The Commissioner of Income-Tax, Bombay
City Vs. The Khatau Makanji Spinning and Weaving Co. Ltd., Bombay [1960] INSC
103 (4 May 1960)
HIDAYATULLAH, M.
DAS, S.K.
KAPUR, J.L.
CITATION: 1960 AIR 1022
CITATOR INFO :
D 1961 SC 699 (8) D 1981 SC1562 (17)
ACT:
income-tax-Additional Income-tax-Total
income-Method of computing-Indian Income-tax Act, 1922 (II of 1922), S. 3-The
Indian Finance Act, 1953 (XIV of 1953).
HEADNOTE:
The Income-tax Officer found that in the
assessment year 1953-54 the respondent assessee-company had declared excess
dividends amounting to Rs. 1,87,691 and he levied additional income-tax on it
at 5 annas in the rupee after deducting income tax borne by the profits of the
previous year at 4 annas per rupee, a surcharge of 5 per cent. less rebate of
one anna in the rupee as allowed by the Finance Act, 1953.
The Income-tax Tribunal held that the excess
dividends were deemed to be paid out of undistributed profits of the earlier
year ending June 30, 1951 on which a rebate of one anna in the rupee was given
in the assessment year 1952-53.
It further observed that additional
income-tax was also a tax on income, and that the Finance Act could say that
the tax would be payable on the income of any year preceding the previous year.
The Tribunal, however, referred three questions to the High Court which the
High Court compressed into one as below :" Whether additional income-tax
has been legally charged under Clause (ii) of the proviso to paragraph B of
Part 1 of the First Schedule :to the Indian Finance Act, 1951, as applied to
the assessment year 1953-54 by the Indian Finance Act, 1953, read with s. 3 of
the Indian Income-tax Act? " The High Court held that s. 3 of the Indian
Income-tax Act put the liability to tax on the total income of the previous
year or what can be deemed to be income. The Finance Act provided the rate
applicable to the income so found and a method of computing the total income.
The Finance Act in providing that additional income-tax should be paid upon the
accumulated profits of the previous years went beyond the purpose for which the
Finance Act was passed every year, and the Finance Act could not stand by
itself without the support Of S. 3 of the Indian Income-tax Act. On appeal by
the Commissioner of Income-tax on certificate of the High Court:
Held, that the High Court was right in
answering the question framed by it, in the negative. The Finance Act provided
that the tax should be levied on the " total income " as defined in
and determined under the Indian Income-tax Act. The Additional income-tax was
not properly laid upon the total income because what was actually taxed was
never a part of the total income of the previous year, nor deemed to be so.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 303 of 1958.
Appeal from the judgment and order dated
August 3, 1956, of the Bombay High Court in Income tax Reference No. 10 of
1956.
K. N. Rajagopal Sastri and D. Gupta, for the
appellant.
N. A. Palkhivala, S. N. Andley, J. B.
Dadachanji and Rameshwar Nath, for the respondents.
1960. May 4. The Judgment of the Court was
delivered by HIDAYATULLAH, J.-This is an appeal against the judgment and order
of the High Court of Bombay dated August 3, 1956, in a reference under s. 66
(1) of the Indian Income-tax Act by the Appellate Tribunal, Bombay. The
Tribunal referred four questions for the decision of the High Court. The High
Court did not answer the first question because it was not pressed, and
answered the remaining in the negative, after modifying them. It has certified
this case as fit for appeal to this Court, and hence this appeal. The Commissioner
of Income-tax, Bombay City, is the appellant, and the Khatau Makanji Spinning
and Weaving Co. Ltd., Bombay, (the assessee Company), is the respondent.
The assessee Company has its year of account
ending June 30 every year. At the close of the account year 1951, it carried
forward profits amounting to Rs. 30,680. In that year, it appears it had earned
a rebate by declaring dividends below the limit fixed by the Finance Act. For
the account year 1952 its book profits were Rs. 28,67,235 less allowances for
depreciation and tax. After these and other sundry adjustments, the balance
available for distribution was Rs. 5,02,915. It may be pointed out that the
Incometax Officer on processing the income found the total income to be Rs.
5,26,681. For the account year 1952, the assessee Company declared dividends
amounting to Rs. 4,78,950 and carried forward the balance of Rs. 23,965.
We are concerned with the assessment year
1953-54, and the Finance Act, 1953, is applicable. That Finance 875 Act applied
the Finance Act, 1951, with some changes. The Finance Act, 1953, with the
modifications will be referred to briefly, hereinafter, as the Finance Act. The
Income-tax Officer found that the assessee Company had declared excess
dividends amounting to Rs. 1,87,691. He calculated additional income-tax on it
at 5 annas in the rupee after deducting income-tax borne by the profits of the
previous year at 4 annas per rupee, a surcharge of 5 per cent. less rebate of
one anna in the rupee as allowed by the Finance Act. This additional tax
amounted to Rs. 21,115-4-0.
The appeals of the assessee Company under the
Income-tax Act failed. The Tribunal held that the excess dividends were deemed
to be paid out of undistributed profits of earlier year ending June 30, 1951,
amounting to Rs. 6,60,720 on which a rebate of 1 anna in the rupee was given in
the assessment year, 1952-53. Tile Tribunal observed that additional income tax
was also a tax on income, and that the Finance Act could say that the tax would
be payable on the income of any year preceding the previous year. The Tribunal,
however, referred four questions to the High Court, of which the first need not
be quoted because it was abandoned before the High Court. The other questions
were:
" (ii) If the answer to question No. 1
is in the negative whether the said provisions go beyond the ambit and scope of
the Indian Income-tax Act ? (iii) Whether additional income-tax can be levied,
assessed and recovered under the provisions of the Indian Income-tax Act ? (iv)
Whether at any rate the additional income tax has been legally charged under
the Indian Finance Act, 1953, read with the Indian Income tax Act?" The
High Court compressed the three questions into one, and it reads:
" Whether additional income-tax has been
legally charged under clause (ii) of the proviso to paragraph B of Part 1 of
the. First Schedule to the Indian Finance Act, 1951, as applied to the
assessment year 1953-54 by the Indian Finance Act, 1953, read with Section 3 of
the Indian Income-tax Act?" 876 This question was answered by the High
Court in the negative.
In the opinion of the High Court, s. 3 of the
Indian Income tax Act lays down the liability to tax, and it puts the tax on
the total income of the previous year. The method of computing this total
income is also to be found in the Finance Act. The Finance Act merely provides
the rate applicable to the income so found. According to the High Court, the
Finance Act in providing that additional income tax should be paid upon the
accumulated profits of the previous years goes beyond the purpose for which the
Central Act is passed every year, and cannot stand by itself without the
support of s. 3 of the Indian Income-tax Act. The High Court held that the
Finance Act had ' misfired', because it did not resort to legislation which
would have conformed to the object for which the Finance Act was passed every
year.
The learned Chief Justice, who delivered the
judgment of the High Court, stated that there were several methods open to the
legislature to achieve that purpose but that it had not resorted to any of
them. This is what the learned Chief Justice observed:
" The Legislature could have achieved
this object by one of three methods. It could have treated the excess dividend
declared by the company as a notional income and made it apart of the total
income of the previous year. It could have provided for rectification of the
assessment of the year in which these profits were charged at a lesser rate,
and we now find that Parliament has actually provided for this in the Finance
Act, 1956. Or, finally, it could have provided for a penalty imposed upon a
company which transgressed the direction of Parliament that it should not pay
dividend beyond a particular ceiling ... The ambit of Section 3 is clear and
the ambit is that the tax to be levied must be a tax on income and the power of
Parliament is equally clear and that is to fix the rate at which income-tax is
to be charged upon the total income of the previous year of the assessee. In
our opinion, the provision of the Finance Act travels beyond the ambit of
Section 3, and if Parliament 877 has done so then no effective charge can be
made on the total income of the previous year of the assessee under the
provisions of the Finance Act which deals with additional tax on excess
dividend." It may be pointed out that before the High Court it was
conceded that in order that the provisions of the Finance Act might be
effective, the Finance Act had to come within the scope of s. 3 of the Income
tax Act. The point that was argued here was that it was not necessary to look
only to s. 3 of the Indian Income-tax Act but also to the provisions of the
Finance Act, through which Parliament could impose a new tax, if it so pleased.
Other arguments involved modifications of language suitable to sustain the tax
independently of s. 3 of the Indian Income-tax Act, a procedure which we do not
think is open, for reasons which we have given in Civil Appeal No. 427 of 1957,
decided today. These modifications, which were suggested, involve a recasting
of the entire relevant paragraph of the Finance Act to make it independent of
s. 3 of the Indian Income-tax Act, a course which is only open to a legislature
and not to a Court. We need not give all the modifications suggested, because,
in our opinion, the words of the Finance Act must be given their due meaning,
and must be construed as they stand.
The learned Chief Justice, with respect, very
rightly pointed out that the Income-tax Act puts the tax on income or something
which it deems to be income. In other words, the tax deals with income and
income only. It further provides that this tax shall be collected at a
particular rate on the total income for which provision shall be made in an
yearly Central Act. The Finance Act also follows the same scheme, and lays down
the rate at which the tax is to be collected. In the Finance Act, the tax is
laid on the total income, but two provisos modify the rate under certain
circumstances. We may at this stage read the relevant provision (Part 1, First
Schedule):
878 B. In the case of every company Rate.
Surcharge.
On the whole of Four annas One-twentieth of
total income. in the rupee. the rate specified in the preceding column:
Provided that in the case of a company which,
in respect of its profits liable to tax under the Income-tax Act for the year
ending on the 31st day of March, 1953, has made the prescribed arrangements for
the declaration and payment within the territory of India excluding the State
of Jammu and Kashmir, of the dividends payable out of such profits, and has
deducted super-tax from the dividends in accordance with the provisions of
subsection (3D) or (3E) of section 18 of the Act(i) Where the total income, as
reduced by seven annas in the rupee and by the amount, if any, exempt from
income-tax, exceeds the amount of any dividends (including dividends payable at
a fixed rate) declared in respect of the whole or part of the previous year for
the assessment for the year ending on the 31st day of March, 1953, and no order
has been made under sub-section (1) of section 23A of the Income-tax Act, a
rebate shall be allowed at the rate of one anna per rupee on the amount of such
excess;
(ii) Where the amount of dividends referred
to in clause (i) above exceeds the total income as reduced by seven annas in
the rupee and by the amount, if any, exempt from income-tax, there shall be
chargeable on the total income an additional income-tax equal to the sum, if
any, by which the aggregate amount of income-tax actually borne by such excess
(hereinafter referred to as ' excess dividend') falls short of the amount
calculated at the rate of five annas per rupee on the excess dividend.
For the purpose of clause (ii) of the above
proviso, the aggregate amount of income-tax actually borne by the excess
dividend shall be determined as follows :879 (i) the excess dividend shall be
deemed to be out, of the whole or such portion of the undistributed profits of
one or more years immediately preceding; the previous year as would be just
sufficient to cover the amount of the excess dividend and as have not likewise
been taken into account to cover an excess dividend of a preceding year;
(ii) such portion of the excess dividend as
is deemed to be out of the undistributed profits of each of the said years
shall be deemed to have borne tax,(a) if an order has been made under
sub-section (1) of section 23A of the Income-tax Act, in respect of the
undistributed profits of that year, at the rate of five annas in the rupee, and
(b) in respect of any other year, at the rate applicable to the total income of
the company for that year reduced by the rate at which rebate, if any, was
allowed on the undistributed profits." By the first Proviso, a rebate of
one anna per rupee is given to a company which pays dividends less than 9 annas
in the rupee out of its profits. By the second Proviso, the rebate disappears,
and an additional income-tax has to be paid on dividends in excess of that
limit, paid in the year.
The explanation says that " the excess
dividend shall be deemed to be out of the whole or such portion of the
undistributed profits of one or more years immediately preceding the previous
year as would be just sufficient to cover the amount of the excess dividend and
as have not likewise been taken into account to cover an excess dividend of a
preceding year ". This fiction, as we have already pointed out, provides
only that the dividends shall be deemed to be out of the profits not of the
previous year under assessment but of some other years. What the Finance Act
fails to do is to make them " total income ", so as to take in the
rate which is prescribed for the total income in the Proviso. Unless the
Finance Act stated that after the working out of the fiction the profits of the
back year or years shall be deemed to be a part of the total income of the
previous year under assessment, the purpose of the Act clearly fails.
Income-tax is a tax on income 880 of the previous year, and it would not cover
something which is not the income of the previous year, or made fictionally so.
The Finance Act could have gone further, as pointed out by the learned Chief
Justice in the extract quoted, and made the profits a part of the total income
of the previous year under assessment, but it did not do so. The Finance Act
could have also resorted to some other fiction, which might conceivably have
met the case; but it has failed to do so.
Even if one considers the dividends as having
come out of the profits of preceding years, they do not become the income of
the relevant previous year, and unless the Finance Act expressly laid down that
it should be taxed as part of the total income, the purpose is not achieved.
Indeed, the Finance Act continues to say that the tax shall be on the total
income, as defined in the Indian Income-tax Act and as determined under that
Act. It is impossible to say that the additional income-tax was properly laid
upon the total income, because what was actually taxed was never a part of the
total income of the previous year.
For these reasons, we are of opinion that the
High Court was right in answering the question which it had framed, in the
negative.
In the result, the appeal fails, and is
dismissed with costs.
Appeal dismissed.
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