Scope-Assessment on shareholders of non-distributed profits -Exemption from taxation-Computation of dividends deemed to be distributed-Deduction of interest-Merged States (Taxation Conces- sions) Order, r949, para. r2-lndian Income-tax Act, r922 (fr of r922), ss. r4(2)(c), z8A(8), 23A.

The appellant had been incorporated in r944 as a private company limited by shares in the former State of Bhor with its registered office in Bhor. The sharehol

The order continues below.

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