COMMISSIONER OF INCOME TAX Vs. PHIROZSHAW PALLONJI MISTRY

JUDGEMENT

(1.) THE assessment years in this reference are 1949 -50 and 1950 -51. Phirozshaw Pallonji Mistry and Shapurji Mistry are the two assessees. Their respective wives held shares in a private limited company styled Shapurji Pallonji and Co. Ltd. An order under Section 23A of the Income -tax Acdt was passed by the Income -tax Officer in making the assessment of Shapurji Pallonji and Co. Ltd., and the income deemed to have been distributed as dividend under Sec.23A in the hands of the respective wives of the two assessees was sought to be included in the income of the two assessees relying upon Section 16(3) of the Income -tax Act on the ground that the shares in the company held by the respective wives were purchased with the funds provided by the two assessees. It was contended by the assessees that where an order under S. 23A is passed the dividend income is only deemed to have been distributed amongst the share -holders and such income cannot be included in the income of the assessees under Section 16(3). The Income -tax Appellate Tribunal accepted that contention of the assessees purporting to follow the judgment of this Court in S. C. Cambatta v. Commissioner of Income - tax, Bombay : [1946]14ITR748(Bom) . At the instances of the Commissioner of Income -tax, the following question has been referred by the Tribunal:

(2.) UNDER Section 23A of the Income -tax Act, before it was amended by the Finance Act 1955, in certain eventualities it was open to the Income -tax Officer to make an order that the undistributed portion of the assessable income of a company, 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 dividend amongst the shareholders. On the footing that the undistributed profits are deemed to have been distributed, the income will be taxable in the hands of the shareholders. But this liability is the consequence of a fictional distribution of income which in reality has not reached the hands of the shreholders , Sec 16(3) provides for another fiction. In so far as it is material, that section provides:

(3.) ON the view taken by us, the answer to the question will be in the negative. The Commissioner of Income -tax to pay the costs of the assessees.