S C CAMBATTA Vs. COMMISSIONER OF INCOME-TAX

JUDGEMENT

(1.) THIS is a reference under Section 66 (1) of the Indian Income-tax Act, 1922, and the questions, which under order of this Court of March 29, 1945, have been submitted by the Tribunal, are these: (1) Whether on the facts proved there was any evidence to support the conclusion that the money paid for the purchase of 1,245 shares belonged solely to the assessees (2) Whether in a case in which the provisions of Section 23 A have been applied, the proportionate share in the undistributed profits of the company must be taxed in the hands of the shareholders in whose name the shares stood and nobody else ?

(2.) SECTION 23a creates what might be described as an artificial income. It is as follows : (i) Where the Income-tax Officer 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 [as therein mentioned] he shall, unless he is satisfied that having regard to 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 Inspecting Assistant Commissioner 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 [as therein mentioned] 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 :

(3.) SECTION 21 of the Indian Companies Act, 1913, is the section which makes the memorandum and articles of association of a company the contract between the company and its shareholders and it is as follows: The memorandum and articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by each member and contained a covenant on the part of each member, his heirs, and legal representatives, to observe all the provisions of the memorandum and of the articles, subject to the provisions of this Act.